APA Group. Earnings and target price revision. Price catalyst

Transcription

1 AUSTRALIA APA AU Price (at 13:13, 22 Aug 2012 GMT) A$4.78 Volatility index Low GICS sector Utilities Market cap A$m 3, day avg turnover A$m 16.1 Number shares on issue m Investment fundamentals Year end 30 Jun 2012A 2013E 2014E 2015E Revenue m 1, , , ,450.3 EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x APA AU vs ASX 100 Source: FactSet, Macquarie Research, August 2012 (all figures in AUD unless noted) 23 August 2012 Macquarie Securities (Australia) Limited Growth pipeline now in sight Event APA reported its FY12 result. From a statutory perspective, PAT was $131m, 5% below our expectation of $140m. EBITDA was $526m (MRE $539m with the variance around Qld and the growth in RBP) inclusive of one-offs. Operating cashflow was $336m (MRE $339m), up 16% albeit operating cashflow per share was flat at $0.525 given additional shares on issue. The distribution of $0.35 was as expected. Impact Overall the result was in line with guidance from the interim result, with underlying EBITDA coming in at $535.5m, right in the middle of guidance at $530m-$540m. This may be seen as a little underwhelming given APA has had a habit of beating guidance, but given the interim implicitly contained an upgrade it should not be a surprise. Whilst EBITDA was slightly lower, so were borrowing expenses. Cashflow was broadly in line with our expectations. The capital raising and Allgas sale have left the balance sheet in a strong position, keeping in mind the future capex profile, with ND:EBITDA of ~5.0x (ex-associates) and interest coverage of ~2.5x. We expect the strong cash generation to continue into the medium term given management do not envisage paying tax until FY15, one year later than we had forecast. FY13 appears as if it will be somewhat of a transitional year. The loss of earnings growth from the Allgas divestiture will not be replaced until ~FY14 as capex is focussed on the growth projects, including Mondarra, Goldfields and RBP. Consequently, we expect capex to remain in the vicinity of ~$300m over the next three years, albeit a reasonable proportion of this includes reinvestment in the associates. Subsequently, we are expecting flat dividend growth for FY13, however we should this begin to expand again in FY14. FY13 is likely to be a transition year before APA moves to accelerated growth in FY14 and FY15. APA reiterated guidance of ~$300m of capex which is consistent with our expectation. One consequence of the higher investment, given there is a two- to three-year lag for the projects turn on, is dividend growth is constrained. APA again reiterated FY12 guidance of at least last year s dividend. In the current circumstances we believe the dividend will likely remain flat in FY12. Earnings and target price revision FY13/14/15E EPS -11.4%/-13.9%/-9.4%. Our EBITDA expectation is largely unchanged, but we have factored in the convertible notes increasing the interest expense with the proceeds used for debt reduction only. Price catalyst Due to research restrictions, Macquarie cannot advise its valuation on APA AU at present. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Fig 1 APA Result Key takeaways The good The not so good What else was interesting Hitting guidance. The key positive of the result was that management hit the mid-point of guidance for underlying EBITDA, reiterating the stability and predictability of the underlying businesses. We expect this trend to continue into FY13 with (continuing business) EBITDA guidance of $540m-$550m and a distribution of at least $0.35ps. Interest costs decreased. While it was largely expected, management did flag the ability to refinance expensive facilities more favourably under a low bond and swap rate environment. This is obviously a one-off kick to earnings, however, and we would expect the cash net interest payment to remain around the ~$240m level over the medium term from the current $218m level. Distribution in line. Again it was expected, however given the environment beating guidance of at least 34.4cps is a positive. Importantly the distribution was fully covered, with the payout ratio increasing slightly from FY11 (65.7%) to 66.7%. Debt metrics., With ND:EBITDA of ~5.0x (exassociates) and interest coverage of ~2.5x, the balance sheet looks in better shape then many had expected given the sale of Allgas. Whilst the capital raising is responsible, we expect these metrics to improve into FY13 and FY14. Further, there are no debt maturities in FY13, which bodes well for the credit risk of the business and allows management to focus on extending new debt maturity as well as bringing in further diversity following the Japanese and Canadian issues in FY11. DPR no longer a crutch. Importantly, APA s risk profile has diminished with the hybrid equity raising. The dependency on the dividend reinvestment program has been reduced and we see APA as now well funded for the current capex cycle. Guidance in FY13 of $ m reflects a very conservative regulatory outcome with Gasnet. We estimate EBITDA could be impacted by as much as $7m, with little offset from debt hedging. Slightly softer than we had expected. The variance to our expectation in the EBITDA number centres around the RBP and CP business in Queensland. Growth outlook taking a breather. Currently management is focussing on the projects and acquisitions at hand, and hence in our view FY13 will be a year to consolidate the overall business, allowing for stronger growth to ensue from FY14 onwards. This is little more than a time issue for investors. Gas demand environment soft. Whilst also largely expected, the soft demand environment in Victoria contributed to softer earnings in the VTS. We would obviously expect this to revert to the mean in the long run, given a move toward an El Nino cycle, away from La Nina conditions on the east coast. Lower customer contributions. The Asset Management business received a lower input from customer contributions, continuing on from the first half. Typically APA gets $5-8m pa from this source, yet in the first half they received none. This hurt the asset management business fullyear result, reporting a ~18% decline in EBITDA to $31.9m. Long-term gas growth outlook unchanged. Management reiterated their view of longer-term gas growth despite the high short-term price, citing peaking electricity generation as a major contributor. Further, they did not see the current high gas price as contributing to lower overall usage, and would expect current planned investment to go ahead as usual. FY13 starting well. Management inferred that they had seen a strong start to FY13 in terms of gas volumes, which bodes well for the 1H13 results. Other minor elements like insurance claims in Qld should offset the drag from FY12. VTS reset still to come. Interestingly management have given guidance with the VTS reset still due in March This points to either a relatively certain outcome from management s view, or potential upside to the FY13 continuing EBITDA guidance of $540m-$550m. Tax payment delayed. Management reiterated at the interim result that tax would most likely begin to be paid in FY14. They have since changed their target and now expect it to begin in FY15, with scope for further delays depending in investment spend. Cashflow rebound. Operating cashflow rebounded in the second half, following the large payment which was held up over the new year. Importantly, operating cashflow growth was 15.7% on FY11. Source: Macquarie Research, August August

