Origin Energy: Takeover to take time but we think it’s likely

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

29 March 2023, 8:00 AM

Sectors Covered:

Industrials, New Energy

• Following receipt of the binding offer, we lift our target price to the offer price, less our dividend forecast prior to potential implementation.
• We also lift our forecast for Integrated Gas earnings and increase forecast 2H cash receipts from APLNG dividends.
• We maintain our HOLD rating given the limited upside to the offer price.

Binding scheme offer proposed

EIG and Brookfield have moved forward with a binding proposal to acquire Origin Energy (ASX:ORG) for $8.91ps (assuming a 0.7 AUD/USD exchange rate). The payment will be made in AUD but includes a USD2.19ps component that will be calculated using the prevailing exchange rate at the time of implementation.

The next steps will be to seek regulatory approval and for the issue of a scheme booklet which will likely include an independent expert’s report. The timing of ACCC and FIRB approvals and a shareholder vote are not yet clear but ORG has indicated implementation may happen early in CY24.

Analysis

There is potential upside for shareholders who wish to accept currency risk. Based on current prices for March 24 AUD:USD futures, the total AUD compensation would be ~$9.04ps. The 4.5cps per month ticking fee (applies after 30 November) could also add to total compensation.

Investors should also consider the tax implications of the interim franked dividend and any potential dividends to be announced at the full year result in August.

The key downside risk, apart from currency, would be the chance that regulatory approvals aren’t received. Given where the bidders are domiciled, we see minimal FIRB concerns and little change to the competitive landscape should the takeover proceed.

Nevertheless, approvals aren’t guaranteed and the offer was at a considerable premium to the undisturbed price.

Forecast and valuation update

We lift our FY23 forecast for Integrated Gas earnings after reviewing our assumptions for net costs of hedging.

We also lift our forecast for APLNG dividend payments to shareholders (including ORG) in 2H.

Investment view

We maintain our HOLD rating given the limited potential upside for shareholders given the rally in the share price.

Unless investors wish to take, or manage, the FX exposure, it may make sense to trim holdings while being aware of the tax implications from franked dividends.

Price catalysts

• Regulatory approvals.
• Issue of the scheme booklet and independent expert’s report.
• Potential for final and special dividends to be announced in 2H.

Risks

• Regulatory approvals.
• Foreign exchange rates.
• ORG avoiding triggering any Material Adverse Change definitions which references generation fleet capacity, Energy Markets writedowns, APLNG infrastructure among other factors.

Find out more

If you would like more information, please contact your adviser or nearest Morgans office. 

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.