Company Overview: AGL Energy Limited (ASX: AGL) is a leading integrated essential service provider that deliver gas, electricity, and telecommunications services to its residential, small and large business, and wholesale customers across Australia. AGL operates one of the largest electricity portfolios in the National Electricity Market made up of traditional coal and gas-fired generation, and renewables such as wind, hydro and solar. The company also operates gas storage and production assets. The company is focused on renewing and expanding its portfolio of sources and products to make them more sustainable, reliable, affordable and useful.
AGL Details
Decent Long-term Outlook Backed by Business Growth Strategy: AGL Energy Limited (ASX: AGL) is a leading energy company that is primarily involved in electricity generation, gas storage and the sale of electricity and gas to residential, business and wholesale customers. As of 12 November 2020, the company’s market capitalisation stood at $8.31 billion. AGL currently provides more than 3.95 million total services to customers that include ~78k new energy services and ~168k broadband and phone services. AGL continues to grow its customer base by delivering better service and simplified products. The company’s goal is to be a leader in multiple essential services and currently, its target is to provide 4.5 million customer services by 2024. Over the last five years, the company has witnessed significant improvement in its bottom line, rising from a statutory net loss of $408 million in 2016 to a statutory net profit of $1,015 million in FY20.
Over the past one year, the company had made significant progress on its growth strategy through synergistic acquisitions with Perth Energy, Southern Phone Company and Click Energy, which will support its overall growth in the future. Looking ahead, the company is focused on growing its customer base and progressing its projects that will transform its energy supply portfolio for the long term. The company intends to achieve growth by developing flexible generation assets, investing in offtakes, balancing its sustaining capital expenditure and building its origination and trading capabilities. With over $1 billion in cash and undrawn facilities at 30 June 2020, the company seems well placed to make investments in the core business and growth opportunities as they arise.
5-Year Financial Summary (Source: Company Reports, Thomson Reuters)
FY20 Results Highlights: For the year ended 30 June 2020, the company reported total revenue of $12,160 million and underlying profit after tax of $816 million. Further, the company reported statutory profit after tax of $1,015 million, up 12.2% on FY19, as a result of a positive non-cash movement in the fair value of financial instruments. Despite facing several headwinds, including a major outage of one of the four units at the AGL Loy Yang power station, lower wholesale energy prices, and COVID-19 crisis, the company was able to deliver resilient operational performance in FY20. During the year, AGL’s electricity generation portfolio delivered broadly flat output as compared to FY19, and its Macquarie power station delivered higher generation. Over the year, the company also added the Silverton and Coopers Gap wind farms and Barker Inlet Power Station to the portfolio. During the year, the company’s net cash flow from operating activities after interest and tax grew by 35% to $2,156 million. This allowed the company to undertake $620 million of on-market share buy-back during FY20. As at 30 June 2020, the company had total net debt of $2,723 million, comprising adjusted total borrowings of $2,864 million and cash and cash equivalent of $141 million.
FY20 Results (Source: Company Reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 20.41%. Franklin Resources Inc and BlackRock Institutional Trust Company, N.A. hold the maximum interest in the company at 5.00% and 3.14%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For FY20, the company’s gross margin and net margin stood at 30.0% and 8.3%, respectively. The company’s quick ratio and current ratio stood at 1.14x and 1.31x in FY20. The company’s debt to equity stood at 0.38x in FY20, slightly higher than 0.34x in FY19.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Dividend History: The company’s cash position and prudent credit metrics have allowed it to pay dividends, maintain its pay-out ratio and continue the buyback program while maintaining enough headroom to support investment in the business. On 25 September 2020, the company paid the final dividend of 51 cents per share (80% franked), taking the total dividend for FY20 to 98 cents per share (80% franked). From 2016 to 2020, the company’s dividend grew at a CAGR of 9.57%. The annual dividend yield of the company is about 4.80% on a five-year average basis (FY16-20). Currently, the annual dividend yield of the company happens to be at 7.34%, which is higher than the industry median (Multiline Utilities) of 5.6%. We presume that, moving forward, the company will continue to pay dividend to its shareholders which might attract the attention of the dividend seeking investors.
Dividend and Buyback History (Source: Company Reports)
Acquisition of Click Energy: On 30 September 2020, the company completed the acquisition of Click Energy Group Holdings Pty Ltd (Click Energy), a wholly-owned subsidiary of amaysim Australia Limited (ASX: AYS), for $115 million. The acquisition brought 215,000 new energy services to AGL’s leading customer service platform and has increased AGL’s total services provided to almost 4.2 million services to homes and businesses across Australia. It is expected that this acquisition will help the company in achieving its target of 4.5 million customer services by 2024. Further, the acquisition is expected to be modestly accretive to AGL’s underlying earnings.
Key Risks: The company is exposed to the risks associated with wholesale market pricing and market disruption. Further, the company is exposed to operational and people-related risks, mainly related to organisational culture, customer privacy and cybersecurity. The company’s longer-term strategic risks (government intervention, regulatory intervention and climate change) have been heightened by the uncertainties created by the COVID-19 Pandemic.
Outlook: Looking ahead, the company is focused on expanding its multi-product offerings to reach more households and businesses with increased efficiency. Further, the company is making incremental decisions to yield long-term results for AGL’s portfolio. For FY21 and FY22, the company intends to operate a special dividend program, under which, the company’s target dividend payout ratio will increase to 100% of the underlying profit after tax during this period. The company plans to temporarily remove franking from dividends while it recoups historic tax losses.
With its clear strategic priorities and decent financial position, the company seems well placed to navigate through the COVID-19 pandemic. In the next few years, the company expects its cost efficiencies to improve further as it continues to invest in automation, optimising processes and digital adoption.
The company’s contracting and hedging strategies continue to provide resilience against falls in wholesale prices. In FY21, the company expects its underlying profit after tax to be in the range of $560 million to $660 million. With decent cash flow and financial position, AGL seems well-positioned to invest in the business and support growth and capital management initiatives.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)
P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Month
Stock Recommendation: The stock of AGL has corrected by 19.38% in the past six months and is inclined towards its 52-weeks low price of $12.460, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$12.43 and a resistance of ~$15.36. We have valued the stock using Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). For the purpose, we have taken peers like AusNet Services Ltd (ASX: AST), Genesis Energy Ltd (ASX: GNE), Origin Energy Ltd (ASX: ORG), etc. Hence, considering the company’s resilient performance in FY20, its recent acquisition with Click Energy, track record of paying regular dividend to its shareholders, valuation, and current trading levels, we give a “BUY” recommendation on the stock at the current market price of $13.100, down by 1.800% on 12 November 2020.
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AGL Daily Technical Chart (Source: Company Reports)
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