REITs

Goodman to benefit from flight to defensive assets: Macquarie

By Market Index
Tue 25 Jan 22, 1:49pm (AEDT)
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Key Points

  • Macquarie expects slowing economic growth to be a positive for the REIT sector
  • Goodman Group delivered a total shareholder return of almost 45% over the previous financial year
  • Goodman Group's guidance has already been upgraded to growth in earnings of more than 15%

While it’s a tough trading environment within which to make bold bets on any stock’s future upside, Macquarie thinks the current macroeconomic environment provides some strong tailwinds for Goodman Group (ASX: GMG).

So much so that the broker expects the global integrated property group is a prime candidate to upgrade FY22 guidance when it delivers it half year results on February 17.

Positive market sentiment to the broker’s upbeat note on Goodman yesterday saw the group finish the day 4.2% up.

Office could surprise

Much of Macquarie’s outlook on Goodman is based on the expectation that slowing economic growth will be a positive for the REIT sector over 2022, resulting in a flight to defensive asset classes.

While office is the one REIT sector Macquarie expects to provide upside surprises, the broker is taking a more bearish outlook on both retail and residential.

The broker expects the group’s upside will be largely driven by more positive development assumptions and rental growth, and maintains an Outperform rating, while the target price rises to $26.63 from $26.45.

Rental growth has been strong, driven by retailer demand for logistics driving up the value of these assets. 

However, Macquarie’s upgraded outlook on Goodman shouldn’t come as too much of a surprise given that shortly after releasing its FY21 result, the group had already upgraded its earnings outlook for FY22.

In light of ongoing demand for logistics space created by the pandemic and continued acquisition of industrial assets, the group’s guidance has been upgraded to growth in earnings of more than 15%.

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Goodman Group 12 month share price performance versus the ASX 50 Index

Fundamentals

Goodman delivered a FY21 operating profit of $1,219.4m, up 15.0% on FY20, and operating earnings per security (EPS) of 65.6 cents, up 14.1% on FY20.

Total assets under management (AUM) were up 12% on FY20 to $57.9bn, and the portfolio maintained a high occupancy of 98.1% and like-for-like net property income (NPI) growth of 3.2%.

Overall, Goodman delivered a total shareholder return of almost 45% over the previous financial year and enhanced the group’s standing as a leading global developer, owner, and manager of industrial property.

Looking forward, work in progress of $12.7bn is materially ahead of previous guidance, and Macquarie expects the group to maintain the current production rate.

The group also expects to benefit funds under management (FUM), which were upgraded to $70bn for FY22. 

What other brokers think

  • Credit Suisse believed it was only a matter of time until an upgrade occurred, given the conservatism embedded in prior guidance. The broker retains an Outperform rating and raised the target to $25.01 from $24.04 (3/11/21).

  • Morgan Stanley believes the $200m unrecognised profit that’s available for FY22 provides increased confidence the company has the means to ensure earnings growth can be maintained at least through to FY25. In terms of AUM, the broker estimates that the company is a year ahead of market expectations. Overweight rating is unchanged, and the target price rises to $26.50 from $25 (3/11/21).

  • Citi expects the FUM-exposed Goodman Group stands to benefit from rising property values. The Buy rating and $26 target price are unchanged (14/12/21).

  • To reflect the increased activity across the business, UBS upgrades earnings estimates by 4%. Neutral rating maintained. Target rises to $23.80 from $22.50 (3/11/21).

  • Given guidance is typically conservative, Ord Minnett also expects further growth upgrades. Accumulate rating and $24 target price retained (3/11/21).

Consensus on Goodman Group is Moderate Buy.

The group is currently trading at a 12.5% discount to the $25.65 consensus target price of the six brokers who cover the stock (as reported by FN Arena).

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