AGL Energy Limited

AGL Details

AGL Energy Ltd (ASX: AGL) operates Australia’s largest private electricity generation portfolio and has an operating generation capacity of 11,208 MW. It supplies 4.2 million energy and telecommunications services to its customers across Australia.

FY21 Performance (For the Period Ended 30 June 2021)

• Decreased Revenue: Overall revenue from continuing operations decreased by 10% to $10,942 million from $12,160 million in FY20. Total generation volumes during the period reduced by 6% to 41,137 GWh owing to the impact of planned and unplanned outages and reduced grid demand.
• Lower Profitability: Underlying EBITDA reduced by 18% to $1,666 million on FY20. The company has posted a statutory loss after tax of $2,058 million that includes $2,929 million of impairment losses, onerous contracts and costs related to acquisitions, restructuring and cessation of the Crib Point project. However, underlying profit after tax fell by 34% YoY to $537 million.
• Dividend: The company has declared a final dividend of 34 cents per share taking the overall dividend for FY21 to 75 cents, including 10 cent interim special dividend.

Consolidated Income Statement (Source: Company Reports) 

Investment in Honey Insurance

As per the press release dated 19 August 2021, the company updated that it will commence delivering smart insurance products to customers building a new home or renting. This was as part of a $3 million investment in Honey Insurance.

Investment in Torrens Island Grid-Scale Battery

The company on 9 August 2021, declared the appointment of a technology group, Wärtsilä to build the $180 million, 250MW Torrens Island grid-scale battery in South Australia which commence construction within AGL’s planned 850MW national battery roll-out and will aid in the growth of intermittent renewable energy in South Australia.

Demerger of its Business

• To Create Two Separate Entities: The company, on 30 June 2021, declared that it is demerging its business into two leading energy businesses with seperate listings on the ASX. As per the proposal, AGL Energy will become Accel Energy Limited, a baseload power producer with an emphasis on boosting energy transition. Accel Energy will demerge AGL Australia Limited, which is a leading multi-product energy retailer with flexible energy trading, storage and supply. AGL Australia will retain the AGL brand.
• Shareholding: Post the demerger, Accel Energy will hold a minority stake of 15-20% in AGL Australia.
• Demerger to Complete in Q4FY22: The company expects the demerger to be completed in Q4FY22, subject to relevant approvals.

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 has guided of achieving underlying EBITDA in the range of $1,200 million and $1,400 million in FY22. Further, it estimates its FY22 NPAT to stay in the range of $220 million and $340 million.
• Cost Savings: Additionally, AGL highlighted that it is going as per the plan to deliver at least $150 million in operating cost reduction for FY22. It is also targeting $100 million reductions in sustaining capital expenditure by FY23.
• Proposed Demerger on Track: Besides, the company is on track to implement the proposed demerger 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

The stock has been valued using an EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price, so arrived reflects a rise of low double-digit (in % terms). A slight discount has been applied to EV/EBITDA multiple (NTM) (Peer Median) considering higher debt to equity ratio at 0.58x in FY21 compared to 0.39x in FY20 as well as increased cash conversion cycle of 81.6 day in FY21 versus 69 days in FY20.

Considering its sustained focus on operating cost reductions along with its current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $7.135 per share, (Time: 4:01 PM (GMT+10), Sydney, Australia) on 20^th August 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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