AGL Energy Result Highlights Its Dependence on Coal. No Change in View, Fair Value Estimate Intact

AGL Energy's net profit after tax, or NPAT, for fiscal 2015 fell 62% to AUD 218 million, however, the result was hampered by AUD 578 million of impairments, largely relating to upstream undeveloped gas assets, and boosted by a AUD 166 million gain on electricity derivatives. Underlying NPAT rose 12% to AUD 630 million, broadly in line with our AUD 623 million forecast and at the top end of management guidance. The acquisition of Macquarie Generation was a key contributor to profit growth, but the equity issuance to fund the transaction meant underlying earnings per share was flat on the prior year. We maintain our AUD 14 fair value estimate. AGL is overvalued, with the market too focussed on potential short-term capital returns while ignoring the long-term challenges facing the business, such as the rise of competing solar and battery technology. We maintain our narrow economic moat rating, based on low-cost coal-fired power generation, and our medium fair value uncertainty rating given earnings stability.