AGL Energy: VIC market a key battleground with shots fired by Cannon-Brookes

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
03 May 2022, 9:00 AM
Sectors Covered:
Industrials, New Energy

  • AGL Energy (ASX:AGL) has lowered its guidance for FY22 underlying profit after tax by $55m (-18%) largely as a result of the Loy Yang Unit 2 outage. Despite this the stock only closed down 0.7% as news emerged of Grok Ventures seeking an 11% stake.
  • Victoria is a key market for AGL and medium-term prices are moving upwards but the reliability of Loy Yang raises risks.
  • We maintain our ADD rating and update our target price to (login to view).

FY22 guidance downgrade and Cannon-Brookes looks for blocking stake

Underlying EBITDA guidance has been downgraded 5% and underlying profit after tax by 18%, largely as a result of the unit 2 outage at Loy Yang. Most of the estimated $55m after tax impact is expected in FY22 ($41m) with the remainder in FY23 ($9m).

Grok Ventures has announced it has secured an 11.3% stake in AGL and intends to vote against the demerger. The scheme will require 75% shareholder approval so if another ~16% of the remaining votes are cast against it the demerger will fail.

VIC is a key market and prices are getting stronger

In Victoria AGL has excess generation capacity. In 1H22 Loy Yang generated 6.7TWh (~31% of total generation) against only 2.9TWh of retail and C&I demand.

Provided that AGL can continue to run unit 2 at full capacity following its expected return to service in August, futures prices suggest significant opportunities for profit as old hedging contracts expire.

Prices for VIC baseload futures have surged but even before AGL’s unit outage wholesale prices were well above the market lows in FY20. The whole curve has lifted between 93% (active quarter) and 6% (Mar 24 contract) during April and we think it could still potentially move higher if NSW prices remain elevated.

Forecast and valuation update

We have incorporated the updated guidance into our FY22 forecast and lowered our underlying net profit forecast by 21% to $237m (guidance is $220m - $270m). 

Our forecast for FY23 and FY24 includes higher assumed prices from a lift in VIC futures that will impact the gross margins of both the retail and legacy generation businesses.

Investment view

Outside of the recent performance issues at Loy Yang we see conditions continuing to become more supportive of earnings and cash flow growth which we expect to peak in FY24. We think it’s likely that Loy Yang will close much earlier than the company’s expected date in 2042 but we still see value in the remaining cash flows. 

Despite the large amount of effort the company has expended in pursuing the demerger we don’t see a major risk to short term cash flows should Grok be successful in voting it down.

We imagine the biggest financial impact would be a potential hindering of AGL’s plans to restructure its debt but we think it can manage the relatively small amount of near term expiring debt from its operating cash flows. Longer term, we see debt capacity improving with increasing earnings.

We continue to see AGL as the best opportunity to get exposure to rising electricity prices and we maintain our ADD rating.

Price catalysts

  • Release of the demerger scheme booklet to provide clarity on proposed structures.
  • Outcome of the shareholder vote in June.

Risks

  • Commodity prices (gas, electricity, carbon).
  • Energy markets regulation.
  • Performance and reliability of generation plant.
  • Potential for increased capital expenditure to maintain plant performance and/or increase capacity in new assets to manage electricity position.
  • Interest rates and changes to tax regimes.

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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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