Valuation APA - $9  

Strategic

APA group is an infrastructure provider in Australia with just over $27b of gas, electricity, solar and wind assets.

APA are targeting four growth areas for the future energy transition being remote grid / renewable power, gas and electricity transmission and carbon storage. With the global shift towards decarbonisation, they are well placed to ride the renewable energy thematic, if they can manage costs and demand continues.

Sticky contracted revenues with relative high yield (6-7%). In a government aligned investment thematic that has a pipeline of growth opportunities.

Risks

• High debt and overpaying for acquisitions (recent Bass Link and Pilbara (Alinta)
• Changes to the gas regulations in QLD are examples of the regulatory risk in this business.
• Cost of borrowings has impact on cashflows, their WACC is 4.6%
• High SIB Capex risk, and ongoing asset maintenance

APA has fallen 33% since 2022 despite increases in cashflows and distributions. Given the WACC at 4.6% there is a particular asymmetric correlation with interest rates. I think if interest rates were to be cut this could re-rate APA. They will need to continue to manage their SIB capex program and ensure minimal disruption to their assets. FCF declined 1% FY23 due to rise in SIB costs, this was also at the same time they announced the Pilbara (Alinta) acquisition, which I think spooked the market and caused an overraction. The current management have an appetite for growth in this space, but it comes with both market risk, integration risk and ongoing regulatory risk moving forward.

Fundamental

EBIDTA Margins of approx. 70% +

Distributions of 6-7% increasing each year

Payout of 60-70% FCF

WACC has risen to 4.6%

Valuation

$9 utilising Gordon growth model assume 10% disc rate and 4% div growth. Based on their FCF per share from FY23 its close to 90cents, and their commitment to payout 60-70% of FCF. They should be able to continue to pay increased distributions. This investment thesis is broken if they were to move away from progressive dividends.

This valuations assumes an upside of close to 20% from todays SP inclusive of dividend for the next 12months.

Technical

APA technicals do not look pretty and look set in a downtrend, although there is a bullish divergence on the RSI starting to appear and it seems that around $8 is a support level that now has been tested 3 times since October last year. If it holds and we see some higher lows, that may give me the signal to add to my position. Will review when they provide their FY report.

Final Thoughts

An asset play that comes with regulatory risk, capex risk and demand use risk. However if the 6-7% distributions stay consistent and they can grow their FCF in single digits then when interest rates are cut, and some positive announcements of their growth pipeline, this could deliver 12-15%pa over the next 2-3years.. The long term thematic gives me confidence to hold a larger position in this business.