Company Overview: Goodman Group (ASX: GMG) is engaged in owning, developing and managing industrial property and business space. It operates in the region of Australia and New Zealand, Asia, Continental Europe, the United Kingdom and the Americas. The main objective of the company is to make space for its customers’ need for sustainable solutions in high-quality locations. It executes its strategy through the application of its business model of – own + develop + manage.

GMG Details

Growth in Digital Economy to Drive Demand: Goodman Group (ASX: GMG) provides development and management of industrial and business space property. The market capitalisation of the company as on 08 March 2021, stood at ~$31.29 billion. As per the company, its development work in progress (WIP) has doubled over the past twelve months with a decent interest of customers in pre-commitment and long lease terms. The emergence and acceleration of e-commerce have made the global industrial asset class very attractive, and GMG has been witnessing a shift in investment capital towards this sector.

The long-term strategy of the company is to own properties in strategic locations that are close to consumers. It is optimistic about further increasing its development activity in the near future, with strong demand from customers in the digital economy space.

During H1FY21, the company delivered resilient performance, underpinned by the long-term trends in the digital economy. The operating profit increased by ~16% to $614.9 million on the back of strong performance in the development activities when compared to H1FY20. The Group reported a statutory profit of $1,041.5 million. There was an improvement in the EPS by ~15% to 33.1 cents. The gearing level reduced to 4.8% during the period end, from 7.5% at FY20. Moreover, the strength in asset pricing has driven ~$1.5 billion in revaluation gains across the Group. The development work in progress increased to $8.4 billion in H1FY21, with a committed workbook of ~69%. The cash position of the company stood at ~$1,275 million as on 31 December 2020.

H1FY21 Financial Performance (Source: Company Reports)

Development Activities Driving Growth: The company reported impressive developmental performance during the first half of FY21, and it remains strong globally, with WIP at $8.4 billion. It witnessed an increase in scale and value of the projects, with 80% of the developments undertaken through partnerships. The development yield on cost stood at 6.6% during H1FY21.

H1FY21 Developmental Performance (Source: Company Reports)

Growth in External Managed AUM: There has been an improvement in the external managed AUM to $48.5 billion in H1FY21, an increase of ~6% on the prior corresponding period. The growth has been impacted by asset sales during the period but offset by robust development completions. The company expects the growth in AUM over the next few years to be organically supported by increased development activities and revaluations. The Group manages 15 Partnerships with 49 investors, and it maintains an average ~26% equity position in the partnerships which ensures exposure to a high quality diversified portfolio. The company raised $1.8 billion of third party equity during the period, and the partnerships remain well funded to take advantage of further growth opportunities. The total AUM was at $51.8 billion as on 31 December 2020.

Managed AUM in H1FY21 (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 33.09% of the total shareholding, while the top 4 constitute the maximum holding. China Investment Corporation and Vanguard Investments Australia Ltd.  are holding a maximum stake in the company at 9.12% and 6.70%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company delivered decent margin performance during the period with gross margin of 44.8% in H1FY21, as compared to the industry median of 70%. It reported an improvement in the ROE to 8.9% in H1FY21, compared to 7.5% in H1FY20. There was also an improvement in the cash cycle to 141.2 days from 359.1 days during the same period under consideration. The debt to equity ratio improved to 0.18x in H1FY21 from 0.26x in the prior period. The current ratio stood at 1.86x during the period end.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: GMG and its properties are exposed to the impacts of various climatic conditions like heat waves, intense precipitation, hailstorms, rising sea level, etc., across its diverse operating regions. It remains a challenge, particularly on larger continents that are subject to various conditions and incidents at the same time. In this regard, the company should try to understand the potential impacts of various climate scenarios and look for ways to mitigate them in the long run. The scope of the company’s business includes project risk and developmental risks, which it mitigates through global diversification and sharing the business with its investment partners. The company is also exposed to volatility in earnings, given the impact of the COVID-19 pandemic on the business environment. Moreover, the global economic climate and future movements in interest rates provide the company with opportunities as well as risks in the property and financing markets.  

Outlook: Despite the impact of the COVID-19 pandemic on the general business environment, the business conditions for industrial assets are expected to remain favourable in the near term. GMG has witnessed sustainable and competitive growth aided by high occupancy level and decent rental growth. Moreover, the scarcity of quality land is forcing the players in the sector to make increased use of multi-storey logistics, data centres, and other commercial uses, providing potential value add opportunities in the process. It has also been experiencing a permanent shift in utilisation and requirements from its clients, driven by long term trends in the digital economy space, increasing the demand for its properties. Therefore, in view of the decent outlook, it has upgraded the FY21 forecasted operating profit to $1.2 billion, which represents an EPS growth of ~12% on FY20. GMG has forecasted distribution for FY21 at 30 cents per security.

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company's asset creation capability has provided decent risk-adjusted returns and has provided it access to high-quality real estate. As per ASX, the stock of GMG is trading above its average 52-weeks’ levels of $9.600-$20.070. The stock of GMG gave a positive return of ~12.29% in the past nine months and a negative return of ~6.26% in the past one month. On a technical analysis front, the stock of GMG has a support level of ~$16.402 and a resistance level of ~$17.808. We have valued the stock using an P/CF multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company might trade at a slight premium to its peer average P/CF (NTM trading multiple), considering the decent performance in the developmental segment, significant growth in operating cash flows in FY20 to $878.5 million and positive outlook. For the purpose, we have taken peers such as Centuria Industrial REIT (ASX: CIP), Charter Hall Long WALE REIT (ASX: CLW), Charter Hall Group (ASX: CHC), to name a few. Considering the current trading levels, indicative upside in valuation, impressive financial performance during the COVID-19 crisis, reduction in debt level and upbeat guidance performance, we recommend a ‘Buy’ rating on the stock at the current market price of $16.900, down by 0.237% as on March 08, 2021.

GMG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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