APA Group

APA Details

Key Updates for Investors Consideration: APA Group (ASX: APA) operates one of the leading natural gas infrastructure businesses in Australia. Recently, the company has noted that AusNet Services has accepted the 100% acquisition proposal offered by Brookfield and entered a Scheme Implementation Deed. The company also submitted a non-binding indicative offer for AusNet on 21 September 2021 and was provided due diligence last week.

• Recently, the company announced its plan to build an 88 MW solar farm at Mica Creek in Mount Isa to support customers in the Northwest Minerals Province with affordable, renewable electricity.
• In addition, the company has reached Final Investment Decision (FID) to develop the 44 MW stage one of the Mica Creek Solar Farm with an investment of over $80 million. This is being backed by a new 15-year solar offtake agreement with existing APA customers and MMG Dugald River (MMG) to supply renewable energy.
• Recently, the company noted the operations update by Cooper Energy (ASX: COE), wherein, it was mentioned that the average processing rate at the Orbost Gas Processing Plant (OGPP), owned and operated APA stood at 35 TJ/day in October, which was in line with the prior month.
• After cleaning of both sulphur absorbers during the last week of October, the average processing rates returned to 45 TJ/day on 30 October.

FY21 Financial Summary:

• Revenue Growth: For the year ended 30^th June 2021, the company recorded revenue amounting to $2,144.5 million, reflecting a rise of 0.7% in spite of the challenging market conditions.
• Impact on Bottom Line: APA 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
• Decline in Free Cash Flow: During FY21, the company witnessed a fall of 5.7% in free cash flow to $901.9 million mainly because of a non-recurring item in FY20.
• Growth in Distribution: The company declared a final distribution of 27.0 cents per security, which brought the total FY21 distributions to 51.0 cents per security, indicating a rise of 2% over pcp.

 Free Cash Flow (Source: Analysis by Kalkine Group)

Key Risks:

• Demand & Supply Risk: The company’s financial and operational performance could be impacted by any decrease in demand due to its price and a long-term shortage of competitively priced gas.
• Counterparty Risk: The anticipated revenue of the company 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 in 1H21.
• The company is optimistic about its positive long-term growth, evident by the expected rise of 3.9% in distribution guidance to 53 cps for FY22.
• By 2050, the company aims to reach net-zero operations emissions.

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: During FY21, the company strengthened its balance sheet and capabilities to fund its growth, backed by the debt refinancing of $2.2 billion. The stock of APA is trading below its 52-week low-high average of $8.200 - $11.140, respectively. The stock of APA has been corrected by ~9.03% and ~12.39% in the past three and six months, respectively. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average EV/Sales multiple, considering the rising revenue, sound financials, and increasing margins. For the purpose of valuation, peers such as AusNet Services Ltd (ASX: AST), AGL Energy Ltd (ASX: AGL), Genesis Energy Ltd (ASX: GNE), and others have been considered. Considering the expected upside in valuation, rising revenue and margins, growth in distribution, decent long-term outlook, strengthened balance sheet, and current trading levels, we recommend a ‘Buy’ rating on the stock at the current market price of $8.720 as on 04 November 2021, 10:40 AM (GMT+10), Sydney, Eastern Australia.

APA Daily Technical Chart, Data Source: REFINITIV 

Energy World Corporation Ltd

EWC Details

Repayment of Dues: Energy World Corporation Ltd (ASX: EWC) is engaged in the production and sale of power, oil and natural gas. As announced on 18 October 2021, the company has made repayment of monies (principal and interest) due and payable to Augusta Investments I Pte. Ltd of US$24,349,315.07. As a result, all outstanding Notes held by Augusta Investments I Pte. Ltd was cancelled. However, Augusta Investments I Pte. Ltd. Still continue to hold 101,122,429 warrants which have an exercise price of A$0.495

Q1FY21 Financial Summary:

• During the quarter ended 30 September 2021, the company recorded a net cash inflow from operating activities of US$11.53 million and receipts from customers stood at US$40.45 million.
• EWC incurred expenses on payment of gas purchases to PT Energi Sengkang, power plant operations and maintenance costs, staff costs, etc.
• The company closed the quarter with cash and cash equivalents of ~US$19.88 million.

FY21 Financial Highlights:

• Fall in Revenue: For the year ended 30 June 2021, the company recorded revenue amounting to US$149.4 million against US$159.2 million in FY20, reflecting a fall of 6.2%.
• Decline in Bottom Line: As a result of numerous one-off developments, the company witnessed a fall in net profit for the year to $1.8 million from $12.3 million in FY21.
• Fund Raising: The company raised A$65 million in FY21 through an entitlement offer and were ultilised for the repayment of dues to Augusta Investments I Pte. Ltd in October 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Price Risk: The company is exposed to a risk arising from the adverse movement in oil price; hence its operational and financial health could be hampered.
• Regulatory Risk: EWC is also exposed to a more complex regulatory environment; any failure could lead the business to fines, penalties, etc.

Outlook:

• During FY22, the company is planning to restart gas production from Eromanga, followed by gas production from Gilmore.
• EWC has scheduled to conduct the 2021 Annual General Meeting on 25 November 2021.

Stock Recommendation: As on 30 June 2021, the company had a cash balance of ~US$15.44 million as compared to ~US$1.40 million as on 30 June 2020. The stock of EWC is currently trading below its 52-week low high average of $0.047 - $0.159, respectively. The stock has been corrected by ~17.34% and ~10.01% in the past six and nine months, respectively. On a TTM basis, EWC has an EV/Sales multiple of 5.2x as compared to the industry average (Utilities) of 9.6x. Thus, it seems that the stock is undervalued at the current trading levels. Considering the valuation on a TTM basis, repayment of dues, decent liquidity position, deleveraged balance sheet, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating at the closing price of $0.081, down by ~3.572% as on 04 November 2021.

EWC 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.

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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