APA - The biggest buy yet
About the author:
- Author name:
- By Nathan Lead
- Job title:
- Senior Analyst
- Date posted:
- 11 December 2014, 11:27 AM
- Sectors Covered:
- Infrastructure, Utilities
The US$5bn acquisition of BG's CSG-LNG pipeline in Qld provides APA
with low risk, direct exposure to the LNG projects in Gladstone.
pipeline will generate substantial earnings and cashflow improvement,
at least for the initial 20 year contract term.
Our Target Price
reduces 63cps to $7.49, after factoring in the asset value, funding
structure, and cost leakage.
Take up your rights under the entitlement
offer – we estimate total potential return may be 20%.
Take up the entitlement offer
The offer is a 1 for 3 accelerated renounceable entitlement offer at a price of
$6.60 per new share. On our CY15F distribution of 43cps, the offer price
implies a yield of 6.5%. If the share price trades at our revised Target Price of
$7.49ps, the upside to the offer price is 13%. Total potential return is ~20%.
Strategy and structure
APA has successfully built its business from the acquisition and development of
gas infrastructure assets that can be leveraged for further growth opportunities.
However, the structure of the BG pipeline haulage tariff is not something APA
has said it would usually agree to, whereby the primary component ceases at
the end of the initial 20 year contact term.
The result is that EBITDA may not
be generated from year 21 of the contract onwards. This eliminates the
potential for perpetuity cashflow assumptions to be built into valuations, which
we believe has assisted in share price outperformance.
Acquisition and capital raising impact on forecasts
Forecast EBITDA increases about 55% from FY16. However, this translates
into only a 10% increase in operating cashflow per share due to shares issued
under the entitlement offer and new borrowings to fund the acquisition.
We've set a more conservative FY15 DPS forecast of 37cps (guidance remains at
least 36.25cps), but have increased our FY16+ DPS estimate by 11-15%.
Our Target Price has decreased 63cps to $7.49ps. We agree with APA on the
$6bn value of the asset, but the entitlement offer (+33% more shares on issue)
dilutes the value of the existing portfolio and the $255m of stamp duty and
transactions costs incurred in the transaction are meaningful value leakage.
Morgans clients can access our detailed research on APA Group (APA). If you are interested in finding out more, please contact your nearest Morgans office.
Disclaimer: Morgans Financial Limited is a Co-Manager to the APA entitlement offer and will earn fees in that regard.
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