Stocks’ Details

APA  Group

                                                                                                            Low-Risk Business Model: APA Group (ASX: APA) operates the largest natural gas infrastructure business in Australia. The market capitalisation of the company stood at ~$11.58 billion as on 6^th January 2021. Recently, the company noted that Cooper Energy has affirmed that the remaining Sole Gas Sales Agreements (GSAs) have commenced on 1 January 2021. It was mentioned that the Sole gas is processed at the Orbost Gas Processing Plant (OGPP), which is operated by APA Group.  The company operates a low-risk business model, mainly supported by its stable and predictable cash flows and long-term take or pay contracts with CPI linkage or price regulated assets.

For FY20, the company reported revenue (excluding pass-through) amounting to $2,129.5 million as compared to $2,031.0 million in FY19. Net profit after tax for the period amounted to $317.1 million, reflecting a rise of 10.1% over pcp. Distribution per security for FY20 stood at 50.0 cents, indicating a growth of 6.4%.

Key Financials (Source: Company Reports)

Guidance: For 1H FY21, the company is expecting to pay a distribution of 24.0 cents per security, indicating a growth of 4.3% over 1H FY20. The company is focused on improving its portfolio of gas transmission pipelines and power generation.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company ended FY20 with enough liquidity supported by cash and committed undrawn facilities of $2.5 billion. In the last one and three months, the stock of APA has corrected 3.65% and 9.14%, respectively. As a result, the stock is trading slightly below its 52-week low-high average of $9.940. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). On a technical analysis front, the stock has a support level of ~$8.5 and a resistance level of ~$10.2. Hence, considering the low-risk business model, decent performance in FY20 and returns in the form of a dividend, we give a “Buy” recommendation on the stock at the current market price of $9.81 per share, down by 0.102% on 6^th January 2021.

AGL Energy Limited

Decent Growth in Operating Cash Flow: AGL Energy Limited (ASX: AGL) is engaged in the operation of energy businesses. The market capitalisation of the company stood at $7.47 billion as on 6^th January 2021. Recently, a transformer incident at Unit 3 of its Liddell Power Station in New South Wales has taken place. Resultantly, the unit has been taken out of service, and the company is currently assessing the length of any outage that may occur at Liddell Unit 3. For FY20, the company recorded a statutory profit after tax amounting to $1,015 million, reflecting a rise of 12% over FY19. In addition, the company recorded a rise of 35% in net cash from operating activities to $2,156 million.

Key Metrics (Source: Company Reports)

Guidance: For FY21, the company anticipates underlying profit after tax in the range of $500 million and $580 million, which has been downgraded from the previous guidance range of $560 million to $660 million. This follows the anticipated impact of the transformer incident at Unit 3 of the Liddell Power Station in New South Wales.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is also planning to pay special dividends during FY21 and FY22. The stock of AGL has corrected 11.57% and 29.49% in the last three and six months, respectively. As a result, the stock is trading towards its 52-week low of $11.950, offering a decent opportunity for accumulation. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). For the said purposes, we have Origin Energy Ltd (ASX: ORG), Ampol Ltd (ASX: ALD), Worley Ltd (ASX: WOR), etc., as peers. On a technical analysis front, the stock has a support level of ~$11.5 and a resistance level of ~$13.2. Thus, in light of the growth in operating cash flow, rise in statutory NPAT and anticipated dividend payments, we give a “Buy” recommendation on the stock at the current market price of $12.03 per share, up by 0.25% on 6^th January 2021.

Contact Energy Limited

Consistent Dividend Payment: Contact Energy Limited (ASX: CEN) is engaged in the generation and retailing of electricity. The market capitalisation of the company stood at ~$6.39 billion as on 6^th January 2021. In the month of November 2020, the customer business of the company has recorded mass market electricity and gas sales of 299 GWh and Mass market electricity and gas netback of $96.58/MWh. In addition, the wholesale business reported electricity and steam net revenue of $73.59/MWh. For FY20, the company recorded EBITDAF amounting to $451 million as compared to $518 million in FY19. Underlying profit for the year amounted to $129 million against $176 million in FY19. The company-maintained a dividend payment and declared an annual dividend of 39 cents per share, which was in-line with last year.

Key Financial Metrics (Source: Company Reports)

Outlook: Looking forward, the company will be focused on enhancing operational efficiency and leveraging its lean operating model. In addition, the company has recently signed a long-term 13MW renewable agreement, which is likely to support the company’s future growth.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: During FY20, debt to equity multiple of the company stood at 0.46x, which is lower than the industry median of 0.51x. The company has scheduled to release its 1H FY21 results on 15 February 2021. The stock of CEN has provided positive returns of 22.74% and 38.90% in the last three and six months, respectively. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with an upside of high single-digit (in percentage terms). For the said purposes, we have APA Group (ASX: APA), Mercury NZ Ltd (ASX: MCY), and Meridian Energy Ltd (ASX: MEL). On a technical analysis front, the stock has a support level of ~$8.7 and a resistance level of ~$10.5. Thus, considering the decent returns in the past months, consistent dividend payment, and decent outlook, we give a “Hold” rating on the stock at the current market price of $9.26 per share, up by 4.044% on 6^th January 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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