ASX: BUY HOLD SELL – GMG

Goodman Group is a global integrated property company, engaged in owning, developing and managing industrial property and business space in the markets across the world. The principal activities are investment in directly and indirectly held industrial property, property services, property development (including development management) and fund management. GMG’s segments include Australia and New Zealand, Asia, Continental Europe, United Kingdom and Americas. Their Australian portfolio that consists of approximately 190 properties located in Sydney, Melbourne, Brisbane, Adelaide, Canberra and Perth. The growing demand for state-of-the-art logistics facilities and the reweighting of portfolios from retail to industrial, has been a boon for GMG recently.

• In its half-year update, GMG upgraded its full-year earnings guidance to 51.1¢ per share after statutory profits rose 71% to $929 million and after booking a huge $2.4 billion valuation gain.
• Operating profit rose 10.4% to $465 million, whilst earnings across GMG’s development business rose 12.3%, to a value of $3.6 billion (and will soon hit $4 billion), with 68 projects across 12 countries.
• Earnings across Goodman's funds management business increased 15% year-on-year and the value of assets under management rose 27%, to $40 billion.
• The valuation gain was due to rising industrial rents and tightening capitalisation rates, factors which have continued to provide tailwinds since.
• As the developer, owner and manager of $43 billion worth of logistics assets leased to the likes of Amazon, Walmart, Wesfarmers, DHL and Toll, GMG is now Australia’s most valuable property trust and its most successful global property player after the sale of Westfield Group to France's Unibail-Rodamco.

While the stats above are impressive, they have been driven by demand for new advanced fulfilment, distribution and logistics centres in big urban areas, as companies like Amazon and other online retailers fight for prime locations in order to get their wares to clients as quickly and efficiently as possible. CEO Greg Goodman notes that “there's still structural change going on around the world. Time to service customers is the holy grail if you want to be competitive in the online environment. You can't take a week to deliver something". UBS put out a research note recently saying that an ongoing undersupply of global warehouse space, coupled with ever-expanding e-commerce will drive strong growth for the homegrown logistics giant. THE NUMBERS - These are the numbers from our STOCK BOX. Main observations:

• ROE is solid and stable, hovering around 10%. Here, consistency is good.
• Revenue growth and EPS growth are equally stable, with revenue growth expected to grow steadily in future periods and EPS expected the hover around 10%.
• The stock is not cheap, at almost 30x current earnings. GMG also trades at a 60-70% premium to both the A-REIT and ASX 200 on a price to earnings (PE) basis. The question begs, is that valuation justified?
• Yield is modest, at just 2%.
• The stock is reasonably well covered, with 8 brokers offering an opinion. 3 have a BUY rating or better, with 3 a HOLD
• The stock is trading at a 50.6% premium to intrinsic value, and a 10.7% premium to the average target price of brokers surveyed by Thomson Reuters.

WHAT SORT OF INVESTMENT IS GMG? Most people probably think of REITs as fairly boring, stable, income stocks. That is not the case with Goodman. First and foremost, if you buy it now you are paying a hefty premium, and a premium which is pricing in future growth. Fortunately, that expectation for growth of not unfounded. The latest research from UBS shows that while total warehouse space is expected to grow 7% over the next 1-2 years, e-commerce users are expected to increase their warehouse space requirements by 13% alone in 2019. This should support Goodman, who is well-placed to capitalise on the increasing demand. Furthermore, GMG already has $3.7bn worth of projects in the pipeline, which constitutes 11% of its assets under management. Bottom line, GMG is already well down the road building the capacity to meet the demand. When preparation meets opportunity, success follows. BROKER RECOMMENDATIONS The broker table above is fairly balanced. Most brokers are positive on the stock but don’t have aggressive price targets. Macquarie notes that the company’s Investor Day left their thesis intact; i.e. strong global demand, with data centres and cold storage becoming increasingly important. SHORT-TERM TECHNICAL VIEW What can we say about the chart above? It’s an undeniable trend which has persisted for 12 months. Momentum is strong and any modest pullbacks or sideways consolidations have been met with renewed buying pressure. SHORTING This is taken from the Short Man website. The grey line is the share price, the blue line is the percentage shorted (left-hand scale). Short interest in GMG has been range-bound between 0.2% and 0.6% for the past 12 months. At those levels, it is insignificant. It has picked up a little recently, as questions about the valuation being stretched have cropped up, but all told people are reluctant to be shorting this stock – and rightly so. CONCLUSION We hold this in the MT Growth Portfolio and it is up circa 20% since we added it. Despite that gains and despite the fact that it is not ‘cheap’, we continue to like it. GMG has a big pipeline of investment which will meet the increasing demand for global warehouse space. Furthermore, the low interest rate environment globally should allow Goodman to fuel expansion with cheap debt. GMG has been on point in capturing timing this trend and is well-placed to continue to benefit. More conservative investors might look to buy on any weakness back towards 1450c, but those who aren’t fussed could accumulate around current prices.