Goodman Group: Leading the Charge in Australian Data Centre Expansion

Investors in leading global industrial property and digital infrastructure specialist Goodman Group (ASX:GMG) have witnessed a remarkable turnaround in their fortunes over the past year. I urged GMG investors to capitalize on its steep pullback in late 2023, although GMG bottomed out decisively only in early 2024. Accordingly, dip buyers loaded up and sent GMG surging over the past year, registering a 1Y total return of almost 20%. Relative to GMG's 5Y and 10Y total return CAGR of 1.5% and 3.5%, respectively, I believe it's clear that pouncing when the market reaches peak pessimism has proved to be a winning game plan. The spike has also normalized its valuation closer to its 10Y average, suggesting the risk/reward is much less enticing. In addition, GMG has been consolidating over the past six weeks, although I didn't assess clear Sell signals. Therefore, investors holding on to their positions shouldn't be in a hurry to reallocate, although a near-term pullback could occur.



The thesis on GMG is straightforward. It's a leading global industrial property and digital infrastructure specialist, focusing on Class A assets, including data centres, logistics facilities, and warehouses. In addition, the initial fears of a hard landing have all but dissipated, bolstered by the resilience in consumer spending, particularly in GMG's target segment. Despite that, the concerns over higher interest expenses affecting the growth momentum of its adjusted funds from operations, or AFFO, are justified. Note that while the company has refinanced its near-term 2024 debt obligations, the debt was also more expensive. As a result, investors must focus on Goodman's ongoing ability to generate robust domestic same-store NOI growth (Q3: 4.5%) to mitigate the cost of financing challenges.



Goodman's third-quarter earnings release indicated that the company has not been impacted by the struggles seen in the typical office landlords. Its occupancy rates have remained resilient, posting a 95.5% metric in Q3, up from 94.8% in the previous year. As a result, I gleaned that investors' worries over the structural challenges faced by the leading industrial property specialists over faster e-commerce market share gains could be overstated. Management highlighted its confidence in delivering a 3% domestic same-store NOI growth rate over time, bolstered by its stable occupancy rates. Therefore, it indicates that the company has strong and sustainable pricing levers to pull, suggesting underlying demand is expected to remain robust.



With GMG still trading at a relatively attractive forward dividend yield of 5.5%, I expect the worst in its battering is likely over. Notwithstanding its high-quality portfolio composition, even the leading industrial property specialists like Goodman aren't immune to macroeconomic factors like interest rates. The Reserve Bank of Australia is expected to cut rates in 2024 (although the timing remains uncertain). However, the mean reversion in GMG over the past year suggests the market has likely priced in these tailwinds, which could improve the clarity of its AFFO outlook. In addition, management seems committed to lifting its dividend payout to its 2019 level, although Goodman cautioned about a "time lag between generating earnings and increasing dividends." Analysts' estimates suggest Goodman's dividend payout is expected to reach the $1.20 level by FY25, suggesting further potential for a valuation re-rating.

GMG's forward AFFO per share multiple of 12x indicates it's still markedly below its 10Y average of 15.2x. Therefore, the implied undervaluation aligns with the appeal seen in its forward dividend yield. As a result, I gleaned that it's still possible for further gains if Goodman could surpass its 3% same-store NOI growth outlook. The opportunity to recover its dividend per share toward its pre-COVID levels should keep income investors onside, mitigating potential downside volatility.



GMG's surge since its bottom in early 2024 has hit a momentary snag. However, I view a possible pullback as an opportunity to load more exposure than a more sinister one requiring investors to cut significant exposure. Given the recent recovery, GMG holders should anticipate downside volatility. Despite that, Goodman is likely still in the earlier stages of recovering its pre-COVID dividend payout, providing robust valuation support at the current levels. With the economy expected to remain resilient, supporting consumer spending at Goodman's high-quality industrial property portfolio, I expect income investors to be keen buyers at significant dips. As a result, I don't see a solid reason to turn cautious, although GMG holders may want to consider buying at its next pullback to improve their risk/reward potentially.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.