Stock of the Day – AGL Energy (AGK) 


AGL Energy’s 2014 result came as little surprise as profit guidance was provided in July. The 4% decline was largely attributed to unusually warm weather. However we consider much of the weakness in the retailing business to be structural as electricity demand has been falling for a number of years due to growing solar panel use and more energy efficient electrical devices.


Retail operating EBIT drivers (Source – Company Reports)

Since 2010 AGL’s retail customer numbers have increased 24% but retail electricity volumes have fallen 2%. Much of the customer growth in fiscal 2014 was due to the acquisition of Australian Power and Gas but lack of acquisition opportunities means any additional customer growth is likely to be organic. The recent deregulation of retail electricity prices in New South Wales should help sustain or even improve retail profit margins but we expect long term decline in electricity demand to continue.


Merchant operating EBIT drivers (Source – Company Reports)
 
The Macquarie Generation acquisition will be funded by AUD 1.2 billion one for five pro rata accelerated renounceable entitlement offer at AUD11 per share. We consider the offer price to be attractive. The acquisition increases generation capacity by 180% to 10,500MW and will make AGL the largest electricity generator in the National electricity Market or NEM. More importantly it means AGL now generates all of the electricity it needs for sales to customers.


AGL Daily Chart (Source – Thomson Reuters)

The strategic shift to increase generation capacity is in response to two key industry changes, namely the onset of liquefied natural gas or LNG exports and less political support for environmentally friendly energy policies such as the carbon tax and the Renewable Energy Target or RET. AGL expects Queensland LNG exports to reduce gas fired generation within NEM by 16 or 17 terra watt hours or around 8% of total generation. Aside from the NEM wide supply reduction the impact will be particularly pronounced in Queensland which will need to import electricity from New South Wales benefitting generators like Macquarie Generation. We reiterate our HOLD recommendation on AGL Energy at the current price of $13.61.

Note - This report was covered on 04/09/2014 under Kalkine Daily

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