"Clear runway for solid earnings growth over the coming years" for APA Group

APA Group (ASX: APA) is a company that finds itself at the intersection of many of today's prevailing trends: notably energy and infrastructure, and their importance in the wider AI megatrend.

While its 1H26 result was broadly in-line with expectations, the gas and energy infrastructure manager has enjoyed a solid 12 months, offering investors reliable performance at a time of heightened volatility. 

To pick out the key takeaways from APA's results, and see how it's medium-term outlook is now shaping up, I spoke to ClearBridge Investments Portfolio Manager Andrew Chambers. 

1H26 key numbers

• Revenue up 2.0% to $1.61bn vs. $1.63bn ests (1% miss)
• Underlying EBITDA up 7.9% to $1.09bn vs. $1.08bn ests (in-line with estimates)
• EBITDA margins up 280bps to 77.3%
• Statutory NPAT up 179% to $95m, reflecting EBITDA growth and lower net interest expense
• Interim dividend up 1.9% to 27.5 cps (in-line)

Do you currently hold APA Group and what is your rating?

Rating: BUY

We're sizeable APA holders. We have positions across numerous strategies including our various real income strategies, real asset strategies, as well as our equity income strategies and then some of the broader equity strategies also have positions in in APA. 

It's also worth flagging our parent company, Franklin Templeton, which includes different portfolio management teams and is a substantial shareholder in APA.

What matters from the results?

The first metric would be underlying EBITDA where we saw growth of over 7%, driven by inflation-linked tariff escalation, new assets coming online and really good progress on cost-out delivery that help margins. 

APA also confirmed ongoing dividend growth which we think is quite appealing given it already has a yield of greater than 6%.

Whilst management reiterated FY26 EBITDA guidance, they did state that their current expectation is to exceed the midpoint of guidance. So we believe that the earnings forecast risk is to the upside for the full year. 

They also announced the East Coast Gas Grid Stage 3 Expansion to help solve some of the projected east coast gas shortfalls and that will see a 30% increase in capacity. 

The results highlight APA's ability to keep growing earnings despite all the global economic and AI uncertainty. 

We see APA is very much delivering on being that that "port in a storm" or a "stock for all seasons". It's really providing good steady defensive growth despite all the uncertainty in the world.

How do those outcomes affect the outlook?

APA should benefit from inflation-linked tariffs and the sticky inflation here in Australia.

We're seeing some new asset completions that will ramp up and help earnings growth, and then additional capex into the East Coast grid capacity expansion will then provide further growth in the medium term. 

Combine all that with really good progress on cost-outs and there's a pretty clear earnings runway for solid earnings growth over the coming years. 

We're also watching new gas basins development options, such as the Northern Territory's Beetaloo Basin, that could provide additional growth opportunities for APA in the medium-to-longer term.

What should investors be paying attention to as the story unfolds?

The biggest upside driver would be further acceleration in organic growth. Today they announced that their organic growth pipeline had increased quite substantially and, given the massive growth in energy demand around the world from AI, we think there's probably upside risk to the utility sector's growth prospects.

The other upside driver we think is that sustained cost out and simplification of the corporate structure - lower cost base and better maintenance outcomes - that could be really positive. Particularly when you've got top-line growth and good cost management, that creates really strong growth in free cash flow.

On the risk side, what we're watching is regulatory and government policy risk. Gas infrastructure does remain in a politically sensitive area. We have seen government reviews, we've seen regulatory bodies consider different regimes and intervention, so that's certainly something that we're watching with interest. That's a key risk. 

The other one is capital allocation discipline. We did see a couple of years ago a lot of companies, including APA, making acquisitions in areas that weren't in their traditional business.

We want to make sure that companies stay very much focused on their core strengths and deploy the balance sheet capacity and the growth into lower risk, higher return projects. So capital allocation discipline for management is a key area we're watching as well.

What could you be wrong about?

Execution risk is always a big question with these large pipeline projects. The pipelines themselves could take longer to to complete or you could also see some contracting risk on the revenue side if customers don't sign up. 

Those two risks could certainly end up delivering lower returns or pushing out returns that we weren't expecting. 

Another area of uncertainty is the pace of energy transition. We do see electrification as a theme and we're seeing a lot of investment into batteries. 

So whilst we think the whole energy pie keeps growing strongly, the mix of that pie could vary. So we're watching where there could be some pockets where gas demand may decline faster than expected and that's something that could catch people out. 

The last risk is the macro. Whilst APA has a lot of growth opportunities, it does have times where it often trades like a bond proxy. If there were unexpected gyrations in bond markets and we saw a dramatic rise in interest rates, that would certainly work against APA.