APA Group is a good-quality infrastructure stock with good...

APA Group is a good-quality infrastructure stock with good growth options and astute internal management. It owns an unparalleled network of gas transmission and distribution infrastructure assets across Australia. Due to less regulation than most of its peers, it achieves higher returns, particularly from organic expansion projects, which increase use of the existing network. Unfortunately, domestic gas demand is soft, but APA Group's wide-reaching network is well-placed to withstand--and potentially benefit from--changes in the gas market. Servicing liquefied natural gas, or LNG, exporters is the main near-term opportunity. In the long term, Australian domestic gas use is forecast to grow 30% during the next 20 years on population and gross domestic product growth and demand from the mining sector.

Analyst Note
APA Group Looking Better Value as Regulatory Risk and Higher Bond Yields Depress Share Price
Market expectations for lower-for-longer interest rates reached an extreme in July 2016 and propelled income stock prices to record levels. But global government bond prices (which move inversely to yields) have since fallen, pushing yields higher, and dragging share prices for many income stocks including APA Group back to more reasonable levels. At the current price around AUD 8.10, APA Group trades at a modest discount to our unchanged AUD 8.50 fair value estimate, and offers a distribution yield of 5.2% with a small amount of franking going forward. APA Group now looks roughly fairly valued, though we'd recommend waiting for a wider margin of safety before investing fresh capital, particularly with greater regulatory scrutiny increasing uncertainty. The correction in income stocks has been brief at just a couple of months compared with the seven-year rally, so it wouldn’t surprise to see the correction drag out longer. Ultimately, the direction of bond yields will set the tone for income stocks like APA Group. We continue to rate APA Group as having medium fair value uncertainty, balancing highly secure revenue under long-term take or pay contracts and strong free cash flows against high financial leverage and rising regulatory risk. We continue to believe the firm benefits from sufficient competitive advantages stemming from its unparalleled gas transmission network to warrant a narrow economic moat rating. In addition to rising government bond yields making income stocks less attractive, APA Group's share price may have been hurt in the past few weeks by press and analyst reports on rising regulatory risk. APA Group is mostly unregulated and has been able to continue generating attractive returns in recent years, while fully regulated utility peers have seen returns cut. But issues in the gas industry have triggered a government review and will likely lead to unfavourable reform from APA Group's perspective.