APA Group delivers steady earnings boost for fiscal 2018
The energy infrastructure company edged ahead of full-year guidance yesterday when it posted a 3.3 per cent earnings increase, prompting a slight fair value increase from Morningstar.
Mentioned: APA Group (APA)
The energy infrastructure company edged ahead of full-year guidance yesterday when it posted a 3.3 per cent earnings increase, prompting a slight fair value increase from Morningstar.
The positive result was driven in part by regulatory approval on its $13 billion takeover offer by Hong-Kong based consortium, CK Infrastructure.
Earnings before interest, tax, depreciation and amortisation rose to $1.518 billion for the natural gas and electricity operator, slightly above the $1.51 billion top range guidance, aided by contributions from newly commissioned assets and fresh contracts on the company's east and west coast grids.
APA Group provided fiscal guidance for the year ahead of $1,550 to 1,575 million, or 3 per cent growth at the midpoint.
In response to the result, Morningstar senior equities analyst Adrian Atkins marginally upgraded his near-term earnings forecasts, and lifted his underlying discounted-cash flow-based valuation 4 per cent to $8.30.
He describes the result as steady: "This modest growth comes despite ongoing substantial investment in new projects, highlighting headwinds in existing assets, including lower demand on some pipelines and lower returns for regulated assets."
"We expect earnings headwinds to continue as gas market rule changes designed to reduce gas transportation costs ramp up.
"Nonetheless, APA Group remains one of Australia's better-quality infrastructure companies, warranting a narrow economic moat rating," Atkins says.
Each-way bet on watchdog approval
Earlier this month, APA Group committed to accepting a binding takeover offer from Cheung Kong Infrastructure, in line with its indicative offer from June of $11 per security in cash.
A major risk to the deal falling over remains objection from the Foreign Investment Review Board.
Morningstar analysts rate this a 50 per cent chance.
Group directors unanimously recommend the offer, and the independent expert, Grant Samuel, is bound to recommend it as well, says Atkins.
"Should the takeover succeed, upside is around 10 per cent from the current share price," Atkins says. "Should it fail, we think APA Group's security price could fall around 20 per cent towards our standalone DCF-based valuation of $8 per share.
"Our current fair value estimate of $9.50 is set at the midpoint of our standalone valuation and the takeover offer price, reflecting our view that the deal has a 50 per cent chance of succeeding."
Atkins adds that should FIRB reject the takeover offer, there remains a reasonable chance of APA Group being acquired, as Australian pension funds could "come out of the woodwork".
The Australian Competition and Consumer Commission will also provide its view around competition concerns in mid-September, which according to Atkins, might require CKI to sell a few small assets and make other minor concessions. FIRB's decision will come after the ACCC's decision.
APA Group security holders will vote on the takeover at a scheme meeting in late November 2018.
A final dividend of 24 cents a share was declared.
The share price was trading at $10.14 at market close yesterday, a slight premium Morningstar's $9.65 FVE.
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Emma Rapaport is a reporter for Morningstar Australia
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