EUR 850.00 For Business Accounts Only

Morningstar | Solid 1H19 for APA Group, Tracking Towards the Top of the Full-Year Guidance Range. See Updated Analyst Note from 20 Feb 2019

Narrow-moat-rated APA Group’s first-half fiscal 2019 EBITDA increased 4.3% to AUD 788 million, with growth coming roughly 50:50 from new assets and tariff increases. Management expects full-year EBITDA to be towards the top of guidance of AUD 1,550 to AUD 1,575 million, broadly in line with our prior expectations. This represents a slowing of growth to around 3.5% for the full year. We make minor changes to our earnings forecasts and upgrade our fair value estimate 2% to AUD 8.50 per security. Completion of substantial new projects, including solar farms, gas pipelines and a gas processing plant, should drive stronger EBITDA growth in fiscal 2020, we forecast 7%. At current prices, APA Group is slightly overvalued after recent security price strength, which likely relates to the tempered outlook for interest rate increases.

Operating cash flow fell 4% to AUD 39.8 cents per security on higher tax payments and dilution from last year’s equity raising. These aren’t major issues--tax payments will lead to more franking on distributions while equity dilution will be offset once new growth projects come online shortly. Tax payments should steadily increase holding back distribution growth but adding franking credits.

In the core energy infrastructure division, EBITDA rose 6% to AUD 789 million. Queensland was the best performing state, with EBITDA up 8% to AUD 512 million, followed by NSW and Western Australia, which both rose 5% to AUD 75 million and AUD 123 million, respectively. The main negative was Victoria and South Australia, which saw EBITDA fall 4% to AUD 69 million on lower regulated tariffs. The small asset management and energy investments divisions both recorded moderate growth. Corporate costs rose 50% to AUD 42 million because of a payout to retiring CEO Mick McCormack and costs relating to the attempted takeover by Cheung Kong Infrastructure, or CKI.

APA’s balance sheet remains sound, with gearing of 66.5% considered reasonable because of the firm’s highly defensive earnings. Over the past six months, gearing rose 110 basis points as the firm invests in substantial growth projects, which should add AUD 215 million to revenue per year starting in fiscal 2020. Gearing remains comfortably within management’s target range of 65%-68%.

With the CKI takeover distraction in the rear-view mirror, management is once again focused on finding an acquisition in the U.S. It’s looking for a business in gas transmission or distribution, with a platform for growth. We’d expect a sizable acquisition, likely needing another equity raising. Overall, we’re not enamoured with this strategy given inflated infrastructure prices globally, risks from entering a new market and timing with the long-standing managing director retiring this year. But APA has a good track record of accretive growth, so we’re not too concerned.