The $4 Billion Capital Raising Will Fortify Capital Structure For Future Development

Key Takeaways

• Strategic focus on data centers and significant partnerships are expected to drive revenue growth and enhance long-term earnings stability.
  
• Capital raising and low gearing ratio aim to support sustainable EPS growth while efficiently managing financial risk.
  
• The company faces potential risks from over-reliance on external funding, focus shift to data centers, and increased financial risk from gearing and forex fluctuations.

Catalysts

A global industrial property and digital infrastructure specialist group with operations in key consumer markets across Australia, New Zealand, Asia, Europe, the United Kingdom, and the Americas.

• The escalating demand for data centers driven by cloud use, AI, and machine learning is creating a step change in growth opportunities, which is likely to significantly boost Goodman Group's future revenues.
  
• The $4 billion capital raising is aimed at fortifying Goodman's capital structure, which provides the flexibility to undertake large-scale development projects, potentially improving net margins as capital costs are spread over more projects.
  
• The strategic focus on data centers, with an estimated end value exceeding $10 billion for development, is expected to drive significant revenue growth and enhanced earnings over the coming years.
  
• Establishing new partnerships, such as with Norges Bank Investment Management and a data-center-focused partnership in Europe, can optimize capital allocation and improve long-term earnings stability.
  
• The emphasis on maintaining a low gearing ratio through equity raises and careful capital management is designed to support sustainable growth in earnings per share (EPS) while managing financial risk efficiently.

Goodman Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Goodman Group's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.7% today to 84.5% in 3 years time.
• Analysts expect earnings to reach A$3.3 billion (and earnings per share of A$1.56) by about February 2028, up from A$921.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$3.8 billion in earnings, and the most bearish expecting A$2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.2x on those 2028 earnings, down from 71.7x today. This future PE is lower than the current PE for the AU Industrial REITs industry at 39.1x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Goodman Group Future Earnings Per Share Growth

Risks

• The company is engaging in a $4 billion capital raising to fund development, signaling potential over-reliance on external funding which might dilute existing shareholder value, impacting earnings per share (EPS).
  
• Fluctuations in foreign exchange rates negatively impacted operating income by $11 million, which could pose a risk to net margins if such trends continue.
  
• The strategy to develop data centers, though promising, involves long project durations and high up-front capital expenditure, risking reduced short-term net margins.
  
• Goodman Group has limited new industrial development activities, pivoting predominantly towards data centers; this focus shift could risk future revenues if industrial demand outpaces current expectations.
  
• There is a temporary increase in gearing due to recent transactions, which could elevate financial risk and increase expenses associated with higher interest rates, potentially impacting net earnings.

Valuation

• The analysts have a consensus price target of A$37.844 for Goodman Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$42.4, and the most bearish reporting a price target of just A$28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.9 billion, earnings will come to A$3.3 billion, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of A$34.55, the analyst price target of A$37.84 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.