3 Analysis While slightly softer at the top line (excluding the one-off) then we had expected, the FY12 result was relatively straightforward and in line with our expectations. EBITDA increased 6.9% for the full year to $525.8m from $492.1m in the pcp, benefitting from the full period contribution of Emu Downs along with smaller acquisitions, such as the Amadeus pipeline in NT. However, the offset to growth was the sale of Allgas ($20m), such that second-half performance was only up 9%. The sale of Allgas is the main headwind to earnings growth in FY13. The FY12 result highlights that APA is a predictable business. After hitting the mid-point of FY12 guidance, management have guided for FY13 continuing EBITDA of $540m-$550m, up 4.8%- 6.8%. We are expecting $544m. Of that growth, we should see positive contributions from all business segments, albeit the mix will be away from the larger transmission business with asset management and investments driving the majority of the growth. What this highlights is the certainty that APA can provide investors, given its majority regulated/contracted business segments. The focus for FY13 includes: RBP/Gasnet (VTS) regulatory resets. AER released its final decision on the Roma-Brisbane Pipeline (RBP) on 10 August. The outcomes included WACC of 7.31%, MRP of 6.0% and DRP of 4.06%, however the important part of the outcome was the precedent set; in itself the decision will have little impact on the RBP given the pipeline is majority contracted. The review, however, does provide some detailed knowledge of the thinking around WACC. Importantly, AER used the government 10-year bond rate over the 20 days prior to the reset to establish the risk-free rate. Further, the AER spent much time presenting an argument why 6a market risk premium of 6.0% is appropriate, but also rejecting the idea that the MRP goes up when the RFR goes down. The DPR had been established in prior decisions, as had the gamma at 0.25x. While the Roma-Brisbane Pipeline (RBP) is not fully regulated, the impact of the August review highlighted the tighter return environment the regulated utilities are now moving toward. Further, the Gasnet (Victorian Transmission System) review will occur in March 2013 following a review in September, with our expectation now to see a drop of ~270bps in the pre-tax WACC, which should cost ~$7m pa at the EBITDA line. The Goldfields Gas Pipeline reset is in January Interestingly enough, management have provided guidance with the VTS review still lingering, suggesting further upside if a more agreeable outcome emerged. At this point, however, we regard this as having minimal probability. Project expansion, capex spend. FY13 should see a full year contribution from the RBP expansion, as well as a second half contribution from the Mondarra Gas Storage Facility. While the Mondarra contribution will be small, we should see this ramp-up strongly in FY14. Further, the Moomba-Sydney pipeline should continue to add growth as the increased incremental capacity makes a full-year contribution. The capital expenditure program will remain elevated over the coming three years, reflecting the strong expansion project growth and subsequent cashflow growth in the medium term. We expect ~$841m of growth capex over the next three years, albeit some of this will go toward reinvestment in associates. At this stage we remain conservative about thefy15 capex outlook. The swing factor in the capex profile remains Gasnet (VTS). Management have proposed a ~$170m network expansion, however if the regulatory reset moves the WACC around too far the risk is that perceived unacceptable returns on the incremental capex will see the spend deferred. The medium-term outlook post FY13 then turns to growth. With the current projects all beginning to come online, we expect to see strong growth in operating cashflow from FY14 onwards, pointing to escalation in the dividend. Importantly, the capex spend over the next few years is relatively low risk given it is contracted ahead of time. The major issue is execution risk; however, APA has a solid reputation to date of delivering on time. 23 August

