AGL Details

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.

H1FY21 Performance (For the Period Ended 31 December 2020)

• Generation Volumes Declined by 4.5% YoY: Overall revenue decreased to $5,414 million from $6,312 million in the pcp with overall generation volumes during the period reduced by 4.5% YoY to 20,816 GWh owing to reduced market demand and the impact of unplanned outages.
• Lower Profitability: Underlying EBITDA reduced to $926 million, down by 13% on H1FY20. Meanwhile, the company has posted a statutory loss after tax of $2,287 million that includes $2,686 million of onerous contract provision and impairment charges.

Financial Snapshot (Source: Company Reports)

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 different listings on the ASX. AGL Energy will become Accel Energy Limited, a baseload power producer with 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.

To Mothball One Unit in South Australia

Due to sustained fall in South Australian forward prices and the volume of new capacity, AGL recently updated its intention to mothball one of the four operational Torrens B units in October FY22 (Torrens B1 unit) and it has informed the same to the Australian Energy Market Operator.

Expand Carbon Neutral Offering

The company has further diversified its carbon neutral offerings to telecommunications, business energy solutions and solar/battery bundles. This provides its customers with choice and flexibility to offset carbon emissions across its products. It aims to provide carbon neutral options across all its products by FY21 end.

Key Risks

The company is witnessing headwinds in the form of a sharp decline in wholesale electricity and renewable energy certificate prices along with higher costs towards managing COVID-19, lower-cost gas supply contracts rolling off, among others. Additionally, it is exposed to broader risks such as regulatory and government intervention, climate change, failure to generate and sustain a resilient gas supply, among others.

Outlook

The company has sustained its guidance for an underlying profit after tax of between $500 million and $580 million for FY21 as stated in the 21 December 2020 trading update. AGL also expects EBITDA for FY21 to stay in the range of $1,585 million and $1,845 million. However, AGL Energy continues to expect a substantial step-down in earnings in FY22.

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

Technical Overview:

Daily Price Chart:

Source: REFINITIV, Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

AGL has delivered 6-months and 9-months returns of ~-32.64% and ~-39.88%, respectively. The stock is trading lower than the average of the 52-week high price of $17.336 and the 52-week low price of $7.810, which indicates a good opportunity for accumulation.

We have applied EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a discount to EV/EBITDA multiple (NTM) (Peer Average) considering lower wholesale electricity prices, lower liquidity as well as risks associated with the COVID-19 pandemic.

For relative valuation, we have taken peers like Origin Energy Ltd (ORG.AX), and New Energy Solar Ltd (NEW.AX), among others.

Considering its maintenance of earnings guidance along with its sustained focus on operating cost reductions, we give a “Speculative Buy” recommendation on the stock at the current market price of $7.910 per share, up by 0.508% on 21^st July 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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