- The Treasurer's preliminary view seems to squash CKI's takeover bid for APA.
- We had hoped that share price weakness following the announcement would provide a buying opportunity. Unfortunately, the share price held up more than we expected. With expected TSR of ~6% (including 5.4% yield).
Treasurer's view is CKI takeover is contrary to national interest
The Federal Treasurer's preliminary view is that the CKI takeover is contrary to the national interest. He intends making a final decision under the formal process within two weeks.
It's not obvious from this language whether this is a high conviction "no" from the Treasurer, but APA's share price reaction to the news seems to have mostly factored in the negative scenario. Note FIRB was unable to reach a unanimous recommendation.
Is this the end to corporate activity targeted at APA?
The Treasurer says his view was based on undue concentration of foreign ownership by a single company in Australia's most significant gas transmission business. The financial press has speculated that institutional investors (eg. Industry Funds Management) may lob in a bid for APA if CKI were blocked, given they may not have the foreign ownership issues hindering CKI.
Alternatively, CKI may be able to push the deal through by bidding jointly with domestic investors willing to pay the all-cash price CKI has offered.
Without a takeover, share price likely to be driven by fundamentals
The mid-point of FY19 EBITDA guidance of $1550-1575m implies ~3% growth. Over the following three years, we think EBITDA should be able to compound at ~4% pa.
With CPI currently at low levels, significant growth capex (~$2.1bn over FY17A-21F) will be an important driver of EBITDA growth. APA expects the investment program across FY17-19 to deliver an incremental $215m+ of revenues by FY20 (<$5m in FY18), albeit at below current group EBITDA margins.
Offsetting this will be a decline in the AUD-translated earnings from the WGP's US$-denominated revenues as a result of the increase in AUDUSD translation rate (this translation dynamic also helps to reduce AUD-translated US$-denominated interest costs). FY19 DPS guidance of 46.5 cps delivers 3.3% growth on pcp, similar growth to FY18.
We think APA could lift DPS at close to 5% pa CAGR across FY20-22F given our forecast Operating CF growth, but caution we have been surprised previously by APA's conservative capital management.
12 month target price setting
We previously set our target price on the basis of a 40% weighting to CKI's $11ps takeover price and 60% weighting applied to the price we expected APA's share price to fall to if the deal fails.
With CKI's takeover bid looking effectively blocked, the share price will likely return to be driven by fundamentals instead of takeover speculation. As such, we reset our target price in line with our June 2019 DCF valuation (Morgans clients can log in to view).
Key macro influences are inflation expectations (Australian and US CPI), bond rates, and AUDUSD movements from FY19 (impacts net revenues on the WGP). Firm-specific risks include re-contracting, gas market developments, capital investment, competition, regulation, M&A, and cost control.
We retain our Hold recommendation.
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