APA Group posted first-half FY17 operating earnings of $760 million, beating Ord Minnett’s forecast of $710 million, with an interim dividend of 20.5 cents per share in line with what had been pre-announced by the company in December.
Operating earnings increased a strong 14% on a year ago with strong contributions from Diamantina Power Station, Moomba-Sydney Pipeline, and Emu Downs Wind Farm, along with lower corporate costs. Meanwhile, free cash flow was very strong and implies a 7.5% yield.
We think the company's guidance now looks conservative as despite the strong interim result, management reiterated full-year guidance – only indicating the outcome will likely be at the top end of the range. This implies a 10% decline in operating earnings for the June half.
APA has already identified some 63% of the projects underpinning its three-year capital expenditure target of $1.5 billion. Included in this are the Reedy Creek Wallumbilla Pipeline, the Emu Downs Solar Farm, the Badgingarra Wind Farm and the Western Slopes Pipeline. The Western Slopes Pipeline is still awaiting regulatory approvals and final investment decision, but the other three projects should be completed by 2019.
In our view, the regulatory headwinds that have impacted APA in the past are now likely behind us. Our positive view on the stock leads us to raise our recommendation to Buy from Accumulate, and we point out the potential 25% upside to our December 2017 target price of $10.90 (up from $10.30).