Stock Review

Australian Pipeline Trust

11/12/2003

  • Company: APA Group (APA)
  • Recommendation: Buy for Yield
  • Price at Review: $2.55
  • Current Price: $6.78
  • Category: Financial Analysis

After an 11% price fall, this pipeline trust should look a little more attractive to Most Bankings.

After downgrading this gas pipeline owner in issue 128/May 03 (Hold for Yield-$2.85), the stock has fallen 11% since. And that makes it an opportune time to consider whether to upgrade it to a Buy once again. The main (some would say only) consideration for investing in a gas pipeline business such as this, is the income it produces. At the risk of sounding like a broken record, the prospects for strong capital gains over the long-run are pretty slim. But that's not necessarily a problem, as long as the yield is sufficiently good to compensate for this lack of growth. The distributions from pipeline assets usually consist of an income component and a capital distribution. As chairman George Bennett explained in his 2003 address to unitholders, the income component consists of unitholders' share of accounting profits while the capital distributions represent 'the free cash generated in excess of accounting profit from charges such as depreciation and amortisation'. Basically, the income component is the part the ATO will immediately tax you on, while the capital component is tax deferred-meaning you only pay tax when you sell your units.

Unfortunately, most newspapers don't bother to include the capital component in the published yield but it's real cash in the pockets of unitholders, paid by real cash flow from the pipelines. In the 12 months to 30 June 2003, the trust paid quarterly distributions totalling 21.5 cents per unit. Of this, 17 cents was a taxable income distribution, with the remaining 4.5 cents being a tax-deferred capital distribution. While we don't expect the total distribution to grow in a hurry, the income component will probably continue to grow as a percentage of total distributions. But, even if the entire 21.5 cents was immediately taxable, the current price of $2.55 offers a yield of 8.4%. Compared with what's on offer in the bond market, that looks quite attractive. And the willingness of the Reserve Bank to increase short-term rates suggests that it's keen to keep them low over the longer term. The risk is that if it fails in this task and raises rates to a point where 8.4% isn't quite as attractive, the unit price may well fall. It's the same argument we described in our review of GasNet in issue 140/Nov 03 (Buy for Yield-$2.06), with the same result. But for those happy to accept that risk, we're once again upgrading Australian Pipeline trust to BUY FOR YIELD. GasNet offers a higher yield but, in our view, carries more risk.


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