Stock of the Day – Goodman Group (EXPENSIVE)
Goodman Group (ASX: GMG) is an integrated commercial and industrial property group dealing in real estate (warehouses, business parks, offices globally etc.). In addition, the Company offers a range of investment property funds. The Company is based in Australia and operates in most of the Asia Pacific region.
FY14 results have been solid for GMG, which aims to emerge as a successful operating business at the international platform. With operating platform traversing across 33 cities in 16 key countries and 73% of Goodman staff in markets outside Australia, the Company has penetrated well with offshore earnings grown to represent 56% of FY14 operating EBIT.
Operating and Financial Review Results (Source – Company Reports)
The operating profit of $601 million (10% increase from last year) and statutory net profit after tax of $657 million have been witnessed. The operating earnings per security (EPS) has been 34.8 cents (increased by 7% from FY13). GMG reported balance sheet gearing of 19.5% and interest coverage ratio of 5.9x while the group liquidity was $1.5 billion (including maturities to December 2018).
Operating EPS (Source – Company Reports)
Sales of A$1.18 billion for FY14 (ending June), with an increase of 33.6% from that of FY13 have been reported; and the Company is trading at 1.63 times book value. The stock has traded as high as high as A$34.51 in 2007 vis-à-vis A$5.170 on 30 Sep 2014. GMG’s long term debt was A$2.16 billion and total liabilities were A$3.16 billion, as of June 2014.
Total Assets under Management (Source – Company Reports)
In the Osaka Bay region, the Company collaborated with Nippon Express, Nissin and Keihin, to create a multi-customer facility for reducing overall logistics costs. The Company also completed the 43,038 square-meters second phase of its built-to-suit logistics facility at Wuqing for Vipshop. GMG through its joint venture, WTGoodman, in Brazil, has made a lot of progress. In Australia, a lot of innovation has happened since the acquisition of Moorabbin Airport in 2011. The Company has been doing well on the urban renewal strategy, with a pipeline of over 35,000 residential lots identified.
Further, GMG announced acquisition of a key 26,000 square meters development site in Nagoya, Japan by Goodman Japan Development Partnership (GJDP), in April 2013.
Under the development-led strategy of the Company, focus has been brought down to China and North America markets. Completion of Goodman Logistics Centre Oakland in the United States has been a key achievement for the Company. In addition, New Zealand business experienced its highest level of development activity in the last five years. The Company maintained its leading market position in Europe.
GMG has also come up with various initiatives to its fund platform. To name a few - Goodman European Logistics Fund (GELF) completed a €550 million equity raising; and Goodman and Canada Pension Plan Investment Board committed an additional US$500 million of equity to Goodman China Logistics Holding Limited (GCLH).
We thus note that the Company has benefitted from momentous growth in key markets, development performance in the Asia Pacific region, and expansion through organic growth.
For the 2015 financial year, the Company expects full year operating earnings per security of 36.9 cents, up 6% on the 2014 financial year and a distribution of 22.2 cents per security, an increase of 7% per security on the 2014 financial year. It is targeting about $1bn in sales in FY15 after ~$1.5bn in FY14 in view of exploiting investment markets and pursuing urban renewal opportunities.
Goodman’s Strategic Partners (Source – Company Reports)
However, GMG’s hasty efforts to maintain the growth rate appears to position it in a riskier environment, primarily because, Development heavily contributes to the earnings. There has been an increase in operational risk in view of speculative development being undertaken while only 53% of current development work in progress is pre-committed.
GMG Daily Chart (Source - Thomson Reuters)
We also can’t ignore the flat EBIT from balance sheet investments irrespective of the growth witnessed through the underlying asset base and earnings retention. Also, the 6% EPS growth guidance speaks for a ‘not-so-great’ probability of future growth. Further, the urban regeneration program is not really touched upon in the guidance
per se giving a misty appearance to respective contribution to the earnings. Then comes the soft leasing spreads in Australia.
Other factors to consider are challenges in securing tenants for Development, and low interest rates in Australia, the United Kingdom, Europe and the U.S. which may impact asset value and end-user demand. There is high risk with regard to expansion in Brazil, China and Japan in view of possibility of currency devaluation with changing economics.
Therefore, we believe that the stock is EXPENSIVE at the current price of $5.17 and would review it at a later date.
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