APA Group

APA Details

Initial Substantial Holder: APA Group (ASX: APA) operates as one of the leading natural gas infrastructure businesses in Australia. Recently, the company announced that Vanguard Group (The Vanguard Group, Inc. and its controlled entities) had become a substantial holder in the company with a voting power of 5.001%.

Commencement of Stage Two at Mica Creek: As announced on 17 December 2021, the company has entered Final Investment Decision (FID) to develop the stage two of the Mica Creek Solar Farm in Mount Isa. The investment for stage two is being backed by a variation to the existing offtake agreement with APA customer Mount Isa Mines Limited (MIM). The company added that solar farm is expected to be operational by mid of CY23.

FY21 Financial Summary:

• During FY21, APA recorded revenue amounting to $2,144.5 million, reflecting a rise of 0.7% despite the challenging market conditions.
• The company posted a profit after tax of $3.7 million, which was impacted by significant items, which include a non-cash orbost impairment charge of $249.3 million as well as the finance costs associated with bond note redemptions of $148.0 million.

Revenue Highlight (Source: Analysis by Kalkine Group)

 Key Risks:

• Demand & Supply Risk: APA’s financial and operational performance could be affected by any extreme decrease in demand due to its price and a long-term shortage of competitively priced gas.
• Counterparty Risk: The company’s topline could be impacted by any failure in meeting contractual commitments by counterparties

Outlook:

• APA expects that organic growth capex may exceed the toll of $1.3 billion during FY22-24 as compared to $1.0 billion at 1H21. The company aims to reach net-zero operations emissions by 2050.
• The company expects to pay an interim distribution of 25.0 cents per security for 1HFY22, indicating a rise of 4.2% over FY21 at a record and payment date of 31 December 2021 and 17 March 2022, respectively.
• In addition, APA has scheduled to release 1HFY22 results on 23 February 2022.
  

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: The stock of APA is trading above its 52-week low-high average of $8.200 - $10.430, respectively. The stock has provided positive returns of ~15.58% and ~11.52% in the past three and six months, respectively. The stock has a support and resistance level of $9.870 and $10.320, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a correction of high-single-digit upside (in % terms). The company can trade at a slight premium to its peers’ average EV/Sales multiple, considering the rising revenue and anticipated growth in capex, etc. For the purpose of valuation, peers such as AusNet Services Ltd (ASX: AST), Meridian Energy Ltd (ASX: MEZ), Infratil Ltd (ASX: IFT), and others have been considered. Considering the expected correction in stock prices, decent price movement in the past months, current trading levels, and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the closing price of $10.190, up by ~1.696% as on 07 January 2022.

APA Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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