After a period of exceptional performance from Goodman Group (GMG), driven largely by AI-related tailwinds, we have taken the opportunity to review our position in the company in the lead up to the August 2024 reporting season.
While we are firm believers that AI is a genuine megatrend that will drive a structural uplift in demand for digital infrastructure - including GMG’s data centre development pipeline - this has already been quickly priced in by the market. GMG’s valuation now reflects increasingly high market expectations for earnings growth, which sets a high bar for the group and leaves it at risk of disappointing the market this reporting season.
This report details our rationale for trimming GMG and redeploying the proceeds into other high-quality global leaders CSL and Aristocrat Leisure, which have greater total return potential over the medium-term.
| Company Name | Ticker | Focus Portfolio weight % | Valuation metrics | Consensus EPS growth % | |||||
| Pre changes | Change | Post changes | Active weight vs ASX 300 | P/E multiple (NTM) | +/- vs 5 year average | FY24 | FY25/26 (CAGR) | ||
| Goodman Group | GMG | 5.0% | -2.5% | 2.5% | -0.2% | 29.9 | 23% | 14% | 12% |
| CSL | CSL | 6.5% | 1.5% | 8.0% | 1.8% | 29.2 | -16% | 33% | 16% |
| Aristocrat Leisure | ALL | 3.5% | 1.0% | 4.5% | 3.1% | 20.7 | -3% | 17% | 9% |
Source: Refinitiv, Wilsons Advisory.
Trimming Goodman Group
Goodman Group’s (GMG) Focus Portfolio weight has been reduced from 5% to 2.5%
Following a period of strong relative performance, we have trimmed GMG to a neutral position (vs its ASX 300 weight) on valuation grounds.
GMG has delivered a total return of ~80% over the last 12 months, including ~30% since we increased our position in February. While GMG’s outperformance has been driven by positive consensus earnings momentum underpinned by its evolving data centre strategy, the company’s valuation is now within our ‘fair value’ range.
Therefore, notwithstanding the quality of the business and its long-term earnings growth potential, the re-rate of GMG’s valuation this year has reduced our total return expectation over the near-term, which warrants a reduced position within the Focus Portfolio.
Data centre pivot positions GMG to benefit from AI tailwinds
GMG has shifted its development pipeline towards data centres over the last 12 months to take advantage of growing data centre demand as AI usage and cloud computing expands. There is a strong rationale for GMG’s pivot towards data centre developments, considering:
- Stronger fundamentals - the supply/ demand dynamic for data centres is stronger than it is for logistical warehouses, which are experiencing moderating demand from pandemic-era highs. On the other hand, data centre demand is increasing rapidly, driven by growth in cloud and AI requirements, while the supply of well-located assets is highly constrained.
- Higher margin – development margins are higher for data centres than logistic assets due to their higher average asset value per square metre (GMG believes data centre sites are 5x the value of logistics sites). Therefore, GMG’s pivot towards data centre developments will be earnings accretive.
- Strong value proposition - hyperscale cloud tenants (e.g. AWS) are compelled to work with GMG due to its large global land and power banks and its faster 'speed to market'.
Despite all the positives, GMG’s valuation has become stretched
While GMG’s evolving strategy is likely to underpin double-digit earnings growth over the medium term, this has been quickly reflected in consensus estimates and priced in by the market.
GMG’s outperformance is partly attributable to the market’s enthusiasm towards the AI thematic. Since the beginning of the ‘AI arms race’, GMG’s returns have broadly matched other ‘AI beneficiaries’ – including pure play digital infrastructure companies like NEXTDC (NXT).
GMG’s valuation has re-rated well above its historical range, reflecting increasingly high market expectations for earnings growth over the medium-term. GMG now trades at a premium to offshore logistics and data centre REITs on a price / AFFO (adjusted funds from operations) basis.
While consensus EPS growth expectations have been upgraded to ~12% in FY25/26 (CAGR) driven by higher development earnings forecasts, in our view a more optimistic scenario is priced in with the company trading on a forward PE of ~30x.
Therefore, notwithstanding the quality of the group and its long-term earnings potential, GMG’s valuation has become increasingly full, which leaves it at risk of disappointing the market’s elevated expectations over the near-term.
