Alinta Energy Pilbara acquisition

CORPORATE ACTION

Need To Know

• SPP up to $30,000 for eligible security holders at $8.50 per share
• Offer closes 5pm 15 Sep 2023
• Proceeds applied to purchase the assets of Alinta Energy Pilbara for $1.8bn

Summary

The Security Purchase Plan (SPP) is aiming to raise approximately $75m with the proceeds being used to fund the purchase of Alinta Energy Pilbara assets in Western Australia (WA). An institutional Placement raised $675m on 24 Aug 2023, priced at $8.50 per security.

Alinta Energy Pilbara's assets are a mix of electricity generation/ distribution assets for the Kalgoorlie (WA) to Pilbara (WA) gas pipeline. APA expects the assets to be accretive to Group distributions from FY25 onwards. APA sees the assets as being well-positioned to grow as the major miners in the Pilbara embark on significant decarbonisation projects over the coming years.

The SPP $8.50 price (or 2% discount to VWAP) is the same price that was offered to institutional investors.

The SPP represents a good opportunity for existing investors to participate in the capital raising by acquiring shares at a discount to the current market price at the same price as the institutional offering and to avoid the dilutionary impact of the offer. Consider participating in the SPP provided this aligns with individual investor objectives.

Investment View

At $8.50, the APA share price is 25% lower YTD. The lower share price reflects a) expectation around the potential for acquisitions (including equity raisings); b) higher long-term bond yields which disproportionally impacted more leveraged, longer-dated cash flows (like APA’s infrastructure assets); and c) prospects of lower period of distribution growth in the years ahead (+2% vs historic distribution growth of +5% CAGR)

At $8.50, APA is currently trading at an EV/EBITDA multiple of 11.7x or a -15% discount to APA's historical multiple of 13.5x, which suggests some value is apparent at current share prices.

The addition of the Alinta Energy Pilbara assets to APA is expected to be financially accretive to the Group in FY25. The acquisition is funded via $1.1bn debt and $0.75bn of new equity.

APA has paid what we see as a full price of 12.9x FY24 EV/EBITDA, a premium to APA's current multiple. The near-term earnings dilution in FY24E reflects the higher price paid and higher costs within the APA base business which have damped earnings (cuts of 2-3%) growth expectations in both FY24E and FY25E.

In our view, the full acquisition price also reflects an APA Board and new CEO who are keen to show tangible evidence they can deploy into large-scale M&A. Particularly, M&A which puts the Group on a pathway to decarbonise APA’s EBITDA profile.

At $8.50, many of the concerns around the APA’s acquisition profile, balance sheet and outlook are now known. The capital raising is priced at a relatively generous discount (-8.7%) to the undisturbed share price of ~$9.25 before the acquisition. APA is yielding 6.4% in FY24e at the SPP price, which is expected to grow 2% in FY23E. We rate APA a Hold.

Key Risk

Upside risks include; 1) earnings and distribution accretive, lower carbon intensity acquisitions; 2) new major gas distribution pipeline developments; 3) UniSuper clarifies is position on APA; 4) longer period of higher inflation would boost revenue growth; 5) APA is bid for by an Australian backed institution. 

Key downside risks include; 1) re-pricing of major gas contracts falling lower than inflation due to timing; 2) increased maintenance costs due to aging life of gas pipeline assets; 3) interest rate risk on debt profile; 4 delays and cost overruns in projects – specifically Basslink (Tas); 5) tightening of regulatory policy around Australian energy, particularly regarding carbon intensity; and 6) further focus on sustainability/ESG issues.

Figure 1: APA EV/EBITDA multiple 11.7x is at 15% discount to long-term average of 13.5x

Figure 2: APA dividend yield 6.4%, which is at the upper end of where APA has historically traded.