Quyen Do

Category: 2023 (page 1 of 1)

May 2, 2023

AGL Energy (AGL:ASX)

MICRO

OVERVIEW

AGL is Australia’s largest energy provider, delivering 4.2m services including gas, electricity and telecommunications to residential, business and wholesale customers across Australia. The company generates around 20 per cent of the total electricity generation capacity in the national market.

AGL’s power generation includes generation plants spread across traditional thermal generation, natural gas and storage, as well as renewable energy sources including hydro, wind and solar.

COMPANY EARNINGS

  • AGL’s fiscal 2023 net-profit-after-tax guidance range was narrowed and increased by 13% at the midpoint and fiscal 2024 guidance was given for the first time, portending a strong rebound broadly in line with our expectations.
  • Headwinds intensified for AGL as average wholesale prices dropped to just AUD 40 per megawatt hour, or MWh, in early 2021. Lower wholesale electricity prices, lower carbon credit prices and rising fuel costs drove underlying net income to just AUD 225 million in fiscal 2022. But electricity prices have since recovered and the medium-term outlook is good
  • Improved fiscal 2023 guidance reflects a solid second-half performance on the back of increased power station reliability and growth in retail customer numbers and profits margins.
  • Earnings are set to accelerate in fiscal 2024, mainly as high wholesale electricity prices pass through to residential and business customers. Earnings should also benefit from the startup of grid-scale batteries in Adelaide and Broken Hill and, hopefully, the nonrecurrence of major power station outages.
  • These positives are expected to be partly offset by higher bad debts and support for struggling customers, increased maintenance spending on power stations, and general cost inflation.
  • With the refinancing of AUD 1.6 billion debt in April demonstrating ongoing support from lenders, and management confirming an anticipated profit recovery in fiscal 2024, key investor fears have been allayed.
  • Further, management provided a long-term expectation for NPAT in fiscal 2036 to be similar to fiscal 2024 as investments in batteries and renewable energy, and growth in retail profits offset the closure of coal power stations.

VALUATION

  • Fair value estimate for AGL Energy is AUD 12.80 per share.
  • The stock still screens as slightly undervalued despite the strong rally in recent months, trading on a forecast fiscal 2024 price/earnings ratio of 11 and offering a dividend yield of 5.4% based on the current share price.
  • Valuation is underpinned by my view that wholesale electricity prices will be well supported for at least the medium term. Average wholesale electricity prices in eastern states recovered strongly since the 2021 lows. Higher wholesale prices will take time to flow through to customer contracts and thus AGL Energy’s profits.
  • Recovery has been partly caused by rising gas prices increasing operating costs for gas-fired power stations and unplanned outages, supporting our thesis.
  • Dividend franking will likely return in fiscal 2025, a little later than  previously expected.


RISKS

  • Companies that obviously have conflicts with ESG standards are faced with a shrinking pool of willing lenders and the possibility of some big investors withdrawing investments to satisfy members/ shareholders.
  • The momentum for climate change action is building. A change in government may mean radical changes to carbon emitting standards, regulatory uncertainty is very high

 CATALYSTS

Electricity prices to remain supported by closure of the Liddell power station in 2023 and tightening Victorian gas supply as gas fields deplete.

MACRO

Significant discussions are currently centered around decarbonisation and electrification across various sectors. However, these topics may not be the primary focus of the current discussion on old-world themes. The key factor influencing the energy space is the balance between supply and demand.

In the short term, the old-world energy sector is seeing a lot of positive signals due to supply-side challenges. The current situation involves less supply meeting the increasing demand, which is likely to result in higher prices. However, the energy landscape might undergo significant changes in the next decade.

In terms of renewable energy, like any energy producer, it’ll just depend on their cost of production and we see a good opportunity for old-world energy companies to invest in renewable energy solutions where the returns are right.  The advantage renewables have is that commodity prices may get adjusted for a price of carbon, which would put them in a favourable position versus other old-world commodities.

The most interesting thing at the moment is how old-world energy companies are transitioning to the new world. AGL Energy is probably a great example of that recently. They’re the biggest carbon emitter in Australia. They’re moving away from coal power generation into renewables.

We’ve seen the share price rise as the market transitions from being concerned about that, to seeing what the scope is for them to use the cash flow that’s being generated in the old world to fund the new world energy solutions. We’ve seen a rerate in the share price.