APA - The biggest buy yet

About the author:

Nathan Lead
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.

The 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%.

Valuation

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.

More information

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.

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents ("Morgans") do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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