Stock of the Day – APA Group (APA)
APA announced last week it will sell its 33% stake in Envestra into Cheung Kong Infrastructure’s $1.32/sh all-cash takeover offer. As a result, APA will realize proceeds of $784m, and will recongnize a pre-tax profit of $430m. APA stated it would use the proceeds to fund ongoing growth and investment projects over the coming 12 to 18 months. We note APA has previously guided to $400m pa in growth capex in the medium term. As a result, we conclude there are no plans for either a special dividend or share buyback at this stage. In our view this further underlines the strong growth profile of APA

Capital Projects Across Australia (Source – Company Reports)
APA has entered into two new long-term agreements with AngloGold Ashanti for the transportation of gas from Yarraloola to AngloGold’s Sunrise Dam and Tropicana gold mining operations. These two agreements underpin the construction of a new 292km gas transmission pipeline (East Goldfields Pipeline) that will connect to APA’s existing infrastructure. The pipeline will cost A$140m to build and completion is due by January 2016.
APA Fully Covered Distributions (Source – Company Reports)
APA’s Western Australia business is driven by ongoing growth in demand for gas for both domestic use and in mining. Mining remains the key growth driver, and while investment levels may have peaked, miners are now looking for lower-cost development options and are also focusing on cost-cutting options. Despite the downturn in mining investment activity in Western Australia, APA still has a strong pipeline of investment opportunities both in Western Australia, and on the east coast. At the company’s investor day in June, Management talked of several opportunities for investment and maintained its outlook for group capex over of A$300-400m pa over the medium term.
APA Daily Chart (Source – Thomson Reuters)
The picture for east coast gas demand, while flattering at the headline level, has shifted lower in recent years on an ‘underlying’ domestic basis. The decline is driven by a number of factors: 1) The contraction in domestic consumption is driven by a combination of lower gas fired generation output and reduced energy use in manufacturing industry. We believe the stock is expensive at its current price and would review the stock at a later date.
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