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On Tuesday, UBS analyst Tom Allen revised his outlook on APA Group (APA:AU) (OTC: OTC:APAJF), upgrading the stock from Sell to Neutral, while also increasing the price target to AUD7.00, up from the previous AUD6.60. The adjustment followed the company’s first-half fiscal year 2025 results, which aligned with expectations regarding underlying EBITDA and free cash flow (FCF). According to InvestingPro data, APA Group maintains impressive gross profit margins of 93.22% and trades at an attractive P/E ratio of 9.85, suggesting potential value for investors.
Allen noted the slowdown in corporate cost growth to +2.5% year-over-year, a positive shift from the +10% previously guided. Despite this, he cautioned that consensus earnings per share (EPS) projections from fiscal year 2026 onward could be at risk due to potential increases in interest expenses and a forecasted decrease in Basslink earnings. The latter could see a reduction of AUD$25 million in EBITDA from FY26 if the Australian Energy Regulator (AER) confirms its draft decision in the upcoming weeks. InvestingPro analysis shows the company has maintained dividend payments for 25 consecutive years, demonstrating strong financial resilience despite market challenges.
The upgrade to Neutral was influenced by APA Group’s significant devaluation in the market. The stock now trades at a level that UBS considers fair and carries a premium above its historical yield spread, which stands at 4.2% compared to the 5-year average of 2.8%. This premium is thought to sufficiently account for the risk of dilution if a substantial equity issuance is needed, a possibility that UBS had previously signaled.
APA Group’s management has allayed immediate concerns regarding a dilutive equity raise, confirming their commitment to a disciplined approach. They plan to consider asset recycling and the introduction of funding partners as viable alternatives. The company’s long-term growth prospects are supported by its expansion plans for the East coast grid, which are expected to yield stronger returns compared to electric transmission assets. However, these opportunities are long-term and unfunded, requiring significant underwriting. With revenue growth of 8.16% in the last twelve months and an overall GOOD financial health score from InvestingPro, the company appears well-positioned to execute its growth strategy. Discover more insights and 7 additional ProTips about APA Group with an InvestingPro subscription.
In other recent news, APA Group announced its first half of 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA), surpassing market expectations. This positive financial performance led Jefferies to upgrade APA Group’s stock rating from ’Hold’ to ’Buy’ and raise the price target to AUD8.44 from the previous AUD8.35. Jefferies analyst Anthony Moulder cited the company’s strong performance and strategic focus on energy transmission as key reasons for the upgrade. The expansion of the East Coast Grid by APA Group was also highlighted as a strategic move to support the development of domestic gas supply. Moulder noted APA Group’s cost-saving measures and management’s confidence in funding growth with its current balance sheet. These developments are seen as indicators of APA Group’s potential for continued success. The analyst’s raised price target reflects a positive outlook on the company’s strategic investments and commitment to enhancing energy infrastructure.
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