AGL Energy: Sheltering from the headwinds

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Max Vickerson
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By Max Vickerson
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Date posted:
14 February 2020, 1:25 PM
Sectors Covered:
Industrials, New Energy

  • The first half result surprised to the upside but a weaker second half is implied by AGL’s updated guidance ($820m-$860m underlying net profit). 
  • The company acknowledges weakening electricity market fundamentals however it might receive a one-off boost in FY21 from an insurance claim on Loy Yang. 
  • The long term outlook remains challenging but the dividend and resumed buy back program will likely support the share price. 
  • We upgrade our recommendation to HOLD and increase our target price (Clients login to view).

Stronger first half than we thought but also a weaker second half

We had anticipated a weak first half result from the impact of the Loy Yang outage but AGL has surprised us with a less severe earnings skew.

Underlying net profit in the first half only fell 20% on pcp however AGL’s updated full year guidance ($820m-$860m) implies a weaker second half than 2H19.

Electricity sales volumes were higher (+3% on pcp) and customer churn was lower (-1.9ppts) although the overall electricity portfolio margin was down (-10%) on higher costs.

The gas business lost both volume (-6%) and margin (-12%) however it has become a much smaller part of AGL’s portfolio.

FY21 headwinds but a Loy Yang claim might calm the storm

AGL acknowledges the challenge of falling wholesale electricity prices and the repricing of legacy gas contracts.

Renewable energy and cheap gas is putting downward pressure on electricity futures which in turn will put pressure on consumer electricity prices. However, AGL believes it can claim back the impact of the Loy Yang outage ($80m - $100m on net profit) in FY21.

Negotiations are under way with its insurers which could buffer earnings from the weaker market conditions next year. 

Coal plants have a shelf life and are increasingly prone to outages

Looking beyond FY21, AGL will struggle to maintain its earnings as it begins to retire its coal fleet.

Liddell is scheduled to close progressively in FY22/23 and the margins from the Bayswater plant will decline as the cheap legacy fuel contracts unwind.

Unplanned outages during this quarter at Liddell and Bayswater will impact second half earnings and the fleet is likely to become more unreliable and expensive to maintain as it ages.

AGL’s currently planned investment program does not replace the generation capacity it will lose when Liddell (2GW) shuts.

AGL could add over 1GW of renewable energy to its portfolio but it will operate on a much lower capacity factor and at lower wholesale margins than Liddell has historically. 

Holding for the dividends in the short to medium term 

The reliability of its coal plants and the Loy Yang insurance claim will be key to AGL maintaining its dividends in the next 12 months.

Given that the worst of the summer period for the wholesale electricity market is probably behind it, upsets at the full year result are unlikely.

The resumption of the buyback program will also provide price support until it’s complete.

Unless there is further significant deterioration in the wholesale electricity market or a large unplanned outage we think it’s likely that the market will have confidence in AGL towards the full year result.

We upgrade our rating to HOLD and increase our target price.

More information

Morgans clients can login to view our detailed report and share price target for AGL Energy. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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