APA Group (APA) – Low risk yield attraction

APA Group operates through Energy Infrastructure, Asset Management, and Energy Investments segments. It runs gas transmission pipelines and interconnected grids, gas-fired power stations, electricity transmission interconnectors, solar and wind farms, and battery energy storage systems, as well as gas storage, processing, and compression facilities. The company is headquartered in Sydney, Australia.

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Ord Minnett has reviewed the outlook for APA Group (APA), an energy infrastructure business that owns and operates a variety of gas pipelines and transmission networks, power stations, wind and solar farms, and battery storage facilities across the country. The reassessment follows a period of underperformance driven by regulatory risks, concerns over its distribution outlook, the potential loss of earnings from the Wallumbilla–Gladstone pipeline (WGP) when the sale and lease-back deal with Shell ends in mid CY35, and the overhang from Unisuper’s sell-down of its stake in the company.

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Our latest analysis means we now take a more constructive view on the stock, given our view that the above-mentioned factors are now discounted in APA’s price, and we raise our recommendation to Buy from Accumulate. Our target price is maintained at $8.60.

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Concerns over the distribution profile emerged when APA flagged changes to its capital allocation policy in CY23, but the market has since adjusted its expectations accordingly, and we now forecast a distribution yield over the FY25–FY30 period of more than 8%, paid out of lower-risk and largely inflation-protected earnings – this appealing yield is a key plank of our investment thesis.