Our Q&As are emailed in our Saturday Morning Report, find the answer to this question below.
Hi team, You have just added APA to the growth portfolio and sold AGL. Could you please explain why the gearing is not an issue for APA at around 380%. I thought maybe this is normal for this type of business but see AGL at a net of gearing of 32%. Regards Ray
Hi Ray,
Gearing is high for APA as they operate a large, regulated asset base generating a fixed rate of return based on a particular pricing mechanism. which also have inflation links embedded in them. AGL on the other hand have more fluidity to their earnings that are more heavily impacted by market dynamics and therefore should not gear to the level that APA do. While it’s not a bond, APA does have bond like characteristics hence our preferred measure around valuation is the prevailing spread over the risk-fee 10-year government bond rate. Ultimately, gearing comes down to the ability to service it, and that comes down to how predictable cash flows are in a business. More certainty generally means more ability to gear.
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