Company Overview: AGL Energy Limited (ASX: AGL) is engaged in providing electricity and natural gas to residential, small, and large businesses, and wholesale customers in Australia. The company catered to 3.95 million customers, representing ~28% of households in FY20. It had generated ~43.7 TWh of energy annually (pooled generation volume) and supplied ~153.8 PJ of natural gas. AGL has a well-diversified portfolio with energy generated using coal, gas, and renewables. Its Customer Market segment accounted for ~49.8% of FY20 revenues, while the Integrated Energy (representing the wholesale market) constituted ~50.2%. AGL catered to customers in NSW, VIC, SA, QLD, and WA for electricity and gas supply.
AGL Details
Steady Focus on Renewables: AGL generated 43,828 GWh of electricity, of which 6,880 GWh was generated through gas, wind, hydro, and solar assets. Renewables together represent ~16% of generated assets in FY20. With a total installed capacity of 11,330 MW, AGL boasts the largest electricity portfolio in the wholesale market in Australia. Solar, hydro, and wind assets constituted 2,503 MW of capacity.
Figure 1. Deep Penetration with Diversified Portfolio:
Source: Company Reports
AGL has set its plans to become zero carbon emission by 2050. It remains committed to the development of renewables with the largest wind farm at Coopers Gap and seeks to diversify away from thermal. The company also took efforts in adding modernization to lower greenhouse emissions at its Bayswater and Loy Yang A power stations. Its Crib Point LNG import project in Victoria is progressing as per the plan and is expected to provide a new source of gas to the east coast region besides serves as an alternative source of generation.
AGL has several projects under development – 250 MW gas-fired power station at Newcastle, NSW, is underway, 250 MW pumped hydro project at Bells Mountain near Muswellbrook is progressing as planned. The company is also considering developing a 500 MW battery storage project at the LinLiddell Power Station site.
It had invested $295 million in gas-fired Baker Inlet Power Station which was completed in November 2019. Its $450 million investment in Silverton Wind Farm in NSW reached full output in May 2020. During fiscal 2020, AGL inked a 15-year agreement with Vena Energy for a 100 MW Wandoan Battery in Queensland that is likely to commence in July 2021. Besides, AGL also secured four-50 MW batteries from Maoneng Group in NSW which will become operational starting from 2023. AGL seeks to set-up an 850 MW grid-scale battery storage by FY24.
Figure 2. Share of Coal Generation to Decline and Renewables to Take-on:
Source: Company Reports
Wholesale Prices to Show Headwinds: The pandemic had created excess supply in the market which led to a decline in wholesale prices across states. As a result, the company’s integrated energy segment underperformed in FY20. Large-scale generation certificate prices may hold steady in the future due to increasing demand for sustainable energy. Lower domestic demand and falling LNG exports impacted spot prices for gas. As investments in renewables are firmed-up and ambitious battery storage plans are progressing well, AGL is likely to show resistance from falling margins.
Figure 3. Wholesale Prices Showing Steady Declines:
Source: Company Reports
Historical Financial Trend:
AGL is spearheading decentralized energy systems with 350 MW assets planned for FY24. It currently had 72 MW in FY20. The integrated energy systems with thermal, renewables, and battery storage technology will provide twin benefits of low costs and reliable energy during winters and blackouts. AGL showed a steady increase in customer addition in the last two years. It had posted the lowest churn rate from residential and small customers which stood at 14.3% in FY20 as compared to 19.4% by the industry. Electricity demand from large businesses has been upward trending. The acquisition of Perth Energy will widen its reach to Western Australia.
Figure 4. Five-Year Financial Trend of AGL Energy Limited:
Source: Company Reports
A major outage of unit 2 at Loy Yang power station affected electricity generation. FY20 revenue was also impacted by lower average wholesale electricity prices and challenges in the sourcing of gas due to the expiry of supply contracts. A drop in prices of large-scale generation certificates dented gross profit by 4.1%. AGL implemented digital transformation measures resulting in savings of $57 million. Its Customer Market segment reported an uptick in underlying EBITDA of $318 million in FY20 (vs. $295 million in pcp) aided by a sharp increase in residential demand for electricity during the pandemic offsetting lower offtake by businesses. The acquisition of Perth Energy in September 2019 supported the segment. Its Wholesale Market segment showed a decline in underlying EBITDA from $2,778 million in FY19 to $2,630 million in FY20.
