Treasure Chest: APA Group’s Electric Future

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Today’s idea is on APA Group

By Greg Peel

Whose idea is it?

Analysts at Jarden

The Subject:

Pipeline company APA Group ((APA)).

APA Group operates over 15,000km of gas pipelines across Australia, generating the majority of its revenue from CPI-linked contracts which provide a natural hedge against inflation.

As a utility, investors look to APA for its distribution (dividend) growth.

Jarden has initiated coverage of APA with an Overweight rating and a $10.95 target. Note that Jarden uses a five-tier ratings system, and Overweight sits in between Neutral and Buy.

In FY22, APA derived the bulk of its earnings from gas pipelines, but now the company is prioritising investments in the Australian electricity sector to participate in the estimated $250bn of investment required to decarbonise the east coast electricity grid.

APA is well positioned to benefit, Jarden suggests, from increased reliance on gas volumes in Queensland to meet east coast gas demand, due to political and regulatory intervention in gas markets, combined with the decline of gas supplies in southern Australia.

But APA is committed to growth, with $1.4bn of growth investment underway over the next two-three years, recently investing in capabilities in the electricity/energy transition sector. Jarden sees this move as a desire to diversify away from reliance on gas and participate in opportunities in electricity transmission.

While APA recently missed out as the preferred developer for the first NSW Renewable Energy Zone (REZ), Jarden notes more than $12bn-worth of projects have been identified by the Australian Energy Market Operator and the broker expects the company to target participation in the next wave of transmission investment.

Jarden’s analysis concludes the company is set to maintain its track record of growing dividends through to the end of the decade, due to inflation-linked revenues and the contribution from its new growth investment.

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The market was disappointed in early May when APA did not win the REZ contract, as the project was considered a priority growth opportunity, but selling was short-lived. More recently, rising bond yields have weighed on utilities.

The Alinta North West WA asset auction has since emerged with numerous bidders, and this aligns with APA's pursuit of its remote energy business, Macquarie noted mid-month.

The assets include a residual 11% interest in the Goldfields pipeline, which APA Group already owns, a Newman remote energy grid, plus a Port Hedland power plant.

The Alinta assets would double the company's dispatchable and non-dispatchable power. Macquarie retains a Neutral rating on APA, noting there is a pain-point for investors as pricing for these assets is heated.

Four brokers in the FNArena database cover APA, and all currently have Hold or equivalent ratings. Jarden is not monitored daily.

The consensus target between the four is $10.35 (last trade $10.23), compared to Jarden’s $10.95.

Ord Minnett and Morgans have nevertheless not updated on the stock since its February result release.

Current consensus forecasts anticipate APA Group will pay out 55c and 58.4c to shareholders this year (FY23) and next (FY24) for respective yields of 5.4% and 5.7% at today's share price of $10.23. Jarden's projections are similar, with its estimate for FY25 set on 62c (consensus 61.2c) for a prospective yield of 6.1%.

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