Value in the Pipeline

Ord Minnett Research Insight: APA Group

APA Group owns and operates Australia’s largest natural gas infrastructure business, and other energy infrastructure assets such as gas storage and wind farms.

The company reported first-half FY21 net profit of $162m versus Ord Minnett’s $166m forecast. Operating earnings (EBITDA) of $823m were 1% above the previous period and within 1% of our estimate. An unfranked interim dividend of 24cps was declared.

FY21 earnings guidance was re-affirmed, implying a second-half EBITDA of $822m–842m. Management flagged a dividend increase to 51cps from 50cps, implying a second-half dividend of 27cps. The dividend upgrade was attributed to the growing confidence in the company’s growth aspirations and the capacity of its balance sheet. APA will review its capital management strategy with the potential to both refinance existing debt at lower rates and review its distribution outlook. Subsequent changes are expected to be announced at the investor day in May.

APA reiterated its intention to assess inorganic growth opportunities in the US. The company has been broadening its scope to include integrated gas pipeline and electricity infrastructure. Despite the refreshed strategy, management confirmed the investment criteria had not changed.

We have made only minor adjustments to earnings estimates. Our EBITDA forecasts remain broadly unchanged, while our net profit forecasts have declined due to higher estimated depreciation charges.

We believe the recent weakness in the share price has been driven by the significant increase in benchmark interest rates. Macro-economic drivers could still represent a near-term headwind, although we believe at current price levels the stock looks attractive given the company’s stable, predictable earnings. We also note that unlike network service providers, APA does not face downward pressure from regulatory resets. We have upgraded our recommendation to Buy from Hold and raised our target price to $11.30 from $11.09.