Origin Energy: Corporate Action - Vote Against Takeover at Scheme Meeting

We recommend shareholders vote against the Brookfield consortium’s takeover of Origin Energy ORG as the 4% premium to our standalone valuation is inadequate. It has been nearly a year since the consortium made its mostly unchanged offer. In that time, Origin’s earnings recovered strongly and uncertainty in the aftermath of the energy crisis lessened. In particular, the Australian utility business bounced back more strongly than we expected and U.K.-based Octopus Energy performed brilliantly, swinging from a large loss to a large profit during fiscal 2023. Origin now has a solid outlook and sound financial health, positioning it well to invest in the renewable energy transition and other growth projects. The independent expert values Origin at between AUD 8.45 and 9.48 per share. It considers the offer fair and thus recommends accepting it in the absence of a superior proposal. But we don’t see a compelling reason to sell at such a small premium to intrinsic value.

At current exchange rates, the offer price equates to about AUD 8.81 per share, compared with our unchanged standalone fair value estimate of AUD 8.50 per share. The current share price of AUD 9.21 suggests the market wants a higher offer, a sentiment publicly echoed by Origin’s largest investor, AusSuper, and several others. We think a price closer to AUD 10 would seal the deal. If the consortium walks away, we don’t think the share price will fall heavily given robust valuation support. At the current share price, no-moat-rated Origin trades on a forecast fiscal 2024 P/E ratio of 15 and offers a 5.4% fully franked dividend yield, with solid earnings growth expected in the medium term. This seems reasonable to us.

The scheme meeting will be held on Nov. 23, 2023. The takeover proposal needs 75% approval to pass, which seems unlikely based on public comments made by several of Origin’s largest investors.