2H23 result overview (vs consensus)
EBITDA $846 vs $883m
NPAT $105m vs 142m
DPS 20cps vs 21.5cps. Payout ratio 61% vs policy of 60-70% below the long payout of 64%
FY24 DPU guidance 54cps vs 56cps consensus. Organic growth capex >$1.4bn over FY24-26 (up from X)
Balance sheet: FFO/net debt 10.6%, FFO/interest 3.3x with $2.1bn of cash and undrawn debt capacity
Alinta Energy Pilbara (AEP) acquisition
AEP consists of 7 operating assets and 2 development assets, the portfolio has a mixture of energy generation, storage, and distribution to mining customers in Pilbara (WA). Whilst not disclosed by APA, we estimate ~50% of EBITDA comes from generation activities.
Transaction metrics
Enterprise Value $1.8bn. Fund via equity $750m, debt $993m
FY24 EBITDA $124m or around 7% accretive to EBITDA
FY24 implied EV/EBITDA multiple of 12.9x
Effective 4Q 2023. ACCC is not required.
FFO accretion in the first full year (i.e. FY25).
Equity component funded by $675m institutional share placement, and $75m Shareholder Purchase Plan.
New equity is being issued at $8.50 per share, an 8.7% discount to APA’s 5-day VWAP of $9.31 up to, and including, 22 August 2023.
Result Implications
A soft result along with guidance for FY24 implies a ~3% cut to consensus forecasts for both EBITDA and DPU. Higher operating and head office costs which grew 27% in FY23 are the key reason. These will remain elevated across FY24-25, which is likely to result in DPU at the low end of the payout range.
This is the first real result under CEO Adam Watson (who joined 19 Dec 22). Watson has elected to reinvest back into the business to develop organisational capacity to position the business for the energy transition.
This is being forced on APA by stakeholders, including APA's largest shareholder UniSuper (which has been reducing its holding). There is incremental additional spending on APA's core pipelines driven by age/higher maintenance.
Our Initial Thoughts on Alinta Energy Pilbara
APA has paid what looks like a full price for AEP at 12.9x vs its own traded multiple of 11.3x FY24 EV/EBITDA.
In our view, an almost 13x multiple is more reflective of what low-risk pipeline assets transact for, not generation assets that AEP primarily consists of today (>55% of EBITDA). Greater than two-thirds of the generation assets today are gas-fired power stations, close to 30 years old.
The high price limits earnings and distribution accretion until FY25, and puts APA on a pathway for additional growth capex over the next decade.
Whilst the sale process of the Alinta assets and APA’s own desire to acquire has been well covered in both industry and mainstream press, there remains a risk that the market questions both the price paid and the move into generation assets (higher risk profile vs pipeline assets, lower EV/EBITDA multiple).
Transitioning infrastructure businesses is difficult, and we have seen Aurizon (AZJ), Atlas Arteria Group (ALX), Transurban Group (TCL) in recent years. All acquired assets that were large, expensive assets requiring equity raises that resulted in share prices underperforming whilst the market got comfortable with the assets post the capital raising
In our view, the high multiple reflects four aspects; 1) APA already has part ownership of the Goldfield pipeline asset; 2) APA has missed out on four publicly known acquisition processes over the few years (increasing pressure on new CEO to make a bold move); 3) AEP’s key mining customers in the Pilbara have committed to net-zero operations. AEP will be able to play a role in this transition with >$3bn on energy project development in planning stages for the region; 4) significant pressure to decarbonise its earnings. The pressure is coming from customers, shareholders, regulators and the public.
The capital raising at $8.50, implying an 8.7% discount to 5-day VWAP reflects; 1) the 2-3% earnings and distribution downgrade for FY24 and, 2) the lack of earnings accretion in FY24. It will be interesting to see if APA/s largest UniSuper participates in the equity raising (having last sold stock in Mar 2023). We suspect it will not participate.
APA share price has fallen from $12 in mid-2022, to $9.26. Higher bond yields, management change/strategic pivot, prospects for large-scale acquisitions and Unisuper reducing its ownership have all weighed on the share price. The $8.50 capital raising price attempts to reflect some of those considerations.
In our view, APA has overpaid for assets that near-term increase the carbon intensity of its EBITDA, while putting the company on a pathway to fund large-scale transition growth capex which will benefit some of the most financially astute customers (BHP, RIO, FMG, Roy Hill) in the market.
There are two solar development assets that will add to earnings in time (potentially lowering the implied multiple). The two solar farms under construction represent ~15% accretion to the current ~540MW of generation capacity within AEP.
Figure 1: Alinta Energy Pilbara (AEP) asset base
Figure 2: APA $750m capital raising is priced 12.9x EV/EBITDA. The implied multiple for the Group is 11.5x F24E.
Figure 3: APA $750m capital raising is priced at an implied 6.6% FY24E dividend yield, with distribution growth of ~1.5% in FY24E
