Stock of the Week APA Group (APA)


Stock of the Week APA Group

APA Group (APA) is Australia’s largest natural gas infrastructure business, owning and/or operating more than $8 billion of gas transmission and distribution assets, and can be considered as one of the shares to buy in the Australian stock market.

Its pipelines span every state and territory in mainland Australia, delivering more than 50% of the nation’s gas usage. Unique among its peers, APA has direct management and operational control over its assets and investments.

APA also holds minority interests in energy infrastructure enterprises including Envestra, SEA Gas Pipeline and Energy Infrastructure Investments (EII).

Gas volumes are growing at an average annual rate of 3.4% (compared with 1.4% for primary energy sources), driven by population growth, GDP growth and government policies encouraging lower carbon emissions.

The high level of mining activity operating in Australia is also a driver of increased gas demand and thus a boon for APA.

APA recently reported 1H10 operating profit of $63.6 million, up 28.3% on the previous year as capacity expansions on gas pipelines helped boost earnings.

A Booming Business

APA boasts 12,000 km of transmission pipelines and an interest in 21,000 km of distribution networks.

APA’s infrastructure thus allows transportation of around 70% of natural gas used in east Australia, and around 50% across Australia.

The natural gas APA transports and delivers is from all major production sources to all major markets. Because of this, APA has an unrivalled gas asset footprint and is the largest transporter of natural gas across Australia by pipeline length, capacity and volume.

With natural gas playing a lucrative part in Australia’s international renowned resource sector, APA is well placed. Its integrated portfolio of gas pipeline assets provide revenue and operating synergies as the group’s pipelines serve major growth markets across Australia.

APA’s revenue is contracted and regulated, allowing the group to produce a stable cash flow, and revenue looks set to increase based on an increase demand for natural gas on climate-driven legislation changes.

Taking Care of Business

Last September, APA Group confirmed that it completed a $1.03 billion syndicated bank facility after signing agreements with three domestic and nine offshore banks.

The syndication was oversubscribed, and brought the total amount of facilities finalised since July to $1.37 billion.

The new facility completed the refinancing of all of APA’s debt maturity obligations until July 2011.

Although APA has reduced debt, the company expects an additional $10 to $15 million in net interest costs in FY10.

However, the market was impressed by APA’s update, with the group re-affirming target growth in distributions by at least 5% for 2010.

APA’s distribution yield is approximately 9%.

Major Stakeholding

On 8 April, APA confirmed it had increased its stake in Hastings Diversified Utilities Fund (HDF) from 4.5% to 14.9%, at a cost of $72.3 million.

APA did not rule out upping its stake in HDF if forced to protect the value of its investment.

HDF’s assets include gas transmission pipelines that flow through to APA’s own pipelines, so the acquisition makes sense from a strategic point of view.

The acquisition followed APA’s recent purchase of AGL Energy’s gas pipeline in Queensland.

The market applauded APA’s move to up its stake in HDF, with the latter’s EPIC assets constituting a natural fit for APA. Brokers also noted that the acquisition price was reasonable.

APA advised that the acquisition will not affect its guidance of 5% distribution growth in FY10.

Promising Profits

On 24 February, APA Group released its 1H10 results, impressing the stock market.

The trust reported an operating profit of $63.6 million, up 28.3% on the previous year as capacity expansions on gas pipelines helped boost earnings.

The result was impressive, considering revenue only grew by 1.2% to $495.9 million.

Earnings per share (EPS) of 12.6 cents were up 21%, helped by paying down some interest as well as the previous year’s results being influenced by significant one-off items.

The trust gave core earnings (EBITDA) guidance for its full year of $445-$460 million, and said its distributions should increase by at least 5% this year.

The results pleased the stock market, as the units closed 4.6% higher at $3.42 on the day of the announcement.

Outlook

In terms of stocks to watch, APA is a unique company exposed to Australia’s lucrative natural gas assets. The natural gas APA transports and delivers is from all major production sources to all major markets.

As such, APA has an unrivalled gas asset footprint and is the largest transporter of natural gas across Australia by pipeline length, capacity and volume.

The company has noted that in Western Australia, the delivery of gas for power generation in the mining sector will be key to continued growth, and that the development of the coal seam gas (CSG) reserves in Queensland should also provide longer term opportunities for APA.

APA’s 1H10 results impressed the market, with the group clocking an impressive operating profit increase of 28% on year.

The stock market is also excited to hear that APA intends to increase distributions by 5% this year.

APA is well poised to be a strategic consolidator in the east coast gas network and looks set to benefit from the implementation of renewable energy targets.