Morningstar | Transferring Coverage of Narrow-Moat Goodman Group; Our AUD 12 Fair Value Estimate Is Unchanged
We confirm our AUD 12 per share fair value estimate for Goodman Group as we transition coverage to a new analyst. Our narrow moat, medium fair value uncertainty, and Standard stewardship ratings are unchanged. At current prices, the stock is trading 15% above our intrinsic valuation. Our fair value estimate implies fiscal 2019 price/earnings of 24 and enterprise value/adjusted EBITDA of 22. Our valuation is derived using a discounted cash flow methodology, using a 9% cost of equity and a weighted average cost of capital of 8.0%. Goodman’s narrow economic moat is sourced from switching costs and efficient scale benefits.We forecast Goodman’s earnings to grow annually by 6% to fiscal 2022, with the key catalysts being falling borrowing costs and significantly higher performance fees for the funds management business. Growth in development work-in-progress, or WIP, is expected to accelerate from the current AUD 3.7 billion then temporarily spike AUD 5.0 billion over fiscal years 2020-21. Longer term, we forecast WIP to grow more moderately at 2.5% annually. We anticipate the near-term faster rate of development to have a multiplier effect on earnings, increasing development fees, but also accelerating the growth rate in external funds under management, the firm’s highest return on equity activity. The group’s total assets under management are expected to exceed AUD 45 billion by the end of fiscal 2019 from AUD 44 billion in March 2019.
We forecast that rental income from direct investments and co-investments in industrial property will grow by around 3% over the next three years, then slow to around 2.5% over the longer term.
A key risk is the potential contraction of the overall industrial market, as consolidation in the automotive industry and increasing car sharing hurts the logistics industry. Yet, Goodman’s strategically important sites are less exposed than others to this macro trend.
Goodman Group is engaged in owning, developing and managing industrial property and business space in primary markets around the world. The principal activities of Co. are investment in directly and indirectly held industrial property, property services, property development (including development management) and investment management. The principal markets in which Co. operates in are Australia and New Zealand, Asia, Continental Europe, the U.K. and the Americas.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
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