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Mid-Cap

Origin Energy – An Interesting Dividend Stock

September 29, 2015 | Team Kalkine
Origin Energy – An Interesting Dividend Stock

General Updates:



Origin Energy (ASX: ORG), the provider of electricity and the gas baron recently received a low rating from the credit rating provider, Standard & Poors based on latest oil price forecasts. On the other hand, ORG’s managing director, Grant King, reiterated about profitability of ORG’s $25 billion Australia Pacific LNG joint venture at Gladstone irrespective of the plunging international oil price. He has also vetoed a report stating, $200 billion LNG projects under construction in Australia to struggle to break even. Primarily, ORG believes that lower AUD will equipoise the dipping international oil prices. King predicts Brent crude oil prices of $US75 a barrel over the next decade which is close to the price assumed ($US80 to $85 a barrel) for the investment in the APLNG project and thus sees value coming in from the project. Given the increase in retail energy prices alongside growing energy demand, ORG seems to witness a profit ride. At the same time the profit may be counterbalanced by high-end competition from prices standpoint. However, Australia Pacific LNG project is expected to yield robust earnings growth from 2016 onwards. Also, efforts set for cost reduction will drive earnings growth in near future and the market expects a surge of about 30% in ORG’s bottom line in FY 2017.


EBIT/ Sales Margin (Source: Company Reports)
 

Heavy Impairment charges hurt the earnings:

ORG reported a statutory loss of $658 million impacted by the impairment of the group’s investment in Contact Energy and upstream assets coupled with effect of depreciation of the Australian dollar on the fair value of financial instruments and debt. Contact Energy was reported as discontinued operation and added $199 million to the Statutory Loss. Accordingly, ORG delivered a 4% yoy decline of underlying profit to $682 million.


Performance (Source: Company Reports)

On the other hand, ORG’s underlying EBITDA improved by $10 million to $2.15 billion, boosted by better Energy Markets performance. ORG also has been making efforts to boost its liquidity to offset the pressure from impairment charges as well as increase maturity profile.


APLNG Reserves (Source: Company Reports)

Accordingly, the group changed its syndicated loan facilities to decrease the interest rate margin, and boosted facilities limit by $750 million to $7.4 billion. The group already issued over €1 billion in hybrid capital securities on the Luxembourg Exchange, which were swapped into $1.4 billion. Origin also got over $1.4 billion and NZ $200 million from its divestments of 53.09% interest in Contact Energy. ORG has a solid dividend policy of paying more than 50 cents per share, on an annual basis, or at least 60 % payout ratio of Underlying Profit. Management declared an unfranked final dividend of 25 cents per share leading to a total dividend of 50 cents per share for the fiscal year of 2015.


Loans, Debt and Hybrids (Source: Company Reports)

Strong dividend yield:

Origin shares corrected over 42.9% in last six months, partly attributed to the declining Australian dollar and heavy impairment charges from Contact. On the other hand, ORG continues to drive growth from Energy Markets as ramp gas is mainly replaced with growing natural gas sales to LNG projects. ORG is focusing on cost optimization in Electricity and Natural Gas and intends to invest in booming solar and energy services. Integrated Gas business would be driven by the growing production from the Yolla-5 and Yolla-6 development wells at BassGas. ORG has an outstanding dividend yield of 7.3%. Origin stock is an attractive investment opportunity to investors hunting for bargain stocks, and we reiterate our “BUY” recommendation at the current price of $6.10.


ORG Daily Chart (Source: Thomson Reuters)

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The information given by Kalkine Pty Ltd ABN34 154 808 312 (Australian Financial Services License Number 425376) on this website is general information or advice only.

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