Source: Bloomberg
Company Description
We see the following key risks to our investment thesis:
We recently attended the AGL Energy (AGL) operational site visit at Loy Yang power station and adjacent coal mine in Victoria. The site visits also provided a chance to have a discussion with operational staff and included short presentations from senior management.
The site tour was overshadowed by the Australian Government formally announcing the Australian Energy Regulatory (AER) will introduce a default retail price for retail and small businesses by April 2019. This announcement was largely flagged and now provides a cloud over future earnings certainty given the threat of regulated prices has now increased. If current or subsequent government fully move down the regulated path, this is likely to lead to reduced investment in the industry at a time when it is needed the most.
With price regulation now clearly afoot and more price intervention highly probable, investors will take a cautious approach to the sector despite undemanding valuations. On this basis, we downgrade our recommendation to Neutral. A positive catalyst for AGL could be buyback given the solid balance sheet.
1. AGL has already substantially moved its legacy customers to market offer or on a discount, with 96% of its clients are on these contracts & only 4% on legacy contracts.
2. AGL welcomes reference pricing to give consumers a reference price to compare market offers. AGL is very supportive of this and is keen to compete on this front.
3. AGL would be highly concerned if there is a move towards regulated prices, as it creates uncertainty and allows subsequent governments to reduce/tweak it further (which will create uncertainty for investments).
Buyback still a potential positive. With a strong balance sheet and operating cash flow profile, AGL has the capacity to undertake additional capital management initiatives (buyback) on top of the solid dividend yield. An update is expected at the Feb-19 results.
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Source: Company
Figure 3: Dark blue box = adjacent mine, Light blue box = Loy Yang A power station
AGL Energy Limited (AGL) is one of Australia’s leading integrated energy companies and the largest ASX listed owner, operator and developer of renewable energy generation in Australia. The company sells and distributes gas and electricity. Further, it also retails and wholesales energy and fuel products to customers throughout Australia. The business operates four main segments: Energy Markets, Group Operations, New Energy and Investments.
1st March 2020
1st October 2019
25th September 2019
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