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APA Group (ASX: APA) spent most of 2022-24 trading lower but a better-than-expected 1H25 result on 24 February 2025 helped kick off a formidable uptrend along with a market leading dividend yield.

APA Group weekly price chart (Source: TradingView)

APA Group is Australia's largest natural gas transmission owner, operating through three major segments: East Coast Gas (ECG), West Coast Gas (WCG), and Electricity Transmission. The ECG business contracts with energy retailers to transmit gas from production fields to major cities, while the WCG business primarily serves miners in the goldfields region.

APA's business model is structured around capacity-based contracts rather than volume-based ones, with built-in CPI protection to guard against inflation.

To set the scene, APA's two-year struggle was largely attributed to:

High levels of debt: Total debt increased from $10.9 billion in FY22 to $12.99 billion in FY24 (19.1% increase) at a time where central banks (including the RBA) were hiking rates to battle high inflation.
Mixed views on M&A: APA raised a sizeable $750 million back in August 2023 to acquire Alinta Energy Pilbara. Some analysts saw this as dilutive, high-cost and increasing execution risk.
Regulatory and policy uncertainty: APA Group has faced regulatory uncertainty, such as the AER’s review of the South West Queensland Pipeline, which could impose tighter controls and lower returns on previously lightly regulated assets. This, combined with energy-transition pressures and delayed projects, has weighed on investor confidence and growth sentiment.

1H25 result bucks the trend

The first-half FY25 result (24 Feb) was broadly ahead of market expectations, driving the stock 7.7% higher on the day and another 8.1% in the following session.

Key takeaways:

Underlying EBITDA up 9.1% to $1.01 billion, underpinned by strong performance from new assets, higher customer demand for seasonal gas transmission capacity, inflation-linked tariff increases and reduced cost growth
Underlying EBITDA was 3% ahead of Macquarie expectations
Net debt was $13.1 billion vs. Macquarie estimates of $12.5 billion
Reaffirmed FY25 underlying EBITDA guidance of $1.96-2.02 billion, with analysts expecting the company to hit the upper end of the guidance range
APA reiterated it is not seeking to raise money and can fund the current $1.8 billion of current capex
APA flagged potential asset recycling, which could include Wallumbilla Gas Pipeline (~$5bn)

APA has since rallied 44% since the results announcement, with the re-rating drive by:

Management stressed that they could internally fund the $1.8 billion capex pipeline removed the capital raise overhang that had been weighing on the stock
Asset recycling optionality (Wallumbilla Pipeline, NEM-connected wind/solar farms) can provide additional funding flexibility
Trading at a forward EV/EBITDA less than 11x, well-below its historical range of 11.8-13.3x and vs. global peers, according to Macquarie

So now you've got a scenario where earnings exceeded market expectations, funding concerns have eased, valuations are attractive on top of a favorable macro backdrop with central banks cutting rates, all while the stock sat 39% below its August 2022 highs.

Where are we now?

After such a re-rate, analysts remain relatively upbeat. Macquarie's latest note (dated 8 November), reiterated an Outperform rating, with a $8.13 target price.

The key thesis: "APA is on a yield of 8.3%, with management emphasis on at least maintaining the yield. Its forward EV/EBITDA of ~10.8x is well below the historical range of 11.8-13.3x and now global peers. Organic growth remains appealing."

Still, there are plenty of risks for APA. The high-level ones include:

APA needs to execute on its capex heavy growth strategy but the size of the opportunity is materially larger than its balance sheet/funding sources
APA has ~US$1.8 billion of debt that is unhedged
ECG and WCG continue to face contract risk, with contracts getting shorter

More specifically, APA faces competing capital demands with a full pipeline of committed projects while potentially pursuing Zenith Energy acquisition. Taking a closer look at some of the risks:

Committed capex of approximately $1.8 billion through FY25-FY26 includes $1.15 billion work-in-progress that should add $80-100 million EBITDA in FY26, but accelerating Pilbara projects (DeGrey $200-250 million, Newman wind farm $1.0-1.2 billion, Hamersley transmission $1 billion, Chichester wind farm $1.2 billion) could push total spend to $3.0-3.6 billion over FY26-FY28, well above $1.3 billion guidance.
This aggressive build would drop debt ratios to approximately 9.5% in FY27-FY28, requiring an estimated $1.0-1.5 billion capital raise to maintain 10%+ ratios and preserve deal capacity, creating a $90-180 million dividend shortfall.
Zenith Energy acquisition appears unattractive as the company is already leveraged at 6.3x with no debt capacity, APA previously lost bids on key Zenith projects.
Asset recycling of non-core wind/solar portfolio generating $85 million EBITDA could unlock approximately $1.05 billion post-tax, according to Macquarie.

The bottom line

Macquarie forecasts APA to yield around 7.1-7.3% over the near term, with potential asset recycling viewed as a positive catalyst for the business.

FY25

FY26e

FY27e

Revenue ($m)

3,280

3,519

3,718

Underlying NPAT ($m)

182

269

307

DPS (cents)

57

58

59

Yield (%)

7.1

7.3

7.4

Net debt ($m)

13,165

13,640

13,576

Source: Macquarie Research, May 2025

The analysts describe its pipeline as "brimming with opportunities" with various opportunities (Hemi, BHP, GPG etc.) coming to final investment decision in the next twelve months. Meanwhile, the share price has been in a strong uptrend since February, with pullbacks rarely exceeding 5%.

Still, APA remains highly leveraged with net debt exceeding $13 billion, leaving it vulnerable to rising interest rates and a strengthening US dollar. Regulatory outcomes remain uncertain, and the timing and execution of asset divestments could impact the investment thesis.