4 Fig 2 APA Fundamentals Year end June Profit & Loss Gas Trasmission $m ,006 1,031 1,057 1,085 1,112 Wind Generation $m Asset management $m Energy investments Other $m Total Revenue $m 1,079 1,303 1,316 1,407 1,476 1,537 1,559 1,604 1,653 1,697 Growth % 10.6% 20.7% 1.0% 6.9% 4.9% 4.1% 1.4% 2.9% 3.1% 2.7% Gas Trasmission $m Wind Generation $m Asset management $m Energy investments $m One offs $m EBITDA $m Margin % 45.6% 40.4% 41.3% 43.1% 43.9% 44.8% 45.2% 45.9% 46.7% 47.3% Depreciation $m Net Interest $m Profit Before Tax $m Tax Expense $m Tax Ratio % -23% -27% -26% -26% -25% -25% -26% -26% -26% -26% Net Profit After Tax $m Minority Interest $m Attributed Profit $m EPS (one offs) PE x DPS Yield % Payout ratio (Op cf - maint) x 66% 64% 77% 64% 67% 67% 67% 67% 67% 67% EV/EBITDA x EV/EBIT x Price to book value x Net Debt 2,795 2,576 2,736 2,886 2,980 3,073 3,156 3,239 3,326 3,418 D:EV % 51.3% 45.5% 46.7% 47.5% 47.9% 48.2% 48.4% 48.6% 48.8% 49.0% D:D+E % 62.6% 61.5% 63.3% 64.8% 65.2% 65.4% 65.5% 65.4% 65.3% 65.2% Net Debt : EBITDA x DSCR (post reg & main capex) x RoFE 8.8% 9.9% 10.0% 10.9% 11.6% 12.0% 12.0% 12.3% 12.6% 12.8% RoE 6.5% 8.1% 8.4% 10.9% 13.3% 14.0% 14.8% 15.6% 16.1% 16.2% Share on issue m EFPOWA m Cashflow Schedule Operating Cash Flow EBITDA (inc associates) $m Net Interest Paid $m Tax Paid $m Other (dec Working Capital) $m Net Operating Cashflow $m Investing Cashflow Capex & Acquisitions $m Divestments $m Other $m Net Investing Cashflow $m Financing Cashflow Dividends $m Debt Changes $m New Equity $m Other (inc adj.) $m Net Financing Cashflow $m Net Cashflow $m Balance Sheet Cash $m Debtors $m Tangible Assets $m 3,768 3,472 3,623 3,675 3,755 3,839 3,919 3,998 4,075 4,150 Intangible Assets $m Investments $m ,033 1,091 1,146 1,211 1,287 1,372 Other $m Total Assets $m 5,428 5,496 6,170 6,309 6,095 6,254 6,414 6,583 6,759 6,938 Total Debt $m 2,890 2,906 3,557 3,652 3,408 3,520 3,630 3,740 3,850 3,960 Creditors $m DITL $m Other $m Total Liabilities $m 3,760 3,882 4,584 4,741 4,507 4,629 4,749 4,869 4,989 5,110 Shareholders Equity Ordinary $m 1,575 1,502 1,549 1,604 1,659 1,715 1,774 1,837 1,904 1,972 Reserves & reserves $m Minority Interests $m Total Shareholder Funds $m 1,668 1,614 1,587 1,568 1,588 1,625 1,665 1,714 1,769 1,828 Source: Company data, Macquarie Research, August August

5 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Group is acting as Joint leader Manager to for a $350 million Subordinated Offer, as announced on 9 August Within the last 12 months, Macquarie Group has received compensation for investment advisory services from. Macquarie Group is acting for Marubeni and RREEF in acquiring 80% of the Allgas distribution business from APA, as announced on 14th December Macquarie Group will receive compensation for investment advisory services from Marubeni and RREEF. Macquarie Group is acting as Financial Adviser to (APA) in a public off market takeover bid for Hastings Diversified Utilities Fund (HDF), as announced 14 December Macquarie Group will receive compensation for investment advisory services from. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of 's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at 23 August