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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:
Update on H1FY21 Results:
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:
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.
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.
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.
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