AGL Details

AGL Energy Limited (ASX: AGL) operates Australia’s largest private electricity generation portfolio and has an operating generation capacity of 11,208 MW. It supplies 4.5 million gas, electricity, and telecommunications services to its customers across Australia.

FY21 Performance (For the Period Ended 30 June 2021)

• Overall revenue from continuing operations reduced to $10,942 million in FY21 from $12,160 million in FY20. Total generation volumes during the period decreased by 6% to 41,137 GWh in FY21 versus 43,828 GWh in FY20 owing to the impact of planned and unplanned outages and reduced grid demand.
• Underlying EBITDA declined by 18% YoY to $1,666 million in The company has posted a statutory loss after tax of $2,058 million in FY21 that includes $2,929 million of asset impairment losses, onerous contracts and costs related to acquisitions, restructuring and cessation of the Crib Point project.
• The company has declared a final dividend of 34 cents per share taking the overall dividend for FY21 to 75 cents, including 10 cents interim special dividend.

Key Financial Metrics (Source: Company Reports)

Recent Update

• As per the press release dated 23 September 2021, the company’s proposed grid-scale battery in Broken Hill has made further progress. It has bagged approval from the NSW Department of Planning, Industry and Environment (DPIE) for up to 50 megawatts (MW), 100 megawatt-hours (MWh) projects.
• Following a fruitful introduction of its EV subscriptions in Sydney, Melbourne, and Brisbane, the company on 16 September 2021 has further augmented its subscription service to Adelaide.

Key Risks

The company is exposed to broader risks such as changes in wholesale price and market volatility, regulatory and government intervention, climate change, failure to generate and sustain a resilient gas supply, among others.

Outlook

Guidance: The company expects underlying EBITDA to be in the range of $1,200-$1,400 million in FY22. Further, it estimates its FY22 NPAT to stay in the range of $220-$340 million.

Cost Savings: The company is going as per the plan to deliver at least $150 million in operating cost reduction for FY22. It is also targeting a $100 million reduction in sustaining capital expenditure by FY23.

Proposed Demerger on Track: The company is on track to implement the proposed demerger to create two leading energy businesses with different listings on the ASX in Q4FY22, subject to board, shareholder, and relevant regulatory approvals.

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

Technical Overview:

Chart:

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

AGL has delivered 6-month and 9-month returns of ~-42.33% and ~-49.92%, respectively. The stock is trading lower than the average of the 52-week high price of $14.326 and the 52-week low price of $5.220, which indicates a good opportunity for accumulation.

The stock has been valued using an EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). A slight discount has been applied to EV/EBITDA multiple (NTM) (Peer Average) considering decreased revenue in FY21 as well as higher debt to equity ratio at 0.58x in FY21 compared to 0.39x in FY20 and an increased cash conversion cycle at 81.6 days in FY21 versus 69.0 days in FY20. However, the company posted a rise in the current assets in FY 2021 on the YoY basis.

For the purpose of relative valuation, peers like Origin Energy Ltd (ORG.AX), and New Energy Solar Ltd (NEW.AX), among others have been considered.

Considering its sustained drive towards operating cost reductions along with its current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $5.965 per share, (Time: 11:48 AM (GMT+10), Sydney, Australia), as of 23^rd September 2021.

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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