Goodman Group: Result 2018

Goodman has delivered another impressive profit result for 2018, capitalising on demand for scarce sites in urban locations from industrial, e-commerce and data centres tenants. Additionally, the company has continued to bolster its profits by converting industrial sites into higher value, multi-storey residential redevelopments. Profit grew 9% to $846 million, which allowed the trust to increase distributions by 8% to 28 cents.

The bullish property environment continues to be a major contribution to Goodman's profits, with development profits of $490 million accounting for 41% of earnings. Goodman generates these profits by developing new industrial properties, finding tenants and selling the completed assets into a number of partnerships. It also earns profits from selling existing industrial property to residential developers, booking a profit when it's sold above book value.

Management gave a confident outlook for 2019, with guidance for operating earnings per share to grow 7% to 50 cents and distributions per share to grow 7% to 30 cents.

That would put the stock on a forward price-earnings ratio of 21 and a distribution yield of 2.8%. No doubt the company is making the most of very supportive conditions, but with development profits contributing 41% of earnings, these metrics appear to assume the rosy conditions will continue indefinitely.

For us, though, they leave no margin of safety, particularly in light of the recent cooling of demand for new high-density residential property. This could put a curb development profits in the medium term, and that in turn would put the distribution at risk. We're raising our price guide to Buy below $6 (from $5) and Sell above $9 (from $8.50), but that still means a downgrade to SELL.