APA Group (ASX: APA) shares are 0.11% higher at the time of writing on Wednesday morning, at $9.19 each. Over the past month, the shares are 0.22% higher and 30.91% higher for the year to date.
The energy infrastructure business has been particularly popular with income-seeking investors over the past year, thanks to its defensive earnings, passive payments, and attractive dividend yield.
Just yesterday, APA signed an agreement with CS Energy to develop a new gas-powered plant in Queensland. Early funding for the 400MW Brigalow Peaking Power Plant will be provided by APA. The company will then acquire 80% of the project. Once built, CS Energy will operate and maintain the plant and retain a 20% ownership interest.
APA said the investment in the plant is expected to "deliver returns consistent with its required return hurdles, will be funded from existing balance sheet capacity and forms part of APA's $2.1 billion organic growth pipeline".
Following the announcement, analysts at Macquarie wrote a note to investors with their latest outlook on APA Group and its shares.
APA Group shares tipped to outperform
The broker confirmed its outperform rating on APA Group shares. It has also raised its target price to $9.23, up from $8.14 previously. At the time of writing, this implies a potential 0.43% upside for investors over the next 12 months.
"APA's FY1 EV/EBITDA of ~11.7x looks attractive vs an historical range of 11.8-13.3x. The yield of ~6.3% pa is sustainable, with growing franking in coming years. Core earnings momentum should build with cost reductions and as new investment becomes income-generating," the broker said in its note.
What did the broker have to say about APA Group's new project?
The broker notes that total costs for the first-of-its-kind joint venture haven't been finalised yet. But based on CSIRO's cost for small scale open cycle gas turbines, it will likely be around $1 to $1.1 billion. The majority of this will likely be spent in FY27 and FY28.
"The contract is CPI-based, providing a base-case return above CPI. Return is above APA's cost of capital, which we estimate at ~6.4% post tax, and assuming ~11% pre-tax return, we estimate a base return of ~ $84m EBITDA+op costs of $5-10m pa," Macquarie's analysts said.
"The contract has flexibility in that, if usage is above expectation, additional capex is compensated through a step change in the return."
APA reiterated its $2.1 billion three-year growth capex target. But Macquarie said that this could be upgraded if the company's Bulloo extension is progressed.
"APA is attempting to leveraging its cost of capital advantage relative to the regular retailers, and the off balance sheet dynamics for government generators," the broker said.
