Reporting Season

This ASX stalwart just upgraded its EPS growth forecast by 11%

Thu 15 Feb 24, 2:30pm (AEST)
ReportingSeason Feb24 GoodmanGroup Primary
Source: Livewire Markets

Key Points

  • Goodman Group defies ASX REIT sector trends, showing a 35% share price return in the last 12 months
  • 1H FY24 results: Operating profit up 29%, EPS up 28%, with upgraded guidance indicating strong future earnings growth
  • Wilsons Advisory rates Goodman Group as a "BUY" with confidence in its management, diverse segments, and structural tailwinds in logistics and data centers

There is an axiom that's often used by investors when it comes to understanding the share price moves in the ASX REIT sector (even if it is erroneous). Sell when long-end bond yields surge and buy when long-end bond yields are falling. The reason is rising interest rates impede the valuations of the properties that make up the assets of a REIT. 

But there is one ASX-listed REIT that seems to have bucked the trend of most other competitors in its space. 

Goodman Group (ASX: GMGhas recorded a 35% share price return in the last 12 months and another 5% in today's session (as of writing). Its combination of a large development pipeline, income growth, and a consistent dividend payout has created a situation where many investors have nominated Goodman Group as the top choice among real estate trusts. 

It also happened to report its first-half results today. 

To walk us through the numbers, the outlook, and most importantly whether he would still be buying the stock after its big run, we spoke to Rob Crookston from Wilsons Advisory. Goodman Group is one of the stocks in the Wilsons Advisory Model Portfolio.

Goodman Group 1H FY24 Key Results

  • Operating profit +29% to $1,127.4 million

  • Operating EPS +28% to 59.2 cents per share

  • Statutory loss of $220.1 million (includes the Group’s share of valuation movements, non-cash items and derivative and mark-to-market movements)

  • Gearing at 9.0% (8.3% at 30 June 2023)

  • The Group’s available liquidity is $3.0 billion

  • Net tangible assets (NTA) per security of $8.80 per security, down 3.5% from 30 June 2023

  • Distribution per security of 15.0 cents for 1H24

  • Upgrades FY24 operating EPS growth guidance to 11% (from 9%)

1. In one sentence, what was the key takeaway from this result?

It's a strong beat to operating earnings and once again, Goodman upgraded full-year guidance and we think it will be upgraded at the Q3 update as well.

2. Were there any major surprises in this result that you think investors should be aware of?

It's how strong the beat was - it was across all segments, albeit some of the development earnings are due to timing but it was still a very impressive result and it surprised us and the market. 

The other surprise was how big data centres are now as a proportion of the work in progress. It increased to 37% of WIP (work in progress) relative to 30% in the August result. 

3. Would you buy, hold or sell this stock on the back of this result?

Rating: BUY

It would still be a buy even after the move. It has a top-quality management team that under-promises and over-delivers, which the market tends to like. Logistical warehouses and data centres have structural tailwinds from the digitalisation trend. We're expecting strong earnings growth to continue for Goodman over the next decade. 

We like the company structure, the different segments provide different levers for management to use which is always good. It provides a bit more certainty to earnings and it has a good balance sheet. Look-through gearing was at 22%, which is relatively low versus the sector. 

4. What’s your outlook on this stock and the sector over the year ahead?

The different parts of the REIT sector have structural headwinds - working from home impacts the office at the moment and online shopping is a structural headwind for retail. But Goodman has the structural tailwind in logistics and data centres - and there's still such a long runway for growth in these sub-sectors. 

Goodman is so well placed and the typology of the data centres is very similar to those logistical warehouses - so there is synergy there. Its biggest customer in logistics is Amazon (NASDAQ: AMZN) - and it's very likely to be one of its biggest customers in data centres as well. So there is customer synergy at the same time and we are very excited on that part of their business over the next decade. 

Screenshot 2024-02-13 at 11.37.42 am
GMG 1-yr share price performance versus S&P/ASX 200 REIT Sector (Source: Market Index)

5. Are there any risks to this company and its sector that investors should be aware of?

For Goodman, the risk is valuation. It trades at a premium to the sector so it needs to perform. We think it can and will continue to compound earnings growth over the next decade so we think that premium is reasonable.

Office is where those structural headwinds are the worst. There is so much uncertainty around how much demand there will be in the next 5 to 10 years given the structural shift after COVID.

6. From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious about the market in general?

Rating: 3

The market has gotten a bit ahead of itself in the short term - given the excitement around rate cuts. I think there are still pockets of value out there. Even the volatility we've seen in the last few days has thrown up a few more opportunities.

This article first appeared on Livewire Markets.

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Written By

Hans Lee

Content Editor

Hans is a Content Editor at Livewire Markets and Market Index. He created Signal or Noise and helps write the LW-MI Morning Wrap on Tuesdays and Thursdays.

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