New Technology Like Basslink May Increase Capacity, But Regulatory Risks Persist

Key Takeaways

• Investment in technology and strategic acquisitions could drive revenue growth and enhance profitability, with improved asset utilization and successful integration.
  
• Future projects and pipeline expansions might significantly boost revenues and returns, leveraging growing markets and attracting investors with favorable dividend prospects.
  
• Heavy regulation, interest costs, and economic factors threaten APA Group's infrastructure expansion, project execution, and future financial performance.

Catalysts

Engages in the energy infrastructure business in Australia.

• APA's investment in new technology, such as the dynamic monitoring system on Basslink, allows enhanced asset utilization during peak periods, potentially driving revenue growth by increasing capacity sufficiently to meet heightened demand.
  
• Successful integration and performance of recent acquisitions (like Pilbara Energy and Basslink) align with business projections, which could improve future earnings and enhance profitability.
  
• The development of twin pipelines in Queensland under the CS Energy agreement provides potential for significant revenue expansion as APA capitalizes on a growing gas peaking market.
  
• Key future projects, such as those identified within the $1.8 billion organic growth pipeline, focus on contracted power generation and expansion of the gas transmission and storage network, potentially boosting revenues and generating healthy return margins above APA’s post-tax WACC.
  
• The potential for increasing franking levels on dividends, as higher tax payments begin, adds to net earnings prospects and could position APA favorably with investors seeking partially franked returns.

APA Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming APA Group's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.9% today to 8.3% in 3 years time.
• Analysts expect earnings to reach A$296.9 million (and earnings per share of A$0.23) by about February 2028, down from A$978.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$383.1 million in earnings, and the most bearish expecting A$173 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.8x on those 2028 earnings, up from 9.0x today. This future PE is greater than the current PE for the AU Gas Utilities industry at 9.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

APA Group Future Earnings Per Share Growth

Risks

• The potential for heavy regulation on key assets such as the Southwest Queensland Pipeline could significantly impact APA Group's ability to expand its infrastructure and, as a result, undermine its revenue growth and future earnings.
  
• Increased interest costs and normalization of cash taxes could constrain free cash flow, thereby affecting the company's ability to fund growth projects and potentially limiting earnings and net margins.
  
• The uncertainty in the timing and execution of APA's $1.8 billion growth capital expenditure pipeline, which is largely dependent on customer-driven projects, can introduce significant variability in expected returns and impact revenue.
  
• There is a risk associated with APA Group's reliance on acquiring debt to finance growth, especially if tightening economic conditions or credit market fluctuations make it more expensive to borrow, impacting net margins.
  
• Potential delays in investment decisions due to macroeconomic factors, such as softened commodity prices, could impact APA Group's project timelines, delaying expected revenue growth and affecting long-term earnings projections.

Valuation

• The analysts have a consensus price target of A$8.253 for APA Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.3, and the most bearish reporting a price target of just A$6.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.6 billion, earnings will come to A$296.9 million, and it would be trading on a PE ratio of 43.8x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of A$6.77, the analyst price target of A$8.25 is 18.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.