AGL Energy Limited

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 4.2 million energy and telecommunications services to its customers across Australia.

H1FY21 Performance (For the Period Ended 31 December 2020)

Overall revenue for the interim period decreased by 14.2% YoY to $5,414 million from $6,312 million in the pcp led by a 4.5% YoY decline in generation volumes during the period to 20,816 GWh owing to reduced market demand and the impact of unplanned outages. Total operating costs for the period increased by 5.7% YoY on account of the COVID-19 response. Underlying EBITDA reduced to $926 million, down by 13% on H1FY20 because of increased operating costs and increased D&A. 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. Underlying profit after tax for the period declined by 27% to $317 million as a result of lower electricity generation volumes, lower wholesale electricity and LPG prices, lower consumption volumes, and increased operating costs.

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) 

Recent Update

The company, on 10 May 2021, announced that it has achieved a significant milestone as AGL’s over 50,000 services are on certified carbon neutral electricity and gas products, across Australia. This provides the customers with choice and flexibility to reduce their carbon footprint.

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 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 underlying 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 the $100 million reduction in sustaining capital expenditure by FY23.

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

Technical Overview:

Weekly Chart –

Source: REFINITIV

Stock Recommendation

AGL has delivered 6-month and 9-month returns of ~-34.0% and ~-40.6%, respectively. The stock is trading lower than the average of the 52-week high price of $18.029 and the 52-week low price of $7.965, 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. For the purpose of relative valuation, we have taken peers like AusNet Services Ltd (AST.AX), Origin Energy Ltd (ORG.AX), and New Energy Solar Ltd (NEW.AX).  

Considering the maintenance of the earnings guidance along with the sustained focus on operating cost reductions, we give a “Buy” recommendation on the stock at the current market price of $8.82 per share, up by 1.847% on 4^th June 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.

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