Increasing Goodman Group (GMG)
We have increased our position in Goodman Group (GMG) following the FY24 results and a subsequent price pullback that has created a valuation opportunity relative to forward EPS expectations.
In FY24, GMG achieved a 14% EPS growth, surpassing its revised guidance of 13%, driven by higher investment and management earnings alongside a significant uplift in performance fees. The yield on cost for development commencements rose to 7.5%, reflecting GMG’s focus on high-margin opportunities. GMG’s prudent capital management is evident, with gearing at 8.4% and the preference to stay in the lower half of the target range 0-25%, preserving flexibility and resilience in its balance sheet.
Our conviction in increasing our position is further bolstered by GMG’s strategic expansion in the data center sector, which has become a significant growth driver. Data centers now represent 40% of GMG’s work-in-progress (WIP), a proportion that could exceed 50% as the company continues to expand its global power capacity, currently at 5.0GW, with 2.5GW already secured and an another 2.5GW in advanced stages of procurement. This deliberate shift towards higher-yielding, specialised assets has been strategically advantageous in a market that values focused and specialized development. GMG’s ability to adapt to market-specific dynamics and its shift toward fully fitted, turn-key data center facilities underscores its competitive advantage and positions the company well for sustained long-term growth.
GMG's distinctive approach to navigating market constraints and regulatory challenges sets it apart from its peers. It’s focus on high-demand, low-vacancy markets with substantial barriers to entry provides a defensive edge while supporting strong rent growth and rental reversions. With high occupancy rates across key markets and a proactive development strategy that leverages its expertise in complex utility negotiations and securing critical power resources, GMG is well-positioned to capitalize on evolving market dynamics.
This strategic clarity, combined with a robust balance sheet and a prudent approach to capital partnerships, reinforces our confidence in GMG's ability to deliver value to investors over the long term.
Increasing Origin Energy (ORG)
We have increased our position in Origin Energy (ORG) following its FY24 results, leveraging a recent pullback in its share price to capitalize on its strong financial position, strategic growth initiatives, and emerging technological advantages.
In FY24, ORG reported EBITDA of A$3,258 million, reflecting a 15% year-on-year increase, and an underlying NPAT of A$1,183 million, up 58%. EBITDA for Energy Markets came in at the lower end of the company’s guidance and was 5% below consensus expectations, primarily due to higher-than-expected-costs associated with bad and doubtful debts, increased labor expenses, and Kraken system implementation.
ORG remain committed to achieving a cost reduction of A$100 to A$150 million by FY26 through the broader rollout of the Kraken enterprise software, which is designed to improve cost efficiency and customer satisfaction. The Kraken platform saw a 73% increase in licensing revenue and a 60% rise in contracted customer accounts globally in FY24 , underscoring its financial viability and scalability. The success of Octopus Energy, the owner of Kraken, in the UK market further validates the platform’s ability to deliver cost efficiencies and value-added customer offerings.
Positioned to benefit from the structural shift towards electrification and decarbonization within the National Electricity Market (NEM), Origin's strategy focuses on enhancing firming capacity through investments in batteries and Virtual Power Plants (VPPs) to complement its existing portfolio of gas-fired peaking power stations. The company aims to expand its owned and contracted renewable generation capacity to 4GW by 2030 and expand its Virtual Power Plant (VPP) capacity to 2GW by FY26. As of June 2024, VPP capacity stood at 1,385 MW, a substantial increase from 815 MW a year earlier. The Eraring Battery project, expected to come online by mid-2026, will further strengthen Origin's capability to provide reliable, dispatchable power, ensuring grid stability amid periods of peak demand and intermittent renewable generation.
A strong balance sheet and robust cash flow profile, bolstered by steady APLNG distributions, support ORG’s ability to navigate elevated capital expenditure as it invests in renewable energy and storage. The company's adjusted net debt to EBITDA is conservatively positioned at 1.0x, down from 1.2x at the end of FY23, well within the target range of 2-3x. With a FY25 P/E ratio of 12.6x and a fully franked dividend yield of 5.6%, ORG offers an attractive valuation in a transitioning energy landscape. The combination of diversified energy assets, technological innovation through Kraken, and a focused capital allocation strategy reinforces our confidence in Origin’s capacity to generate long-term value for shareholders.
Sold Woodside Energy (WDS)
We exited our position in Woodside Energy (WDS) due to concerns over its recent acquisitions and capital allocation strategy. The company announced two sizable acquisitions: the Driftwood LNG project from Tellurian (US$900 million) and the Clean Ammonia Project from OCI in Texas (US$2.35 billion). While these acquisitions could diversify WDS’s portfolio, they appear more dilutive than accretive on a return on capital employed (ROCE) basis. The Driftwood LNG project, for example, has a projected internal rate of return (IRR) of only 12% and is several years away from generating cash flows. With the project not yet at final investment decision (FID) readiness and requiring significant capital investment, there is added uncertainty regarding near-term cash flows and integration risks.
WDS’s production growth outlook remains limited over the next five years, with CY24 guidance flat at 189-195 MMboe, indicating minimal growth from its existing portfolio. This is largely due to major projects like Scarborough and Sangomar, which are still ramping up and face significant geopolitical risks. The near-term growth depends heavily on the successful execution of these projects, including Scarborough/Pluto Train 2 (first LNG in 2026) and Trion in Mexico (first oil in 2028). Both projects carry substantial risks, including delays, environmental approvals, and geopolitical challenges. The 2024 capex guidance of US$5.0-5.5 billion, following a high investment of US$5.7 billion in FY23, underscores the need for continued heavy capital investment, raising concerns about Woodside's ability to achieve meaningful organic growth without further M&A.
Further more, WDS now faces reduced flexibility in capital management due to high capex demands for growth projects, recent acquisitions, and a high dividend payout ratio. With net debt likely to rise above its target range of 10-20% due to these expenditures, WDS’s capacity to manage unforeseen expenses or pursue additional opportunities is constrained. The combination of rising leverage, potential project delays, and an 80% dividend payout ratio, which amounted to US$1.3 billion of the US$1.6 billion NPAT for 1H24, puts further pressure on its balance sheet. While the high payout ratio is appealing to shareholders, it restricts cash available for reinvestment. Given the expected earnings decline and significant capex needs, WDS may need to reconsider its dividend policy to balance growth and shareholder returns sustainably.
Increasing Macquarie Technology Group (MAQ)
We have decided to top up Macquarie Technology (MAQ) by taking advantage of the recent drop in share price, despite the company’s solid FY24 performance. MAQ has achieved its 10th consecutive year of EBITDA growth, being in-line with guidance. Strong operating leverage and reduced net interest costs translated the +5% revenue growth into a +6% growth in EBITDA growth and +65% in EPS. While the Cloud Services & Government (CS&G) segment experienced softer performance due to industry-wide issues of US tech suppliers increasing global pricing beyond CPI, the slower segment growth was anticipated. The segment continues to benefit from strong demand for cloud solutions, and MAQ is actively working to address these issues by restructuring contract terms in FY25. For other parts of the business, the Telecom segment is expected to sustain a high-teen EBITDA margin, and the Data Centre segment is progressing well with the construction of IC3 SuperWest. Management plans to upsize the facility’s capacity to 45MW—a move not previously formalised. Additionally, securing all end-state power for the facility enhances MAQ's competitive edge. The improved balance sheet and strong cash flow conversion further bolster MAQ’s flexibility for future investments.
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