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Goodman Group delivers strong result to cement its premium valuation

The Goodman Group (ASX: GMG) share price closed at $15.50 on Friday, up 4.38% off the back of its FY19 results, which brings its year-to-date growth to 38% amid a year of uncertain property prices. Goodman Group owns a portfolio of commercial and industrial property, having a stake in over 13 different countries through its partnerships.

Results

Investors were certainly expecting a lot from the company, with its shares trading at a price-to-earnings (P/E) of 26x prior to today’s announcement. They were not disappointed with the company’s key metrics.

  • Revenue of $1718.6 million, up 8.5% on FY18
  • Operating earnings per share (eps) of 51.6 cents, up 10.5% on FY18
  • Statutory profit of $1627.9 million (including $872million of revaluation gains), up 47.6% on FY18

The company was pleased to hit its main financial metrics, delivering operating profit growth of 11.4% and increasing their dividend by 7%. Through their partnerships, Goodman Group raised its external assets under management (AUM) up 22% to $42.9 billion, bringing in management income of $469.7 million (48% higher than FY18).

How have Goodman delivered despite a bad year in property?

At the start of 2019, it was speculated that property prices were to fall by as much as 20%. Whilst the share price in companies such as Lendlease Group (ASX: LLC) took large losses, Goodman Group and industry peer Mirvac Group (ASX: MGR) managed to sustain modest gains. This highlights the robust nature of industrial and commercial real estate, where the weighted average lease expiry is significantly higher than residential properties. Along with an astonishing 98% occupancy rate, Goodman Group’s recurring revenues could make it one of the best stocks to gain exposure to real estate.

Gearing and financing

In a capital intensive industry such as real estate, Goodman Group actually stands out as a company with a lower gearing ratio (proportion of borrowings over total assets). Although the gearing ratio increased from 5.1 to 9.7, it still remains well below the industry average of 20-25%.

Outlook and potential risks

After a solid performance, the Group is still forecasting further growth of 10.4% in operating profit. This positive outlook, however, does come with an array of potential risks. Whilst commercial property remains stalwart in volatile markets, it is by no means a defensive stock. An economic downturn could cause occupants to default on their contracts, devastating Goodman Group’s earnings. It’s also important to note that approximately $207 million of this years earnings growth was the result of record low interest rates – and so any adverse movements could produce a similarly negative effect.  

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Motley Fool contributor Saran Likitkunawong has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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