Company Reports

Narrow-moat APA Group’s underlying EBITDA increased 10% to AUD 1.89 billion in fiscal 2024, in line with our expectations and driven by tariff increases, acquisitions, and developments. However, free cash flow was flat because of higher interest and tax costs, while free cash flow per security fell 7% to AUD 84.6 cents because of dilution from equity raised to help fund the expensive Pilbara Energy acquisition. Guidance is for fiscal 2025 EBITDA of AUD 1.96 billion-AUD 2.02 billion, up 5% at the midpoint. We downgraded our EBITDA forecast by 3% to align with the range's midpoint, and slightly downgraded medium-term forecasts. The time value of money offsets the impact on our valuation. We maintain our AUD 9.30 per security fair value estimate and consider the stock modestly undervalued.

APA Group is Australia's premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalize on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform and potential regulation of pipelines could weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

APA Group is Australia's premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalize on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform and potential regulation of pipelines could weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

We maintain our fair value estimate for narrow-moat-rated APA Group of AUD 9.30 per share, and we consider it slightly undervalued at current prices. It offers an attractive distribution yield of about 6.5%, though distribution growth is expected to be muted as the firm reinvests cash flows to grow the business. Focus is increasingly on the renewable transition, but there are still opportunities in the gas pipeline network, given that gas is an important transition fuel. The main headwind is that its assets are typically of finite life. In particular, the Wallumbilla Gladstone Pipeline, which contributes one third of group EBITDA, will fall to practically zero in 2035 even if the customer continues using it, as it will be considered paid off. APA needs to continually invest to offset these long-term headwinds.

Narrow-moat APA Group's first-half fiscal 2024 underlying EBITDA increased 6% to AUD 930 million. Full-year guidance for AUD 1.87 billion-1.91 billion represents growth of 10% on last year at the midpoint. Overall, that is a solid result but slightly below our prior expectations. We downgrade our full-year EBITDA forecast by 2% to the middle of guidance. The impact is not material to our valuation, and we maintain our AUD 9.30 per security fair value estimate. APA is marginally undervalued at present. It offers an attractive 6.9% forecast yield, but distribution growth is stunted by rising debt costs and, longer term, by the end of the Wallumbilla Gladstone Pipeline contract in 2035, which contributes a third of EBITDA. We also see long-term headwinds from the renewable energy transition and the potential regulation of its best pipelines.

APA Group is Australia's premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalize on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform will weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

APA Group is Australia's premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalize on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform will weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

APA Group's renewable transition strategy is too aggressive. The cost of debt and equity has increased with higher interest rates and the firm's lower share price. However, management continues to pursue low-quality and low-returning renewable energy acquisitions and developments. Relatedly, APA Group suffered the first strike against its remuneration report at its recent annual general meeting, which we think was because bonus targets for management are overly focused on driving the renewable transition instead of improving returns for shareholders. We downgrade APA Group's Capital Allocation Rating to Poor. We'd likely return the rating to Standard if management becomes more disciplined with investment decisions or if it can sufficiently improve returns from new investments. Alternatively, bond yields could fall and negate the pressure on equity returns.

We maintain our AUD 9.50 fair value estimate for narrow-moat APA Group following the release of first-half fiscal 2021 results. The stock currently trades 5% below fair value and offers a solid 5.7% partly franked yield.

APA Group is Australia's premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalise on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform will weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

APA Group made an unsolicited, conditional and non-binding proposal to acquire the 66.6% of Envestra it does not already own via a scheme of arrangement. Key conditions comprise satisfactory completion of a limited due diligence review, support of the Envestra board and Cheung Kong Infrastructure, which owns 18.9% of Envestra.