Goodman Group (GMG) – Up the curve

Goodman Group owns, develops, and manages industrial, logistics, and data centre assets, and has operations in Australia, New Zealand, Asia, Europe, the UK, and the Americas. Goodman Group comprises the stapled securities of Goodman Ltd, Goodman Industrial Trust and Goodman Logistics (HK) Ltd and is the largest property group on the ASX.

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Ord Minnett has reviewed its Goodman Group (GMG) model post its March quarter update, leading us to downgrade our recommendation on the property developer to Hold from Accumulate and cut our target price to $30.80 from $33.50, to incorporate lower expected returns from its rapidly growing data centre business, which now comprises more than half of its work-in-progress pipeline.

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In the quarter, data centres in Los Angeles (LAX01) and Hong Kong (HK10) were added to its pipeline, taking work-in-progress (WIP) to $13.7 billion, up from $13.0 billion as of 31 December, over a total of 66 projects. Data centres now comprise more than half of Goodman’s WIP, versus around 46% as of 31 December. The latest developments, LAX01 and HK10, are both slated to provide 32.5 megawatts(MW) of installed IT capacity – the key revenue generator in data centre assets– from gross power capacity of 50MW, a ratio of circa 1.5x.

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That conversion ratio, however, falls short of our previous conversion assumptions for installed IT capacity by around 20%. Applying that conversion rate across Goodman’s long-term pipeline results in a cut in Ord Minnett’s revenue growth estimates and end valuation of the group’s pipeline to $150 billion from $190 billion previously. In our view, these latest projects confirm its data centre development business has shifted up the risk curve but without a commensurate rise in returns, i.e. yield on cost. This means the data centre business is now worth less than it was, hence our recommendation and target price downgrade. On a per share basis, we now value the data centre segment at $12.20, down from $14.90 previously.

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