ANALYST’S NOTE

Goodman Group Ltd (GMG) delivered solid FY18 results, with operating profit of $845.9m slightly above the highest analyst estimate of $845m. The outlook for FY19 also suggests momentum is continuing (with management guiding towards +7% EPS growth versus usual +6% growth) and was largely in line with consensus estimates.

These together saw the share price re-rate higher by +5.3% post result release, with the share price up a strong +30% since our last note in Feb-18. For FY18, GMG delivered EPS growth of +8.3% and DPS growth of +8.1% on pcp.

Whist “fairly full’ trading multiples kept us on the sidelines from becoming more positive on the stock in Feb-18 (clearly a decision we now regret in hindsight), we must admit we see limited catalysts which could lead to the stock significantly de-rating from current levels in the near-term. GMG maintains a very solid balance sheet (low gearing of 5.1%), demand remains strong with occupancy levels at 98%, the Company is positively leveraged to solid structural growth and has access to global opportunities.

With the stock trading on 21x FY19E PE-multiple, we maintain our Neutral recommendation, however we expect the share price to trend higher.

• FY18 results highlights

1. GMG delivered strong operating profit of $845.9 million, up +9% on pcp, and operating earnings per share (EPS) of 46.7 cents, up +8.3%. Statutory profit was $1.1 billion and Distribution per security (DPS) was up +8.1% to 28cps. The portfolio performance was the key driver of the operational result with property fundamentals steadily improving in FY18.

2. GMG achieved like-for-like net property income (NPI) growth of +3.2% and 98% occupancy across the portfolio, contributing to an increase in global valuations of $2.8bn.

3. Net tangible assets (NTA) per security was up +10% to $4.64 due to $639.0m in valuation gains.

4. Strong cash flows resulted in gearing reducing to 5.1% from 5.9% (FY17) and interest cover ratio (ICR) of 16.2 times. Management noted that liability management exercises have lowered cost of debt to 2.4% with $3.4 billion of liquidity available, predominantly in cash.

•  Solid FY19 guidance. Management noted, “For FY19 market conditions are expected to remain favorable for our industry and Goodman is strategically well-placed given our financial and operational strength”. Consequently, management expects FY19 operating profit to be $913m with operating EPS of 50.0 cents, that is +7% on FY18. GMG forecasted distribution of 30 cps (up +7% on FY18).

• Management & Development segment – Major earnings contributor. The FY18 results saw continued strong contributions from the development and management operations, with the segment now contributing 59% of total EBIT, up from 56% in FY17. Management earnings were up +18.7% due to the positive performance of GMG’s partnerships, with partnership returns averaging 15% driven by their share of the $2.8bn in revaluation gains and $3.5bn of development completions. Performance fee income grew and now represents around one quarter of the revenue from this segment. External assets under management (AUM) were up +15% to $35.1bn, with total assets under management of $38.3bn, up +11% on FY17. Management noted that revaluations and net investment, predominantly through GMG’s development activity, would support further AUM and NPI growth.