Goodman Group Comes Through

This story features GOODMAN GROUP. For more info SHARE ANALYSIS: GMG

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The CEO of listed property trust Goodman Group ((GMG)) must still wake in a cold sweat at night remembering that fateful day of December 14 – the day that Centro Property ((CNP)) came out of a trading halt with the announcement of potentially terminal financing problems. Oblivious analysts got the shock of their lives and a previously complacent market spared no haste in dumping every property trust on the exchange.

Goodman was not spared from the rout, but as analysts frantically scoured balance sheets and forecasts they all came away believing that if there was one LPT which was probably the victim of too much guilt by association, it was Goodman.

Mind you, some were fairly positive on Valad Property ((VPG)) as well and that trust has since run into refinancing issues of its own.

Goodman’s shares fell from around $6.20 to about $4.10 on that day, before bouncing back to $5.00 the next as bargain hunters heeded analyst assessments. However, ongoing global credit market issues, further bad news from Valad among others, and a general market malaise has seen Goodman’s shares test new recent lows. At around $4.20 today the stock has been trying to pick itself back up, but a revised market approach to risk means LPTs are mostly in the “stay well away” bin for at least the time being.

Nevertheless, the majority of brokers in the FNArena database have continued to recommend Goodman as the LPT to have in a portfolio if any LPT is to be had at all. The big shift-down in share price means Buy ratings have outnumbered, with several brokers having upgraded in December post the Centro rout. The current B/H/S ratio stands at 6/1/1. However, Deutsche Bank (Hold) has not reported since August nor UBS (Buy) since November. That leaves a more realistic 5/0/1, with Credit Suisse (Underperform) not yet commenting on yesterday’s result.

The Buy raters were vindicated yesterday when Goodman posted a first half result that was down 5.4% (realised) but ahead of consensus estimates. Earnings per share was, however, up 11% on the previous corresponding period and funds under management grew 8%. Management reconfirmed guidance, of which the first half result represented 51.5%. Given everything the global and local markets have thrown at Goodman the past six months, this was agreed by all to be a good result.

If you took an LPT analyst aside he or she would probably admit, off the record, that they should have seen Centro coming. The trust was very highly geared, had an inferior portfolio of down-market US shopping malls that were staring at a possible recession, and had refinancing obligations approaching in a frozen credit market. Thus it was that Goodman stood out in contrast, with around 50% gearing, a diversified and high-quality portfolio of international assets and near term finance already in place.

Nevertheless, the outlook for Goodman in the short term is not all beer and skittles. Cost of funds will remain inflated and a large part of the portfolio is in the UK where property prices are under pressure. The trust is holding only around $600m in available liquidity which will make new acquisitions limited. However, JP Morgan points out that Goodman does have the potential to successfully recycle assets worth up to $1.25bn. This is again in contrast to Centro, which is now hoping someone – anyone – will pay at least something for its shopping malls before the tumbleweeds take over.

Merrill Lynch notes three reasons why Goodman should be considered as a Buy. It’s well protected from local inflation, given almost all its debt lies in offshore markets; it is a play on Asia-Pacific growth, with 78% of earnings derived from that region; and it has refinanced $2.3bn of debt in the past eight months, suggesting it’s no “house of cards”. The Group also derives a lot of fee-based income from its services division which makes it more attractive to lenders than other LPTs.

At current prices analysts are forecasting an FY08 yield in the 7.00-7.50% range. Averaging the target prices of the four brokers who reported this morning (the rest are bit old) produces $5.31 against about $4.20 now. All those brokers have Buy ratings.

Macquarie sums up the feeling by suggesting Goodman will see slow growth in the short term, but that the Group is well positioned for the longer term relative to peers. The consensus is that if you want to find a bargain in the potentially over-trashed LPT sector, this is the safest bet.

Click to view our Glossary of Financial Terms