AGL Energy Ltd

AGL Details

AGL operates Australia’s largest private electricity generation portfolio and has an operating generation capacity of 11,208 MW. It provides gas, electricity, and telecommunications services to the customers across Australia.

H1FY21 Performance (For the Period Ended 31 December 2020)

The company for the interim period reported a decline in revenue by 14.2% to $5,414 million from $6,312 million in the pcp as a result of the reduction in generation volumes by 4.5% YoY to 20,816 GWh owing to reduced market demand and the impact of unplanned outages.

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. The board of directors has declared an interim ordinary dividend of 31 cents per share along with a special dividend of 10 cents per share.

Financial Snapshot (Source: Company Reports)

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. Recently, the company informed the market regarding its intention to demerge its energy business into two separate entities namely ‘New AGL’ engaged in Energy Retailing Business and ‘PrimeCo’ engaged in generating electricity. AGL will decide about the terms of the demerger by the end of June 2021 taking due consideration from shareholders and other stakeholders.

Outlook

The company has sustained the 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. Besides, in Integrated Energy, the company is going as per plan to develop 850 MW of grid-scale batteries. Further, it is on track to garner operating cost reductions of $150 million, in addition to offsetting inflation, in FY22. It is also aiming to achieve a $100 million reduction in sustaining capital expenditure by FY23.

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

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status. https://www.bollingerbands.com/

While remaining in a downward slopping channel, the stock has given a softer close for the ongoing week at $8.53. The technical indicator RSI with a reading around 25 suggests that the stock is in the oversold zone thereby limiting the scope of further downside for the stock.

Going forward, the stock may have resistance around $9.00 whereas support could be around $8.00.

Stock Recommendation

The company has stated that it is taking action in order to support the market-leading position as well as customer offerings amidst accelerating external pressure. We have valued the stock using EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price which reflects a rise of low double-digit (in % terms). We have applied a slight discount to EV/EBITDA Multiple (NTM) (Peer Average) considering negative ROE and ROIC as well as uncertainty in regards with the demerger announcement.

The stock declined by ~43.8% in 9 months and by ~22.2% in 3 months. It has made a 52-week low and high of $8.470 and $18.029, respectively and is trading towards the 52-week higher levels.

Considering the above facts, we give a “Buy” rating on the stock at the current price of A$8.510 per share, up by 0.472% on 14^th May 2021.

Note: 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 Valuation has been achieved and subject to the factors discussed above.

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