APA Group

Company Overview: APA Group (ASX: APA) owns and operates energy infrastructure assets and businesses. It is involved in the transmission of gas, gas storage and processing and is also engaged in power generation. Its business also includes asset management services for APA's energy investments and for third parties. The group comprises two stapled entities which include Australian Pipeline Trust and APT Investment Trust (APTIT). The operating segments can be summarised into three principal business segments – Energy Infrastructure, Asset Management and Energy Investments.

 APA Details

Increased Investments to Aid Growth: APA Group (ASX: APA) is engaged in the business of owning and operating energy infrastructure assets. The market capitalisation of the company as on 15 February 2021, stood at ~$11.18 billion. As per a recent update, the remaining Sole Gas Sales Agreements (GSAs) has commenced from 1 January 2021, which implies that the gas will be sold at agreed term contract prices as per the agreement. Previously the sole gas was sold at lower spot prices, and the revenue and costs were shared between Cooper Energy and APA as per the transition agreement announced on 23 August 2020. The sole gas is processed at the Orbost Gas Processing Plant (OGPP), which is operated by APA.

The company delivered a resilient financial performance in FY20, with an increase of 4.8% in revenue (excluding pass-through revenue) to $2,129.5 million from $2,031 million in FY19. EBITDA grew by 5.1% to ~$1,653.9 million during the period from ~$1,573.8 million in FY19. Net profit of the company increased by 10.1% to $317.1 million in FY20 from $288 million in FY19, reflecting the improved margin performance during the period. Operating cash flow increased to ~$1,095.9 million, compared to ~$1,012.1 million in the previous corresponding period. APA ended the year with a strong balance sheet, with a cash position of $1,172.77 million, compared to $354.94 million in FY19.

Key Metrics Trend (Source: Company Reports)

APA incurred a capital expenditure of $427.1 million in FY20, with $287.7 million being allocated for organic growth capex. It had also witnessed the first full-year contributions from the assets in Queensland and Western Australia, during the year.

Historically Proven & Reliable Guidance: The company has delivered consistent guidance performance over the years, reflecting the stable cash flows from its low-risk business model, good relationship with its clients and quality asset portfolio holdings. The revenue weighted average contract tenor stood at ~12 years as on 1 July 2020.

Guidance EBITDA Performance (Source: Company Reports)

Formation of WA Gas Grid: APA has announced an investment of ~$460 million on 25 November 2020, to construct a 580 km, 12’’ pipeline in Western Australia to connect gas fields in the Perth Basin to the Goldfields region. The company believes that by connecting the existing pipelines, the Northern Goldfields Interconnect (NGI) will add capacity and increase supply options for customers. The company expects NGI to be operational from around mid of 2022. This platform will support the growth of APA Group, as more customers seek energy solutions, which includes renewables and battery storage.

First Hybrid Energy Microgrid Investment: In a recent update, the company has announced a two-phase power expansion agreement with existing customer, Gruyere Gold Mine in Western Australia, thereby increasing total installed capacity to 64MW from 45MW. It includes the creation of APA’s first hybrid energy microgrid investment – Gruyere Microgrid, and the total expenditure for the project is estimated to be at ~$38 million. After the proposed completion of the project, APA will provide renewable energy to the Gruyere Gold Mine and gas will be provided on a take-or-pay basis by APA’s interconnected gas pipeline network.

Top 10 Shareholders: The top 10 shareholders together form around 31.93% 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:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: APA has been delivering resilient margin performance over a period of years. There was an improvement in the net margin to 12.4% in FY20 from 11.9% in FY19. ROE of the company stood at 9.3%. There was an improvement in the liquidity of the company with current ratio at 1.66x in FY20 from 0.71x in FY19. The increased revenue and profitability trend reflects the resilient and risk-free business model of the company, which has delivered in the midst of the COVID-19 disruption.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group)

Key Risks: The company is exposed to strategic risks arising from the industry and geographical environments within which APA operates. It has a significant number of assets and investments in its portfolio, which is subject to economic regulation. Any changes in the economic policy related to the regulation of the assets might impact APA’s business. There is stiff completion among the players in the sector, and APA's future earnings might get impacted if customers opt for gas transportation services from new pipelines of competitors. There is also the risk of reduced end-user demand for gas, which might reduce the demand levels for services on APA's assets and therefore might impact the company's contracted revenues. The company is exposed to the shift in consumer sentiment with gas being unacceptable as a source of fuel, and consumers taking to other means of fuel supply. This presents a significant business risk for the company.

Outlook: The company believes that it is in a decent position, financially as well as operationally to take on new investment opportunities and pursue growth in the medium term. Despite the impact of the COVID-19 pandemic on most of the businesses, APA delivered resilient performance owing to its capacity contracts and regulated revenues. The company’s operating plan for FY21 includes ~$10 million of EBITDA contribution from the Orbost Gas Processing Plant. It expects full-year EBITDA to be in the range of $1,625 million to $1,665 million for the year ending 30 June 2021. Total distributions for FY21 are expected to be in line with FY20. APA anticipates net interest costs to be in the range of $490 million to $500 million during FY21.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 believes it is well poised to take advantage of any investment opportunities, and expects the US market to be of key strategic importance for the company. As per ASX, the stock of APA is trading below its average 52-weeks’ levels of $8.060-$11.820. The stock of APA gave a negative return of ~16.22% in the past nine months and a negative return of ~0.52% in the past one month. On a technical analysis front, the stock of APA has a support level of ~$9.18 and a resistance level of ~$9.899. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers such as Mercury NZ Limited (ASX: MCY), Meridian Energy Limited (ASX: MEZ), Contact Energy Limited (ASX: CEN), to name a few, which comes under Utilities sector. We believe the company can trade at some premium to its peer average P/E (NTM Trading multiple), considering its decent financial performance and positive outlook. Considering the current trading levels, expected upside in valuation, robust financial performance, expected benefits from capex investments on infrastructure, positive outlook and resilient & comparatively risk-free business model, we recommend a ‘Buy’ rating on the stock at the current market price of $9.55, up by 0.738% on 15^th  February 2021.

APA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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