Company Overview: APA Group (ASX: APA) owns and operates energy infrastructure assets and businesses. Its range of business activities comprises of gas transmission, storage and processing. It is also engaged in renewable energy power generation businesses in Australia. In addition, it provides asset management services for the majority of the Group’s energy investments and also for third parties.

APA Details

Long-term Growth Drivers Intact: APA Group (ASX: APA) as a part of its long-term focus plans to invest in gas, electricity and renewables infrastructure in Australia and North America. It has come a long way from inception and has created a diverse energy infrastructure portfolio. In the Gas Infrastructure segment, it has built ~15,425 km transmission pipelines and has a storage of 12,000 tonnes LNG and 18PJ gas. In the Power Generation business unit, it produces renewable energy amounting to 342 MW wind and 149 MW solar power. The gas-fired power stands at ~400MW.

Growth Drivers & Strategic Business Propositions:

• Opportunity to Tap the Global Energy Sector Demand: The company has sustainable growth opportunities in renewables, electrification and hydrogen infrastructure, with Australia presenting over $68 billion of investment opportunities to 2040. There are significant investment opportunities in the US market with ~US$2.7 trillion of investment scope to 2040. It expects the hydrogen economy to drive investments to ~US$11 trillion worldwide by 2050.
• Critical Energy Source: Gas accounts for ~26% of primary energy consumption in the Australian market. 40% of domestic gas is used for electricity generation purposes. As per findings from Australian Energy Statistics, peak gas demand in Victoria (~1,300 TJ/d) is equivalent to 2x the peak electricity demand.
• Growth Capex: APA is aware of the organic growth opportunities the sector presents and expects to bring in over $1 billion in capital expenditure over the next two-three years.

Update on H1FY21 Results:

• Resilient Performance: Despite the challenging market conditions driven by softer contract renewals and lower energy consumption, the company delivered a resilient performance during the period. It reported an increase in the operating cash flow performance by 1.4% on the previous corresponding period.
• Growth in Volume: APA witnessed growth in volumes across its key markets including WA, NT and some sections of the East Coast Grid.
• Strategic Investments: It has made strategic investments in development opportunities and capabilities during the period. This, along with higher insurance and compliance costs contributed to a decrease in EBITDA to $822.8 million in H1FY21, compared to $842.2 million in H1FY20.

The company has reported an improvement in the top-line in the past few years, along with an increase in gross profit. It expects to further enhance the revenue with planned and prudent capital investments in order to maximise and optimise shareholder value going forward.

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

Change of Interests in APA: As per a recent update, State Street Corporation and its subsidiaries has undergone a change of shareholding in the company and has increased its voting power to 6% representing 70,802,929 ordinary shares.

Increase in Estimated Dividends:

• The company has recently announced an estimated final distribution of 27 cents per share for the period six months to 30 June 2021.
• The total distributions in FY21 stand at 51 cents per security, reflecting an increase of ~2% over the prior year.
• The ex-distribution date for the said payment was recorded at 29 June 2021, with the payment date to be at 15 September 2021.

FY21 Guidance Update of Cooper Energy: APA owns and operates the Orbost Gas Processing Plant and operates the project along with Cooper Energy as per a transition agreement which provides for a sharing of costs and revenue.

• Cooper energy has recently updated its FY21 guidance and has provided sales volume guidance of ~3 MMboe, compared to previous declared guidance towards the middle of 2.9-3.1 MMboe.
• It has given production guidance of ~2.6 MMboe, compared to previously announced guidance in lower-end of the 2.7-2.9 MMboe range.
• It expects capital expenditure at the lower end of guidance range of $35 -$40 million in FY21.

Top 10 Shareholders: The top 10 shareholders together form around 33.23% 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 has reported improved gross margin performance at 74.9% in H1FY21. EBITDA margin stood at 63.3% during the period. It reported a substantial improvement in the liquidity with current ratio at 2.07x in H1FY21, from a level of 0.43x in H1FY20. The cash cycle stood at negative 110.5 days. It ended the period with cash & equivalents of ~$884 million as of 31 December 2020. The total debt stood at ~$10,083 million, which comprises of ~$10,059 million in long term debt and ~$24 million in short term debt.

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

Key Risks: The company is faced with the following key risks arising from the sector and geography in which it operates and can include markets, customers, brand, to name a few.

• Prudent Regulations: The company’s line of business makes it dependent on favourable regulations such as the regulation of prices that APA can charge. Any adverse impact on these aspects can impact the profitability of the company.
• Stiff Competition: It is faced with the risk of peers by-passing its pipelines or customers switching to the competitor’s services.
• Demand & Supply Risk: It is prone to the risk of reduced end usage of gas or customers switching to alternate sources of energy to tap their needs. It is also faced with supply constraints due to long-term shortage of gas as a result of reserve depletion.
• Counterparty Risk: The failure of a counterparty to meets its contractual obligations and commitments may result in a decrease in the anticipated top-line of APA.

Outlook: The company is focused on disciplined investment of capex in view of the growth opportunities in the sector and has reported a prospective organic growth pipeline of over $5 billion. It expects FY21 EBITDA to be in the range of $1,625 million to $1,665 million and anticipates net interest to be between $490 million to $500 million. In order to complement its refreshed strategy with growth opportunities across Australia and North America, it has launched the Pathfinder Program to expand its presence and also move into new energy solutions. APA will announce its FY21 results on 25 August 2021.

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: On 5 May 2021, the company has announced that it has reached a Final Investment Decision (FID) with regards to start of 25% expansion of transportation capacity on its East Coast Grid, linking Queensland with southern markets. As per ASX, the stock of APA is trading below its average 52-weeks’ levels of $8.80-$11.570. The stock of APA gave a negative return of ~16.49% in the past one year and a negative return of ~7.64% in the past six months. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer average EV/Sales (NTM trading multiple), considering the optimistic outlook, capex investment to leverage on opportunities and significant market potential of the company in Australia and North America. For this purpose, we have taken peers such as AusNet Services Ltd (ASX: AST), Mercury NZ Ltd (ASX: MCY), Genesis Energy Ltd (ASX: GNE), to name a few. Considering the expected upside in valuation and current trading levels, resilient financial performance, capex investments, decent dividend declaration and optimistic sector outlook in the long-term, we recommend a ‘Buy’ rating on the stock at the current market price of $8.96, down by ~1.64% (as on 12 July 2021, 12:09 PM (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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.