Goodman trots to record high

Australia’s largest industrial property REIT Goodman Group (ASX: GMG) has enjoyed a strong run in 2021, hitting record highs in December, buoyed by the huge demand for industrial property.

Many brokers still rate it as a Buy despite its run up in price. 

Goodman owns, develops, and manages industrial property in 17 countries, including warehouses and distribution centres.

Over the year to 9 December, Goodman is trading at up 33%, triple the return of the ASX 200 of 11%, and well above the returns on most other REITs, spurred on by the rapid rise of e-commerce during the covid pandemic. 

E-commerce & online sales upside

Several factors have boosted Goodman’s performance. Whereas the pandemic has hurt retail and office REITs, given social restrictions, and working from home policies, the group has favoured industrial REITs.

The real estate landlord has benefited from the boom in e-commerce and higher online sales penetration during the covid lockdowns, resulting in greater demand from businesses for warehouses and logistics services to hold and distribute inventory.

BDO’s A-REIT Survey 2021 found Goodman has maintained a strong market position to capitalise on growing e-commerce trend. This has resulted in strong rental flows and pushed up Goodman’s securities to a record this month of around $25, having steadily risen from a March 2020 low of $11.13.

The industrial property sector has relatively high barriers to entry, high occupancy rates and, combined with growing rental yields, has placed Goodman Group in good position to take advantage of robust demand, according to BDO.

Industrial property has done much better than either retail REITs such as Scentre Group (ASX: SCG) or Vicinity Centres (ASX: VCX), or office REITs such as Dexus (ASX: DXS) or GPT Group (ASX: GPT).

Goodman’s rental growth is strong at 3.2%, and average lease terms are growing as customers aim to secure its properties for longer terms. The disruption in global supply chains has prompted tenants to hold more inventory in stock, to shore up their resilience against future pandemic shocks.

Fundamentals

Based on higher development activity and better margins, the company has upgraded FY22 guidance to earnings growth in excess of 15% (previously 10%).

Due largely to US drivers, work in progress (WIP) rose 20% quarter-on-quarter and 74% year-on-year.

Goodman expects its assets under management (AUM) to grow to over $70bn in 2021-22 up from $62bn as at 30 September 2021. The company recently said its earnings per share (EPS) is expected to rise by more than 15% in 2021-22, upgraded from 10%.

“Given the strength of our development projects, leasing success and the stronger than expected performance of our partnerships, the outlook for the new financial year is ahead of previous forecasts,” the company said in a quarterly update.

Goodman posted an impressive operating profit of $1.2bn in 2020-21, up 15% on the prior year, with a portfolio occupancy of 98.1%.

What brokers think

Many brokers believe Goodman remains a Buy, despite its record run.

Citi is particularly bullish and is forecasting FY22 EPS growth of 17% growth with a price target of $27.50. Macquarie Wealth Management also rates the stock as a Buy with a $$26.50 target.

Credit Suisse, Morgan Stanley and Ord Minnett also expect the stock to outperform, according to a FN Arena survey of six brokers.

Consensus target is a Moderate Buy, and based on Morningstar’s fair value of $20.12, the stock looks overvalued.