Purchase of APA Group (ASX: APA)

22nd April 2024

Across the Australian Equity component of investor portfolios, we have bought APA Group (ASX: APA). APA owns and operates many energy infrastructure assets across Australia.

APA is the leading gas pipeline owner and operator in Australia with a near monopoly position. It’s pipelines play a critical role in transporting gas around the country for household use, industrial use, electricity generation and for LNG export. In addition to this it owns and operates several smaller gas & renewable electricity generation assets and a number of electricity transmission lines. Recently it acquired the Pilbara Energy Systems business from Alinta Energy which generates and transmits electricity for the miners based in the Pilbara.

We are attracted to APA for the following reasons:

Monopolistic market position
Well run business that has not overplayed their strong market position – this provides a sustainable long term base for earnings
Stable, inflation linked, high margin revenues

APA has three key levers for value creation that we would like to highlight:

APA has recently invested in capacity increases for the East Coast Grid. There are underutilised assets combined with an increasing need for gas to flow through APA’s pipelines from Queensland to the southern states where government policy has led to underinvestment and falling supply
Prospects for significant electricity demand growth in the Pilbara as miners look to decarbonise their operations by shifting from diesel fueled vehicles and trains to battery electric and hydrogen powered. The increased volumes will benefit their transmission assets and allow for further buildout of renewables in the region. A key attraction of this unique market is that it faces large, sophisticated customers in a sparsely populated area meaning it is insulated from the red tape created by a lot of the politics around energy
APA’s recently acquired Basslink transmission line was problematic for its previous owners and bought out of administration for significantly less than it cost to build. Basslink’s previous owners struggled to make enough to look after the asset properly which led to outages and significantly higher Tasmanian Electricity Prices. APA is going through the process of moving this asset to a heavy regulation regime which will allow for more pricing stability, sustainable operations of the asset & returns

We have funded the purchase of APA via the remaining proceeds from the sale of Virgin Money UK (ASX: VUK). Virgin Money UK is a UK bank serving both retail and commercial customers.

As per our last email, VUK is currently subject to a preliminary takeover offer from Nationwide Building Society (Nationwide) at £2.20 per share which is approximately AU$4.20. VUK trades at a mid-single digit spread to the takeover offer and we believe it is unlikely VUK sees a higher offer. In addition to this there are pressures to give building society members a vote on whether the transaction should go ahead which may create uncertainty around the transaction proceeding.

As always, thank you for your ongoing support, it is very much appreciated. If you have any questions or would like more information, please contact your adviser.

Warnings and disclosures

This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person’s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement (“PDS”) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Service Pty Ltd ABN 52 130 772 495 AFSL 325 252 (“Elston”). Although every effort has been made to verify the accuracy of the information contained in this material, Elston, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.