Back in 2017, AGL was all the rage trading above $25.00 per share. Some analysts were confidently “tipping” that it was going to $30.00. Last November, it hit a low of $5.10. For what was once regarded as a ‘blue-chip’ company, this was a massive fall from grace.
AGL’s woes were partly self-inflicted. It took on the Turnbull Government and the ACCC over the early closure of the Liddell coal-fired power station in NSW, hardening their resolve to bring down power prices. It was involved in bungled hedging and onerous contract pricing. And it suffered the ESG (environmental, social and governance) wrath of some institutional investors who liquidated their positions in the stock.
But ultimately, it was the victim of a steep fall in the wholesale electricity price due to the proliferation of rooftop solar and a softening in demand following Covid. As Australia’s largest producer of baseload electricity, principally through its Liddell, Bayswater, Loy Yang A and Torrens Island power stations, electricity prices are the biggest driver of profit.
Profitability collapsed with EBITDA (earnings before interest, tax, depreciation and amortisation) in FY21 $1,666 million, down from $2,070 million in FY20. This is expected to worsen in FY22, with AGL guiding to a range of $1,200 million to $1,400 million for the full year.
But the share price has rebounded. The technicians got excited by the appearance of a “double” bottom formation – in September and in November – a bullish technical signal.
AGL – last 5 years
Source: nabtrade
The bargain hunters noticed that there has been an improvement in electricity prices, with the forward curve (that is the price wholesale customers contract to buy electricity in the future) showing positive signs.
This led to a sharp “percentage” rebound in AGL’s share price. Yesterday, it closed at $7.31 – up more than 40% on its (very fleeting) November 22 low of $5.10.
So, where to from here?
According to the major brokers, they see AGL as fairly valued. The consensus target price of $7.37 is just 1.0% above the current ASX price. There is quite a range, with Ord Minnett (the research is provided by JP Morgan under a white-label) the most bullish at $8.70. UBS is the laggard at $6.00.
Interestingly, broker recommendations are now buy/neutral rather than the sell/neutral position prevailing when AGL released its full-year profit report last August. Credit Suisse, Morgan Stanley and UBS have upgraded their recommendations since October.
Several brokers note that AGL has hedged much of its book until FY23 so that it will not be a major beneficiary of the strengthening of the forward curve. Further, because of the growth of renewables and support for “net zero” carbon emissions, the tide is running strongly against coal-fired energy producers such as AGL.
On the numbers, AGL looks interesting but not exceptional value. If the broker forecasts are correct, AGL is trading on a multiple of 17.3 times FY22 earnings and 14.3 times FY23 earnings. Dividends are forecast to come in about 32c per share in FY22, rising to 40c in FY23 (prospective yields of 4.4% and 5.5%).
One catalyst that may give the share price a lift is the forthcoming split/demerger of AGL into two companies. If approved by shareholders in June, the “dirty” business of coal-fired power stations will be housed in a company named Accel Energy, while the “clean” business of energy retailing and green power will reside in a renamed AGL Australia.
Accel Energy will be Australia’s largest electricity generator. In addition to the coal-fired power stations (which in time will be transitioned into low-carbon industrial energy hubs), it will retain AGL’s existing portfolio of legacy wind farm purchase agreements and gas storage facilities. Focussing on large industrial customers, it will provide (under contract) a large proportion of AGL Australia’s electricity in the early years. It will also retain a 15 to 20% shareholding in AGL Australia.
The new AGL Australia will be Australia’s largest multi-product energy retailer, with 4.5 million consumer and business customers. It will also have an energy portfolio of flexible generation and storage (gas-fired peaking, hydro, solar and battery storage). It will be carbon neutral for scope 1 and scope 2 emissions, with a clear pathway to carbon neutrality for all electricity supply. It will own 20% of Tilt Renewables.
But while demergers are often catalysts for long term share price appreciation, the short term price impact can sometimes be negative because holders suddenly find that they own a business they just don’t want to own. This demerger will be particularly interesting because of the potential ESG implications – arguably positive for AGL Australia, negative for Accel.
I don’t see a lot of upside in betting against the renewable energy drive, so life is going to be pretty tough for AGL (and the new Accel).
So while it looks like AGL has bottomed, I am not convinced that a price of $7.31 represents terrific value. Holders should hold, but to a new investor I say “prefer others”.
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