APA is ‘just’ an Infrastructure company. Right? Well you’d be mistaken for thinking it wasn’t after it has increase by 50% in the last 12 months.
This rapid increase in share price, the result of acquisitions and new contracts, has seen APA’s dividend yield fall from mid 6% to the low 4%’s. Still better than the cash rate but an increasingly poor yield compared to some of its peers.
The question hanging in the air is “where to from here?”
In our view APA has been in a sweet spot. In a recent UBS research note they quite rightly point out that infrastructure companies will do well in falling interest rate environments but once interest rates and bond yields start to rise their valuation should start to fall.
In simple terms, rising interest rates will increase interest payable and with almost $9bn in debt it’s easy to see how a small rise in rates can hit the bottom line. Further, when valuing companies a ‘discount rate’ is applied to future cash flows. This discount rate is based on bond yields. The higher the discount rate, the lower the valuation. It can be a ‘double-whammy’ to valuation.
Globally we are starting to see an increase in some bond yields and the US Fed is talking about raising rates. In medium term the effects to valuation are expected to be minimal.
Still, APA is to finalise the acquisition of the Queensland CLNG pipeline (the line for coals seam gas). In funding this acquisition APA raised capital but in their research note last week RBS Morgans suggested APA raised $500m to much (that’s a little embarrassing). If this is the case the excess capital will most likely be used to decrease debt.
RBS also rightly points out that APA has excess capacity in its QLD pipeline. If they were able to find contracts to fill this then there is further revenue gains to be had.
In our opinion APA is probably trading towards the top of its short-term value but opportunities exist for APA to continue its growth so it may be too soon to look for an exit.
RBS valuation comes in at $8.66. UBS at $9.29. Reality always seems somewhere in the middle with price targets and that is right where APA sits today.
This is general information only and is not personal advice. It does not take into account your personal circumstances. Please consult your adviser before taking any action.