Date : 11/09/2020

AGL Energy Limited

ASX :

AGL

Market Cap : $9.20 Billion

Dividend Per Share : $0.51

Dividend Yield : 6.64 %

Buy

52 Week Range : $14.68 - $21.22

Share Price : $14.76

In the year-to-date the stock has corrected by 22.36%. New investors can acquire the stock at this price point and get the benefit of stable dividends in the next two years

Company Analysis

AGL Energy Limited is a utility company that supplies electricity as well as natural gas to both residential and commercial customers. It generates electricity from conventional sources like coal and natural gas. It also possesses hydroelectric assets and generates energy from wind and solar power as well. The company has 3.95 million customer accounts and serves 28% of Australian households.

AGL has a diverse power generation portfolio including base, peaking and intermediate generation plants, spread across traditional thermal generation as well as renewable sources including hydro, wind, solar, landfill gas and biomass.


Source: Tradingview.com

Investment Thesis

The statutory profit after tax came in at $1,015 million, up 12% on FY 2019. Underlying profit after tax was $816 million, down 22% compared to that in FY 2019, within the guidance range for FY 2020. There were major challenges in the year such as the unplanned outage at AGL Loy Yang, lower wholesale energy prices and higher depreciation expense.

Underlying EBITDA of $2,070 million was 9% lower compared to the prior year and provided a good reflection of the relative strength of the company’s cash flows compare to its accounting profits. Net cash flow provided by operating activities increased 35% year over year to $2,156 million. This was aided by lower wholesale electricity prices which resulted in a positive cash flow from margin money because of the net sold position the company has in futures markets. This price trend is not positive for AGL’s longer term profitability but it provides a short-term benefit to its liquidity position.

The company declared a final dividend of 51 cents per share for FY 2020, taking the total dividends per share to 98 cents per share, 80% franked.

The customer demand for the company was up 1% despite overall fall of 2% across National Electricity Market.

The company provided a guidance of underlying profit after tax of $560 million -$600 million for FY 2021, lower than that in FY 2020, due to weaker trading conditions as demonstrated by fall in wholesale energy prices. The pandemic is expected to result in additional cost impacts including larger credit losses due to customer hardship.

The company has announced its intention to pay special dividends in FY 2021 and FY 2022, with an effective payout ratio of 100% but without franking benefits.

Observations

  • The company has firmed up new renewable power generation assets at Barker Inlet Power Station, Coopers Gap, and Silverton wind farms. The company also has recently acquired Perth Energy which is performing above expectations and also took up a controlling stake in Southern Phone Company, which is intended to provide diversification of the portfolio into broadband and phone services in the near future.
  • The company is trying to realign its portfolio away from coal towards renewable energy sources and energy storage technologies. Project agreements for Wandoan and Maoneng battery projects have been signed. Liddell and Broken Hill are in the pipeline in addition to other projects. It I targeting 850 MW of grid scale storage by FY 2024. The company has an agreement for off-take of renewable energy with Sunraysia solar power plant which will become effective from FY 2023. It is targeting 34% of electricity capacity from renewables and clean storage by FY 2024. It is also in the hunt for 350 MW in decentralized assets under its access by FY2024
  • The company has benefited from long-term legacy supply contracts for gas over the past decade when gas was available at much lower prices. These contracts are now maturing and need to be renewed at market prices in a tight supply condition and hence acquisition costs are increasing. The company expects maturities of these long-term contracts in FY 2021 to have a material impact on wholesale gas margins.
  • The company has delivered over $135 million in recurring cost savings across its businesses – $78 million in FY2019 and $57 million in FY2020.these savings have been generated from two major software upgrades – the Customer Experience Transformation and Enterprise Resource Planning programs. There have also been one-off savings of $75 million spread over two years, primarily from sale of assets and business reorganization.
  • The company enjoys long-term corporate obligation rating of Baa2 from Moody’s imply moderate credit risks. It has material headroom inclusive of all its debt covenants. No major refinancing is due before November 2021 and the company has more than $1 billion in cash and undrawn debt. It has 38% Funds from Operations (FFO) to net debt ratio, down from 41% at the end of 1H FY 2020. The company is in the process of refinancing some of the more expensive debt in its funding profile, which will have a net positive impact over remainder of its maturity.

Recommendation

  • The company has forecasted a $600 million sustaining capital expenditure and aims to re-invest $100 million in operating synergies in FY 2021. It also looks to optimize its borrowing costs by extending tenor of existing debt and re-negotiations.
  • It has also forecast $170 million on growth-oriented capital expenditure in FY 2021 on new opportunities which have the potential to generate an internal rate of return of minimum 3% above the cost of capital.
  • The company intends to follow a dividend policy payout ratio of 75% of underlying profit after tax. It will initiate special dividends in FY 2021 and FY 2022 to increase effective payout ratio to 100%, albeit without franking credits.
  • As part of the on-market share buyback programme, $620 million has already been returned to shareholders in FY 2020.
  • AGL is one of Australia’s leading integrated renewable energy companies and is taking action to gradually reduce its greenhouse gas emissions while providing secure and affordable energy to its customers. It is taking the right steps to diversify its revenue base and add renewable energy to its portfolio which is going to get more traction in the future compared to hydrocarbons.

In the year-to-date the stock has corrected by 22.36%. New investors can acquire the stock at this price point and get the benefit of stable dividends in the next two years. We rate AGL a BUY with a long term outlook.

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