APA Group

Company Overview: APA Group (ASX: APA) owns and operates energy infrastructure assets. Its range of business activities involves providing energy infrastructure, gas storage and processing. It is also involved in asset management services for its energy investments and also for third parties. The company has a diverse portfolio of ~$21 billion of gas, electricity, solar and wind assets.

APA Details

Resilient Top-Line Performance in FY21 Amidst Challenging Market Conditions: The company is a major provider of gas to the Australian market and connects Victoria with South Australia and New South Wales with Queensland. It is expanding its operations in the East Coast Grid, which provides energy security to industries and markets in the region.

Growth in Organic Pipeline:

• East Coast Grid: APA plans to increase the winter peak capacity up to ~25% with the help of two-staged expansion.
• Northern Goldfields Interconnect: It plans a capital investment of ~$460 million in the region and build a new pipeline that increases capacity to the Goldfields region.
• Kurri Kurri Lateral Pipeline: The company also plans the development of gas supply to the Hunter Power Project.

FY21 Performance Overview:

The company reported resilient financial performance in FY21 despite the challenging market conditions.

• Revenue (excluding pass-through) was up by 0.7% to $2.1 billion during the year, driven by higher resources customer demand in the West Coast.
• Underlying EBITDA decreased by 1.3% to $1.6 billion during the period driven by strategic investments in growth opportunities and higher insurance & compliance costs.
• Free cash flow stood at $901.9 million in FY21, compared to $956.6 million in FY20. The cash flow in FY20 was impacted by one-off SEA Gas distribution and shareholder loan interest of $39 million.
• APA reported statutory NPAT of $3.7 million in FY21, compared to $311.7 million in the prior year. It was mainly impacted by: (a) non-cash impairment of $249.3 million recognised against the Orbost Gas Processing Plant, and (b) one-off finance costs of $148.0 million associated with bond note redemptions during FY21.
• It has refinanced its $2.2 billion of debt in March 2021, thereby extending the tenor and lowering ongoing interest costs from 5.2% to 4.8%.

The company ended the year with cash and short-term investments of ~$663 million as of 30 June 2021. The total debt stood at ~$9,987 million, comprising of ~$9,970 million in long term debt and ~$17 million in short term debt.

Increasing Trend in Revenue (Source: Analysis by Kalkine Group)

Update on the Orbost Gas Processing Plant:

As per a recent update, Orbost Gas Processing Plant (OGPP), which is owned and operated by APA Group, reported ~24% increase in average Sole production rate in August 2021 at 41TJ/day, compared to 33TJ/day in Q4FY21. This was achieved on the back of improved performance and stable processing. APA and Cooper Energy have also approved the Phase 2B capital work at OGPP, which is designed to improve reliability and increase sustainable production rates from the plant.

Top 10 Shareholders: The top 10 shareholders together form around 34.05% of the total shareholding, while the top 4 constitute the maximum holding. Unisuper Limited and The Vanguard Group, Inc. are holding a maximum stake in the company at 14.27% and 6.05%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported a gross margin of 73.8% in FY21, compared to the industry median of 28.9%. The asset turnover ratio improved to 0.17x in FY21, compared to 0.16x in FY20. There has been a marginal improvement in the leverage profile with debt-to-equity ratio at 3.36x in FY21, from a level of 3.42x in FY20.

Profitability Metrics and Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Regulatory Risks: The company has significant investments in portfolio assets which is subject to regulatory intervention and comprises of price of gas to be charged. The prudent regulatory purview can have an impact on APA’s top-line.
• Demand Risk: It is faced with the risk that end users can opt for alternate energy sources for their needs, which can impact the profitability of the Group.
• Refinancing Risk: The Group is prone to funding risk or refinancing risk at favourable terms and interest rates.
• Profitability Risk: Its operations are capital intensive in nature, and any impairment charges and expenses put pressure on the Group's bottom line.

Outlook: The company has reported a growth pipeline of over $1.3 billion in FY21. It maintained a decent balance sheet with $1.9 billion in cash and undrawn facilities, which is expected to provide bandwidth for strategic acquisitions. Moreover, the sector is considered critical for Australia's energy needs going forward, providing a substantial opportunity to the company to leverage on the growing demand.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company has declared a dividend of 51 cents per share in FY21, reflecting an increase of 2% on FY20. And it expects to pay a distribution of 53 cents per share in FY22, which is 3.9% higher than FY21. As per ASX, the stock of APA is trading below its average 52-weeks’ levels of $8.800-$11.150. The stock of APA gave a negative return of ~11.73% in the past one year and a negative return of ~1.28% in the past six months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, considering the drop in bottom-line performance, key sector risks and funding risks. For the purpose of valuation, few peers like AusNet Services Ltd (ASX: AST), Mercury NZ Ltd (ASX: MCY), Meridian Energy Ltd (ASX: MEZ) have been considered, which comes under ‘Utilities Sector’. Considering the expected upside in valuation & current trading levels, resilient top-line performance, refinancing of debt facilities in favourable terms, optimistic sector outlook and decent pipeline position, we recommend a ‘Buy’ rating on the stock at the current market price of $9.15, (as on 06 September 2021, 10:00 AM (GMT+10), Sydney, Eastern Australia).

APA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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