APA Group (APA) operates as an energy infrastructure provider by enabling natural gas transmission and distribution. Additionally, ADA derives revenue from asset management, and energy investment segments. APA Group is a blue-chip company that is included in the S&P 50 Index – an index that tracks the largest firms listed on the ASX.
APA operates 29,500km of gas mains and pipelines and distributes to more than 1.4million gas consumers across SA, VIC, QLD, NSW, and NT.
We have analysed how much each of these segments contribute towards APA’s revenues in the below chart to understand the extent of diversity in ADA’s operations.
APA’s business is a part of the essential services supply chain. Therefore, the operations were not disrupted during the pandemic restrictions. The group identifies itself as having a low-risk business model with an active risk management processes in place. The firm mitigates risk by diversifying its customers and industries, assesses creditworthiness, and enters long term contacts when making investments.
APA is a well-managed business that has a history of good past performance due to the growth in energy demand. The assets have performed consistently, which goes to show its high-quality long-life features. The firm has managed to navigate through the pandemic expertly and delivered a performance of strength over the past financial year.
This is a year-to-date chart of ADA stock. The stock has a V-shaped recovery from the March crash, and since then made up most of its losses. However, there is a lot of volatility that can be observed.
The stock is currently trading at $10.23 closer to mid-52-week highs on a scale of the 52-week high and low.
APA’s strategy for growth is through enhancement of their portfolio of gas transmission pipelines, power-generation & renewable energy in Australia, and to explore opportunities in the gas transmission and distribution in North America. Maintaining financial strength is a primary goal for APA, and hence the low risk strategy that delivers consistent returns.
The $3.9 Billion pipeline transport industry in Australia has seen a year-on-year 7% growth the past 5 years. As demand for gas decreases, the industry is now forecasted to grow at 2% every year through to 2025. APA Group has a 50% market share in this industry – indicating its dominance.
The industry is associated with high barriers to entry due to the large investments that are required. Competition therefore is low relative to other industries. As a result of the high barriers to entry, the industry provides a platform to generate high revenues at high margins.
Firms operating in this industry also need to invest heavily. They are hence characterised with a lot of assets on its balance sheet.
Institutional investors and the overall profitability of firms that operate in this space have supported expansion and firms such as APA Group have grown into juggernauts.
APA had a strong financial performance in FY2020. The company reported 5% increase in revenues, 4.8% growth in EBITDA, and a massive 10% increase in net income from FY2019. The segmented revenues have already been discussed earlier in this report.
The firm maintained an average EBITDA margin of 63.7% over the past 5 years. The return on its assets and capital have remained stable over the past 5-year period as well. The return on equity, however, has seen a rising trend during the last two years – mainly due to the increase in revenues and debt capitalisation over the same period.
The firm reported $1.2 Billion in Cash – a 180% increase from 2019. The increase in cash position is welcomed as we entered uncertain economic times due to the pandemic. The firm also has already taken capital management initiatives to mitigate any risk due to the uncertain economic outlook by holding undrawn debt funding facilities of close to $10 billion. While these will definitely help the firm in the short-term if there any unforeseen crisis, it would damage the firm in the longer run due to its already debt heavy capital structure.
The coronavirus induced market downturn in March has already pushed debt heavy and capital-intensive companies. APA holds $11 Billion of debt on its balance sheet, while its assets are $16 Billion. This is a common characteristic in businesses associated with high capital requirements. But given the uncertain times, we find this to be on the higher side to ride out any wave.
The capital structure paints the same picture. The firm is capitalised with 78.2% debt and 21.8 equity – a high debt to equity ratio. APA holds a BBB credit rating from S&P. The BBB rating means that default risks associated with the firm are low. However, adverse economic conditions may impair the risks involved. Therefore, we are concerned about APA’s financial health in the short-term during times of change and adversity.
APA most recent dividend was 31.6% franked, 27 cents per share, translating into a yield of 4.86%. A healthy dividend payout which has been stable over the years.
APA is a blue-chip firm that has a strong past performance that has dominated the sector it operates in and is forecasted to further dominate. The financial health is considered as industry norms; however, caution should be exercised as we do not know the complete extent of the economic uncertainties present in the market right now. The stock may continue to be volatile in the near future. Our recommendation to investors already exposed to APA is to “Hold”.