Origin Energy Limited

ORG Details
 
Record Half Year Production of Integrated Gas: Origin Energy Limited (ASX: ORG) is engaged in the exploration and production of natural gas; and electricity generation. As on 20 February 2020, the market capitalisation of the company stood at ~$13.79 billion. During 1H20, the company reported a record half-year production of integrated gas with a decline in production costs by 13% to $3.5/GJ. Strong performance from Australia Pacific LNG along with record production and higher revenue, resulted in an increase of 7% in underlying EBITDA in Integrated Gas before non-cash accounting changes.

Decent Increase in Free Cash Flows: During 1H20, Underlying EBITDA of the company stood at $1,590 million and witnessed an increase of 22% in free cash flow to $680 million, up from $556 million in 1H19. This was mainly due to a rise in distributions from Australia Pacific LNG and proceeds from the sale of Ironbark, which was offset by higher capital expenditure driven by generation maintenance and Beetaloo appraisal. ORG is executing its strategy to deliver value in a changing energy market and is pursuing opportunities in hydrogen and LNG for transport. The company has declared a fully franked interim dividend of 15 cents per share which is to be paid on 27 March 2020. 


Free Cash Flows (Source: Company Reports)

Growth Opportunities and Future Expectations: The company is implementing actions to improve the profitability of its retail business by enhancing the customer experience and growing the revenue streams. ORG is on track to achieve $100 million in savings in its retail business by FY21. The company expects production at Australia Pacific LNG to be at the upper end of 690 –710 PJ at unit costs of $3.5-$3.9/GJ. Australia Pacific LNG is likely to make a cash distribution of $1.1 billion to $1.3 billion for FY2020. Australia Pacific LNG is aiming total capital expenditure and operating expenditure between $2.5 billion to $2.7 billion and a lower distribution breakeven of US$29-32/boe.

Valuation Methodology: EV/EBITDA Based Valuation

EV/EBITDA Multiple Based Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of ORG gave a return of 8.68% in the past six months. During 1H20, gross margin witnessed a slight improvement on the 2H19 and stood at 18.3%, up from 17.7% in 2H19. In the same time span, net margin of the company went up to 8.9% from 5.95 in 2H19. This indicates that the company is managing its costs well and is able to convert its revenue into profits. During 1H20, Return on Equity experienced an increase over the previous half and stood at 4.5%. This implies that that the company is well deploying the capital of its shareholders and is capable to generate profits internally. Considering the returns, decent financial performance, modest outlook and improvement in margins, we have valued the stock using EV/EBITDA based valuation method and arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered, AGL Energy Ltd (ASX: AGL), APA Group (ASX: APA), Beach Energy Ltd (ASX: BPT), etc., as a peer group. Hence, we recommend a “Buy” rating on the stock at the current market price of $7.970, up by 1.788% on 20 February 2020, owing to its recent release of interim results. 

 
ORG Daily Technical Chart (Source: Thomson Reuters)

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