Goodman reaffirms previous FY23 guidance within first quarter update

The market made no secret of its feelings towards Goodman Group’s (ASX: GMG) first quarter update, with the property giant’s share price down -2.61% in early afternoon trading.

In typical Goodman fashion, management qualified what appeared to be a solid operational performance last quarter, by a flagging a 'patient and cautious' approach given the uncertain economic outlook.’

While all too familiar with the company’s penchant for under-promise and over-delivering, the market has not given Goodman any kudos for reiterating it’s on track for operating earnings per share (EPS) growth of 11% in FY23 and a full year distribution of 30c per share.

Growth in rents

What also seems to have flown under investors’ radar today is continued strong growth in rents amid tight supply conditions.

Management notes, reversion of current passing rents to those achievable in the market has continued to increase, in particular in Nth America, Australia/NZ, and UK/Europe, where reversion now ranges from 20%-60%.

This should continue to support cashflow growth in future periods.

“…scarcity of available space in our markets continues to drive take-up and support rents, and project returns,” management noted.

“While we remain conservative in our assumptions, construction cost inflation appears to be moderating.”

What else happened in the first quarter

Underscoring the three months ended 30 September were high occupancy, with the group reporting 99% occupancy across its partnerships and 100% occupancy on $1.9bn in completed development projects. 

Given that Goodman has $13.8bn of development work in progress across 85 projects, the market should find high occupancy somewhat reassuring.

Also underpinning what was a strong operational result was net property income, up 4% on a like-for-like basis on properties in its partnerships.

Structural drivers

While the economic outlook appears uncertain, CEO Greg Goodman notes the group is in a strong position operationally and financially through the disciplined execution of strategy, significant liquidity, low gearing and extensive hedging.

Goodman also reminded investors that structural drivers, including e-commerce growth and increasing productivity, through supply chain optimisation and investment in automation and technology, continue to underpin sustained customer demand for space.

"We remain focused on providing opportunities in key locations for our customers to establish this critical infrastructure for their businesses and offset higher costs," he said.

"However, we remain patient and cautious, looking to only implement opportunities that provide deep value."

First quarter highlights

• The group had $77.8bn in total assets under management (AUM) at the end of September.

• Portfolio WALE of 5.4 years.

• Leased 4.11m sqm across the platform over the 12-month period, equating to $5271m of rental income per annum.

• Cap rates across the portfolio have increased by up to 40bps in some markets but the impact on values has been more than offset by rental growth.

What brokers think

Goodman’s share price is down around -27% in the last 12 months but has been trending higher since mid-October.

Consensus on Goodman is Moderate Buy.

Based on Morningstar’s fair value of $21.21 the stock appears to be undervalued.

Having concluded that Goodman remains well positioned to deliver in FY23, Goldman Sachs retains a Buy rating. Target price $25.40 (16/08/22).

Based on the six brokers that cover Goodman (as reported on by FN Arena) the stock is currently trading with 32.8% upside to the target price of $22.73.

Following today’s update, Ord Minnett retains a Hold rating and $22 target price but notes early signs of development margins moderating from unsustainably high levels.

It may take brokers a few days to make sense of today's result.

Goodman Group share price over 12 months.