Figure 5. FY20 Key Financial Highlights:
Source: Company Reports
H1 FY21 Performance:
AGL experienced a record-low decline in spot and forward electricity prices to levels seen in 2015. La Nina events affected the electricity demand during H1 FY21. The company is targeting to reach 4.5 million customers by FY24 through expanding its broadband and mobile business. AGL had increased its assets under decentralized energy systems to 100 MW. Acquisition of Click Energy added 224k customers. Its Customer Market segment showed a drop in underlying EBITDA to $177 million in H1 FY21 vs. $201 million in pcp due to an increase in operating costs and a drop in gross margin. A decline in gas volumes and a drop in electricity demand from businesses affected its Wholesale Market segment. The company’s battery projects are progressing on-track. The segment’s underlying EBITDA deteriorated to $911 million as compared to $1,027 million in pcp. In the recent update, AGL recognized impairment charge of $2,686 million in the H1 FY21 financial statements. This was related to provisions in wind farm contracts, restoration expenses related to outages, and impairment in gas assets.
Figure 6. Wholesale Market Segment Showed Contraction in Profit:
Source: Company Reports
AGL reported a decline in operating cash flow to $614 million in H1 FY21 (vs. $1,135 million in pcp) due to a drop in profitability and increased credit losses from customers due to the pandemic. Growth capex declined but was offset by increased spend on acquisitions. AGL closed the period with a cash balance of $716 million. It had no major refinancing due until November 2021.
AGL continues to maintain a dividend payout ratio at 75% during H1 FY21. The management announced a special dividend for FY21 and FY22, lifting the payout ratio at 100% of underlying net profit after tax. The unfranked dividend of 31 cents and a special dividend of 10 cents.
Top 10 Shareholders: The top 10 shareholders together form ~20.70% of the total shareholding. Franklin Resources Inc. and State Street Global Advisors Australia Ltd. are holding a maximum stake in the company at 5.00% and 3.64%, respectively.
Figure 7. Top 10 Shareholders
Key Metrics: AGL experienced steady revenues in the last five years driven by a diversified energy mix, strong commitment to renewables, and initiatives in decentralized energy systems. It had adequate funding flexibility and liquidity to cover its capex plans.
Figure 8. Key Financial Metrics
Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Outlook: The management has downwardly revised earnings estimates for FY21. The underlying net profit after tax is expected to be in the range of $500-580 million, down from the initial estimate of $560-$660 million. Expiry of low-cost wholesale gas contract, continued pressure on wholesale electricity prices, and higher depreciation are some of the factors. The underlying EBITDA is expected to be between $1,585 million and $1,845 million for FY21. The Liddell Unit 3 outage due to the transformer incident may cost $25 million. No recurrence of insurance proceeds (of $80-$100 million) is expected related to the prior outage of Loy Yang A unit 2. In the recent development, AGL plans to invest $341 million to fund PowerAR’s acquisition of Tilt Renewable’s Australian business. This will boost the renewables transformation with 3,500 MW capacity in solar, wind, and battery storage.
Key Risks: AGL is exposed to wholesale electricity prices that directly impact the margin of its integrated energy segment. Excess electricity supply created due to weak offtake by businesses during the pandemic resulted in a drop in wholesale prices. Its gas supply business was also influenced by spot prices of natural gas and LNG exports. AGL is exposed to counterparty credit risk and it had booked credit losses from customers owing to the closure of businesses. La Nina events and bush fire incidents affected demand patterns. Climate change affects electricity generation at the wind and solar assets. The pricing of electricity is exposed to regulatory oversight.
Valuation Methodology: Enterprise Value to EBITDA Multiple Based Relative Valuation (Illustrative)
Enterprise Value to EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
Stock Recommendation: AGL has delivered 3-month and 6-month returns of ~-23.95% and ~-32.36%, respectively. The stock is trading below the average of the 52-week high price of $18.210 and 52-week low price of $9.350, thereby providing an opportunity for accumulation. On the technical front, the stock has a support level of ~ AU$9.342 and a resistance level of ~AU$9.860. We have valued the stock using EV to EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a discount as compared to its peer median EV/EBITDA (NTM Trading multiple) considering the downward revision in earnings estimates by the management for FY21 and the inherent risk of high exposure to the wholesale electricity trading market. For this purpose, we have taken peers like AusNet Services Ltd. (ASX: AST), APA Group (ASX: APA), New Energy Solar Ltd. (ASX: NEW), to name a few. Considering the consistent EBITDA margin, increase in ROE, adequate liquidity, and strong commitment to renewables, we give a “Buy” recommendation on the stock at the current market price of AU$9.690, down 0.718% on March 17, 2021.
AGL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Disclaimer
This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.
Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.
There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.
You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.
The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.
Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.
Please also read our Terms & Conditions and Financial Services Guide for further information.
On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.