Company Overview: Origin Energy Limited (ASX: ORG) is a leading energy company that sells electricity, natural gas, LPG, and green power products to Australian homes, businesses, and industrial customers. The company mainly operates two businesses - Energy Markets and Integrated Gas. The company owns 37.5% interest in Australia Pacific LNG (APLNG), a 9Mtpa integrated LNG project backed by JV partners ConocoPhillips and Sinopec.

ORG Details

Key Takeaways from FY21 Results: During FY21, ORG witnessed strong operational performance across both its businesses - Energy Markets and Integrated Gas. However, the financial results were impacted by lower commodity prices, offset by lower operating costs in Australia Pacific LNG (APLNG), retail cost savings, lower interest expense and oil hedging gains. Key highlights of the results are as follows:

• Rise in Operating Cashflow: For FY21, the company reported operating cash flow of $964 million, up by $13 million on FY20, mainly due to lower working capital requirements and lower tax paid.
• Decline in Underlying Profit: Underlying Profit for FY21 stood at $318 million, down from $1,023 million in FY20, impacted by lower customer tariffs and commodity prices.
• Decent Cash Distribution from APLNG: For the June 2021 quarter, the cash distribution from APLNG stood at $320 million, up by 158% on the previous quarter. In FY21, the cash distributions from APLNG stood at $709 million, higher than the guidance of $650 million.
• Decline in Net Debt: Due to strong cash flow, the company was able to reduce its adjusted net debt by $519 million to $4.6 billion, while making investment in growth and paying dividends to shareholders.
• Dividend Declared: For H2FY21, the company has declared a final dividend of 7.5 cents per share, taking the total dividend to 20.0 cents per share.

Operating Cashflow Trend (Source: Analysis by Kalkine Group)

Key Metrics:  Gross margin for FY21 stood at 15.2%, down from 18.4% in FY20. Current ratio for FY21 stood at 0.72x, down from 1.01x in FY20. Debt to equity ratio for FY21 stood at 0.53x, slightly down from 0.54x in FY20.

Debt to Equity Ratio (Source: Analysis By Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 25.52% of the total shareholding, while the top four constitute the maximum holding. AustralianSuper and The Vanguard Group, Inc. are holding a maximum stake in the company at 11.53%  and 6.02%, respectively, as also highlighted in the chart below:

(Source: Analysis By Kalkine Group)

Improving Wholesale Electricity Prices: During the June 2021 quarter, the Wholesale electricity prices witnessed improvement, mainly due to unplanned baseload plant outages in the National Electricity Market and a winter cold snap, which also drove higher demand for gas. Due to the continued recovery in global oil demand and OPEC+ supply restrictions, the Japan Customs-Cleared Crude has witnessed improvement in the June quarter. Further, the Spot LNG prices have also improved in the June quarter, underpinned by ongoing supply bottlenecks and strong demand in Asia and Europe.

Key Risks:

• Change in Energy Demand: ORG is exposed to the risks related to the changes in energy demand which could create revenue uncertainty and impact future financial performance.
• Fluctuations in the Prices of Oil Gas: ORG is also exposed to the risk associated with fluctuation in oil and gas prices as it could also impact the company’s financial performance

Outlook: In FY22, APLNG is expected to have stable production of between 685-710 PJ, reflecting strong field performance and a distribution breakeven of between US$20-$25/bbl. Capital expenditure in FY22 is expected to be between $370-$410 million, including $75-$85 million primarily in relation to exploration and appraisal in the Beetaloo and Canning basins. ORG expects rebound in Energy Markets earnings in FY2023. It is currently focused on capital discipline and cost management to build balance sheet resilience. Further, the company is targeted $100-$150 million in retail cost savings by FY2024.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by ~7.23% and is trading lower than the average 52-week price level band of $3.87 and $5.38, offering a decent opportunity for accumulation. The stock has been valued using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the ongoing impact of COVID-19 pandemic, and challenging near-term outlook for Energy Markets. For the valuation purpose, peers such as AGL Energy Ltd (ASX: AGL), APA Group (ASX: APA), and AusNet Services Ltd (ASX: AST), etc have been considered. Considering the expected rebound in Energy Markets earnings, improving oil and gas prices, decline in debt levels, expected cost savings, current trading level, modest long-term outlook and valuation, we give a “Buy” rating on the stock at the current market price of $4.49, up by ~0.447% as on 8 September 2021.

ORG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:  

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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