Adding to CSL – Higher Conviction in Lower Collection Costs
CSL’s Focus Portfolio weight has increased from 6.5% to 8%
There is the potential for an upside surprise at CSL’s FY24 result, driven by the ongoing margin recovery of its all-important Behring segment.
1. Peer read throughs support Behring’s margin recovery
CSL’s major plasma competitors have provided a positive read through for Behring, supporting added confidence in the trajectory of its gross margins over the medium-term. Grifols and Takeda have both stated that collection costs continued to fall in the March quarter, while Grifols flagged a continuation of strong demand for IG (Immunoglobulins) across a range of indications.
2. Early evidence of Rika’s productivity benefits could be evident in the FY24 result
The rollout of the ‘Rika’ plasma donation system across Behing’s network will structurally lower collection costs, given the system drives ~30% shorter donation times and ~10% higher plasma yields. At the same time, continued improvements in collection volumes will also underpin manufacturing and collection productivity enhancements, driving gross margin expansion.
Given expectations of Behring’s margin recovery have been delayed significantly over the last 12-18 months (with consensus now implying a gross margin recovery to pre-pandemic levels in FY28), the bar is set relatively low for CSL’s FY24 result and FY25 guidance.
With Rika’s rollout ahead of schedule (according to CSL’s partner Temuro) and on track to be complete within FY25, risks are skewed to the upside for CSL’s earnings over the medium-term.
Adding to Aristocrat Leisure – Raising the Stakes
Aristocrat Leisure’s (ALL) Focus Portfolio weight has increased from 3.5% to 4.5%
Despite its recent share price strength, ALL remains attractively priced for a high-quality global leader, trading on a forward PE of ~21x. This multiple is compelling, considering ALL’s long runway for double-digit EPS growth, which will be underpinned by continued market leadership in land-based gaming, complemented by the rapid growth of its nascent real-money gaming segment.
The decision to upweight ALL has been driven by two key considerations:
1. Market share gains are likely to continue in land-based gaming
ALL’s strong 1H24 earnings beat and full-year guidance has increased our conviction that ALL’s core land-based gaming segment will continue to outgrow the broader industry over the medium term. This will continue to be underpinned by the company’s ‘best-in-class’ games portfolio and its unparalleled development & design spend (which is more than double its nearest competitor).
Read Out of Season Reporting Recap
2. Online real money gaming opportunity remains underappreciated
ALL’s nascent online real money gaming segment, Aristocrat Interactive, is positioned to deliver significant earnings growth over the next decade as the segment scales and participates in the structural growth of the online real money gaming industry.
At its investor day in June, ALL unveiled its target of ‘at least US$1bn’ in revenue in FY29 for Aristocrat Interactive. We are confident ALL will achieve (and likely exceed) this target given the company’s strong existing customer and regulatory relationships, its leading games portfolio, and its track-record of successfully expanding into new adjacencies (as evidenced by the success of Pixel United).
Given our confidence in management’s five-year target, we maintain the view that consensus forecasts underappreciate the earnings potential of Aristocrat Interactive, noting the low end of ALL’s five-year target is ~30% above current consensus forecasts (despite recent upgrades).
This will likely underpin further consensus earnings upgrades over time.
| Real Money Gaming | Land-based Gaming | Mobile Gaming | |
| Segment name | Aristocrat Interactive | Aristocrat Gaming | Pixel United |
| Type of gaming | Online wagering | Wagering | Non-wagering, free-to-play |
| Market type | High Growth | Defensive Growth | Cyclical Growth |
| Market position | Emerging player | Market leader in the US and Australia |
Top 10 mobile games publisher |
| Total addressable market | US$100bn | US$230bn | US$79bn |
| Growth opportunities | Market legalisation Market share gains |
Adjacencies growth Market share gains |
Leverage content through Social Slots |
| FY24e segment profit (A$m) |
$105 | $2,013 | $920 |
| FY30e segment profit (A$m) |
$533 | $2,632 | $998 |
| CAGR % | 31% | 5% | 1% |
| Competitive advantages | Relationships with customers and regulators |
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Source: Aristocrat Leisure, Visible Alpha, Wilsons Advisory.
Written by
Greg Burke, Equity Strategist
Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
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