Company Reports

We downgrade AGL Energy’s Morningstar Economic Moat Rating to none, from narrow. The firm’s narrow moat was underpinned by the cost advantage enjoyed by its coal power stations. While this cost advantage is unchallenged for now, Morningstar requires competitive advantages to persist for more than 10 years to award a narrow moat rating. With its coal power stations scheduled to close in the early to mid-2030s and replacement generation assets unlikely to be competitively advantaged, it is time to remove AGL’s moat. Weak Victorian electricity futures prices also detract from expected returns in the medium term.

AGL Energy is one of Australia's largest integrated energy companies. Earnings are dominated by energy generation (wholesale markets), with energy retailing contributing just a fifth of operating earnings. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

Narrow-moat-rated AGL Energy reported a strong first-half result. Underlying EBITDA increased 78% to AUD 1.07 billion and underlying NPAT more than quadrupled to AUD 399 million, compared with the weak prior corresponding period. Management lifted the bottom end of fiscal 2024 NPAT guidance by AUD 100 million and now expects AUD 680 million to AUD 780 million. The upgrade reflects the strong first-half performance and improved generation fleet availability and flexibility.

Narrow-moat-rated AGL Energy screens as undervalued following the recent selloff, with the stock trading at a 24% discount to our unchanged AUD 12.80 fair value estimate. While there are some near-term risks to electricity demand and thus wholesale prices, we think the longer-term outlook remains solid. At present, AGL trades on a low forecast fiscal 2024 P/E ratio below 10 and offers a generous dividend yield close to 6%, mostly franked from fiscal 2025 onward. We continue to forecast earnings remaining relatively flat over the long term as investment in renewable energy and batteries offsets the expiry of cheap long-term coal contracts and the closure of coal power stations.

We lower our fair value estimate for narrow-moat AGL 6% to AUD 15 on revised corporate cost forecasts associated with the proposed structural separation. We factor in higher corporate costs due to potential duplication of resources including head office functions and loss of scale benefits offsetting previously announced cost-saving initiatives. We now expect EBITDA to fall at an average annual rate of 8.4% to fiscal 2025, compared with 7.4% previously.

Narrow-moat AGL’s plans to structurally separate the company into two businesses, announced at its investor day, doesn’t fundamentally change our long-term view of the business. We maintain our AUD 16.00 fair value estimate and continue to view the stock as materially undervalued.

We downgrade narrow-moat AGL Energy's fair value estimate 6% to AUD 16 per share after incorporating the likely acquisition of Tilt--which appears dilutive--and lower wholesale electricity price forecasts given ongoing weakness amid a wave of new renewable supply. These factors had a roughly equal impact on our valuation. But we continue to think AGL is materially undervalued. Our bullish valuation is underpinned by our view that electricity prices will recover over the longer term as new supply slows, ageing coal power stations close and gas prices rise.

AGL Energy is one of Australia's largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Key attractions for shareholders include relatively defensive earnings, solid dividends, and conservative gearing. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

Narrow-moat AGL Energy’s first-half fiscal 2021 result was broadly in line with our expectations and we maintain our AUD 17.00 fair value estimate. The firm reported underlying net profit after tax, or NPAT, of AUD 317 million, down 27% on the prior corresponding period, and a statutory loss of AUD 2.3 billion, which included preannounced noncash charges of AUD 2.7 billion. The interim dividend comprises a AUD 0.31 ordinary dividend and a AUD 0.10 special dividend, both unfranked. Despite challenging operating conditions, we view AGL as undervalued on a long-term view. The stock is trading at a 34% discount to our fair value estimate, offering investors a fiscal 2022 dividend yield of 5% with robust growth potential over the longer term as conditions improve.

AGL Energy is one of Australia's largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Key attractions for shareholders include relatively defensive earnings, solid dividends, and conservative gearing. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

AGL Energy is one of Australia's largest integrated energy companies. We believe it has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Key attractions for shareholders include relatively defensive earnings, solid dividends, and conservative gearing. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation; this justifies a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (wholesale markets), with energy retailing about half the size, and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy, such as the renewable energy target, or RET. Growth opportunities and competition increased following the privatisation of government-owned energy assets and the deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation; this justifies a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (wholesale markets), with energy retailing about half the size, and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy, such as the renewable energy target, or RET. Growth opportunities and competition increased following the privatisation of government-owned energy assets and the deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation; this justifies a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (wholesale markets), with energy retailing about half the size, and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy, such as the renewable energy target, or RET. Growth opportunities and competition increased following the privatisation of government-owned energy assets and the deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation; this justifies a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (wholesale markets), with energy retailing about half the size, and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy, such as the renewable energy target, or RET. Growth opportunities and competition increased following the privatisation of government-owned energy assets and the deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.

The annual United Nations Climate Change Conference, or COP 21, culminated last week with nearly 200 countries agreeing to limit global warming. The burning of fossil fuels is widely believed to be the primary cause of both carbon dioxide, or CO2, emissions and global warming. It's likely that not all promises made at COP 21 will be kept, but it's clear which way the wind's blowing. Renewable generation is a growth industry that's here to stay.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation, and justifying a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (Wholesale Markets) with energy retailing about half the size, and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy such as the renewable energy target, or RET. Growth opportunities and competition increased following privatisation of government-owned energy assets and deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.

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.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation, and justifying a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (merchant energy) with energy retailing (retail) about half the size and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy such as the carbon tax and the renewable energy target, or RET. Growth opportunities and competition increased following privatisation of government-owned energy assets and deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation, and justifying a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (merchant energy) with energy retailing (retail) about half the size and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy such as the carbon tax and the renewable energy target, or RET. Growth opportunities and competition increased following privatisation of government-owned energy assets and deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.