APA’s fiscal 2013 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) increased 25% to AUD 667 million, in line with guidance and expectations. All divisions reported organic growth, but the biggest contributor to growth was the Hastings Diversified Utilities Fund (HDUF) acquisition. Adjusted operating cash flow per security increased 7% to 56 cents, a solid underlying result. Actual cash flows were hurt by one-offs relating to HDUF. Distributions increased just 1% to 35.5 cents per security (cps).
Fiscal 2014 guidance is for EBITDA of AUD 715 million to AUD 730 million. This represents a roughly 12% increase on last year, marginally beating our prior expectations. But solid EBITDA growth will be offset by an estimated 12% increase in interest expense and an 8% increase in the weighted average number of securities. Growth in operating cash flow per security–the key metric determining distributions–has been muted in recent years, and this is expected to continue in fiscal 2014. Guidance is for fiscal 2014 distributions of at least 35.5 cents per security, flat on last year, though APA will probably do a little better. Importantly, distribution growth should pick up substantially in fiscal 2015 and 2016 as new contracts start on the recently acquired South West Queensland Pipeline.
Morningstar forecasts and fair value estimate are unlikely to change materially on a full review of the fiscal 2013 results. It is well-placed for long-term growth in gas demand with an extensive footprint of gas transmission lines, while limited regulation allows attractive returns, particularly from increasing use of existing pipelines. Secure earnings underpinned by long-term contracts, good management and a sound balance sheet are also positives. Its financial position remains solid, with gearing of 62.8%, below management’s 65% to 68% target range. The firm has done a good job in recent years to lengthen and smooth the debt maturity profile to reduce exposure to debt markets in any one year.
Capital expenditures remain high at around AUD 400 million per annum. It should taper off to AUD 200 million to AUD 300 million per annum in coming years, reducing longer term revenue growth but boosting free cash flows.
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