AGL Energy: A bet each way on carbon?

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
11 February 2022, 8:00 AM
Sectors Covered:
Industrials, New Energy

  • AGL Energy (ASX:AGL) lifted the midpoint of its FY22 underlying net profit guidance 7% after delivering a better than expected 1H.
  • The company confirmed its demerger is on track for the end of the financial year with both new entities expected to receive investment grade credit ratings.
  • Despite this the share price closed down 3.5% after being up 3.5% in early trading.
  • We retain our HOLD rating and update our price target to (login to view).

Stronger outlook for FY22 on back of solid 1H

AGL posted a much stronger 1H underlying net profit result than expected although this was partly due to an earnings skew with a soft 2H to come. The company upgraded its full year underlying NPAT guidance range to between $260m - $340m (from $220m - $340m).

The demerger process is on schedule for the end of the financial year. The company has raised additional equity (~$104m) through an underwritten dividend reinvestment plan (16cps) and expects AGL Australia (AGLA) and Accel Energy to hold investment grade credit ratings (Baa2 and Baa3 respectively).

Future debt looks to be manageable

AGL has said that it will seek $2.4bn of debt for AGLA and $1.4bn for Accel. We estimate that the FY22 net debt / EBITDA ratios would be less than 3.2 for AGLA and 1.9 for Accel.

With rising electricity prices we expect both entities EBITDA to lift next year so we don’t see any issues with debt serviceability at this stage.

Forecast and valuation update

We have lifted our net profit forecast for this year in light of AGL’s increased confidence in its profitability. We have also reduced our forecast profit increase in FY23 to allow for some potentially longer duration contracts in the C&I customer book to roll over in FY24 instead.

Our capital expenditure forecast has also increased to allow for the ongoing spend on the Torrens Island battery as well as paying for AGL’s share of the Tilt acquisition.

Investment view 

AGL remains a difficult investment proposition ahead of its demerger with its component parts likely to attract investors who have environmental priorities that are at polar opposites. AGLA will be a completely carbon neutral entity and aiming to appeal to investors with ESG requirements.

We see the investment proposition for Accel as being a bet that the energy market will need its legacy assets for significantly longer than several prominent forecasts are allowing.

Unfortunately in this scenario neither set of investors is likely to place much value on the assets of the respective unwanted businesses. This could create an opportunity for tactical traders that the demerged entities could both rerate higher as independent entities that appeal to particular segments of the market.

We think this raises challenges and risks though for investors seeking longer term exposure who may find it easier to take a position following the demerger.

We maintain our HOLD rating and update our target price to (login to view) after rolling forward our model by six months.

Price catalysts

  • Price trends in the energy markets.
  • Release of the demerger scheme booklet in mid-May.

Risks

  • Commodity prices (gas, electricity, carbon).
  • Energy markets regulation.
  • Performance and reliability of generation plant.
  • Final costs of demerger process.
  • Interest rates.
  • Changes to tax regimes.

Find out more

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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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