Following on from Mirvac Group (ASX: MGR) this morning and DEXUS Property Group (ASX: DXS) yesterday, investors have an opportunity to check in on big brother Goodman Group (ASX: GMG).
Goodman's results weren't as strong as Dexus, although I noticed some more promising indicators such as higher rent increases across the portfolio. Here are the highlights:
- Revenue up 40% to $2.3b
- Statutory profit up 83%, mostly due to gains on property re-valuation
- Operating profit* up 8.7% to $653m
- Dividends up 7.2% to 22.2 cents per share (~3.4%, unfranked)
- Gearing of 17.3%**, down from 19.5% in 2014
- Net tangible assets of $3.46 per share
- Occupancy of 96%, retention levels of 74%, rent growth of 2.5% and average time to lease expiry of 4.5 years in Goodman-owned properties
*A more representative measure of Goodman's actual profit
**Net debt divided by total assets
So What?
There are a few things to take away from this report. First, strong rent increases in certain markets like Hong Kong have driven property values higher, while super-low rates and inflation in other markets have driven the demand for yield higher, also lifting property values.
Goodman just about – but not quite – states that many of its markets look to be forming a bubble as below-average rental growth combines with demand for yield to push valuations higher.
As a result, management believes that development activity (i.e. building and selling properties) offers the best risk-adjusted returns to shareholders. I took this to mean that there aren't a lot of opportunities out there in terms of assets to buy and thus Goodman will stick to building its own and managing other peoples.
I also felt there was an implication that strong upward re-valuation in property could be prone to reversal once it becomes apparent that growth in rent isn't keeping pace with property value.
Goodman stated that it 'will maintain its prudent capital management policy, with headline gearing targeted to remain low and significant available liquidity to be retained. This will allow Goodman to absorb shocks in global markets and take advantage of future opportunities that might arise.'
Does this translate to 'we're hoarding cash because we expect a market shock and if/when that happens we're going on a buying spree'?
You tell me.
Now What?
Goodman maintains one of the best portfolios in its class, combining high occupancy, tenant retention, and rental growth. With management forecasting a 6% increase in earnings per share for the 2016 financial year it looks as though business is slowing in the near term.
However, Goodman gets big points for its prepared approach and I think the company is very well positioned to take advantage of any weakness in property markets around the globe.
The downside is that investors really like the company and it currently trades at a massive 79% premium to its Net Tangible Assets – which is also why it yields only 3.4%.
Fun fact – the number of shareholders on Goodman's books increased by 15.3% despite a 1.5% increase in securities on issue. It looks as though more smaller shareholders are buying into the company.
One analyst has a 'fair value' price target on the stock of $7.50, but for the moment, Goodman Group looks too expensive for me.
