Roy Davidson, 20 April 2017

Stock Comment - AGL Energy

AGL Energy (AGL) operates one of Australia’s largest retail energy businesses, retailing electricity and gas to over 3.8 million residents and businesses nationally. The company also has investments in upstream gas activities and has assembled Australia’s largest privately owned and operated portfolio of renewable electricity generation assets.


AGL has three divisions. The Retail Energy division sells and markets gas and electricity to over 3.8 million customers across Australia. The Merchant Energy division operates a diverse portfolio of generating assets spread over traditional power generation and is complemented by growing renewable sources including hydro, wind, geothermal and solar. The Upstream Gas division invests in and operates upstream gas exploration, development and production, and also operates gas storage facilities.

In June 2015, the two major Australian political parties agreed on an updated renewable energy target (RET) scheme, bringing enhanced certainty to the sector. The RET scheme targets 33,000GWh of renewable generation by 2020 (around 20% of total demand). To meet this target, it is estimated that current and committed renewable generation will need to almost double. This sets the stage for large investment in this sector over the coming years, with support from both the Federal and State Governments. AGL recently established a fund to invest in renewable energy projects, alongside other investors, and the company continues to invest in its New Energy business which we view as positive, especially given AGL’s large coal generation fleet which we expect will feel the brunt of carbon policies longer-term.

AGL reported underlying NPAT of A$389m, up 3.7% year on year, at its latest interim result. The result was driven by higher wholesale electricity prices and ongoing cost reductions, which offset ongoing challenges in the gas business and milder weather at the beginning of the half. Management now expects Underlying profit to be within the upper half of its A$720-$800m guidance range.

AGL is our preferred Australian utility exposure. Its low-cost power generation fleet and its strong retail presence puts the company in a strong competitive position. The recent focus on renewables and New Energy (solar, batteries, smart meters, electric vehicles) is a positive move in a rapidly changing market. AGL also has substantial balance sheet capacity and we expect either a large acquisition or share buybacks in the near future. With the large Queensland LNG plants now coming online and sucking up gas, power prices are set to continue increasing in the medium-term to the benefit of AGL, which has a large generation portfolio. Beyond this, however, the future is less clear with AGL being the largest emitter of greenhouse gases in Australia from its fleet of coal fired power stations. We therefore see a risk of the company being negatively impacted by future carbon policies longer-term.

Risks to AGL include; 1) increased competition, 2) regulatory change, and 3) lower electricity prices.