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: GMG) has 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.
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%)
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.
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.
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.
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.
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.
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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