Sandstone Insights: Goodman's data centre momentum

ASX code: GMG

Suggestion: Buy

Need to know

• Fiscal year (FY) 2025 guidance reiterated at around 9% operating earnings per share (EPS) growth. It is expected that upgrades to guidance will be driven by a skew in earnings towards the second half (H2) of FY 2025
• Data centres (DCs) product offerings now include fully fitted turnkey solutions, enabling Goodman Group (GMG) to meet client demand more efficiently
• Global hyperscaler growth continues to accelerate, with market expectations rising over the past month.

Q1 2025 update

• FY 2025 guidance

FY 2025 guidance has been reiterated at approximately 9% operating EPS growth, with consensus around 12.5%. A potential guidance upgrade is anticipated to be driven by H2 FY 2025 performance. Given that all of the past eight first-half (H1) results have been upgraded, the market may expect a similar trend in the upcoming H1 FY 2025 results

• Industrial and logistics

Net property income (NPI) growth remains steady at 4.9%. Declining market supply is expected to drive rental growth. Mainland China’s slight drag, with a 94% occupancy rate, is largely offset by performance in other regions. The property portfolio remains stable at A$78.8 billion, in line with FY 2024

• Data centres

DCs now represent 42% of the A$13 billion work-in-progress (WIP) portfolio, up from 40% in June 2024 and 37% in December 2023. The global power capacity stands at 5 gigawatts (GW), with 2.6 GW of secured power. GMG has expanded its DC product offerings to include fully fitted facilities with turnkey solutions, aligning with customer needs for operational assets.

Data centre outlook reflects growth opportunities

Global capital expenditure (capex) expectations are rising, particularly among hyperscalers like Amazon, Google, Meta, Microsoft, and Oracle. Hyperscaler capex spending is widely viewed as a proxy for artificial intelligence (AI) and DC spending trends

Current expectations indicate approximately 47% growth in FY 2024 estimated and 24% in FY 2025 estimated. This equates to an estimated $270 billion across the top five hyperscalers in FY 2025 esitmated, or around $65 billion to $70 billion per quarter.

GMG capex changes since May

Over the past month, consensus expectations for FY 2025 - FY 2026 capex have increased by approximately 10 – 12%, with hyperscalers’ quarterly results indicating a sustained focus on deploying capital to meet AI demand.

Recent data centre reports continue to reflect a positive outlook. With capital flowing toward DCs from hyperscalers, many of whom are GMG’s largest clients, GMG is expected to expand its DC pipeline, highlighting the significance of the AI capex cycle for GMG's earnings base.

GMG capex changes since October

Investment view

• DCs drive multi-year growth potential: GMG remains the preferred investment for exposure to DCs, leveraging its strong access to capital and locations with secured power to capitalise on the global AI boom
• Robust development pipeline supports expansion: GMG’s development pipeline is robust, with new growth areas, such as DCs, providing multi-year expansion opportunities. DCsnare increasingly significant within the business, with over 5 gigawatts of potential power identified in the portfolio
• Growth driven by e-commerce and DCs: GMG is well-positioned to benefit from the growth of e-commerce and DCs. In periods of earnings growth exceeding 15%, the market often assigns GMG a greater than 25 times enterprise value (EV) to earnings before interest, tax, depreciation, and amortisation (EBITDA) multiple. Though currently above average, this higher multiple is justified by expected long-term earnings increases driven by DCs.