AGL Energy: Result 2013
Recommendation
The headline result certainly sounded impressive, with AGL Energy’s statutory profit rocketing 238% to $388m. Even on an underlying basis, which excludes oddities like derivative movements, net profit rose 24% to $598m. From underlying earnings per share of $1.08, up 8.8%, a final dividend of $0.33 was declared (fully franked, ex date already past), taking full year dividends to $0.63 to give a current yield of 4.1%.
The profit surge was entirely due to the debut contribution from Loy Yang A, one of the largest generators in the land.
AGL also announced a $344m asset impairment of its New South Wales coal seam gas interests. Current state laws prevent those assets from being developed and are unlikely to change soon, cementing AGL’s acute gas shortage. With gas prices on the east coast rising – they have doubled over the past year – the company will have to pay higher prices to secure contracted supplies.
Key Points
- Profit increase reflects inclusion of Loy Yang A
- Good result; customer numbers up
- More exposed to industry headwinds
Fierce competition and lower electricity demand are also affecting the business. Although AGL has fared better than archrival Origin Energy in acquiring customers, its operating margins are falling and, at 7.2%, remain lower than Origins. It's impossible to tell whether this trend is cyclical or structural, but it will play a pivotal role for the industry.
Be happy now
Management was slightly more sanguine about lower electricity demand than Origin chief Grant King, claiming that, although rapid price increases had caused a noticeable fall in electricity demand, smaller increases in the future would see demand revert to historic patterns. That is, consumption would rise again once prices stabilise. An increasing number of industry participants suggest that subdued consumption is now the norm so we are sceptical of such cheeriness.
Year to end June | 2013 | 2012 | /(–) (%) |
---|---|---|---|
Stat. net profit ($m) | 388 | 115 | 237 |
Underlying net profit ($m) | 598 | 482 | 24 |
Underlying EPS (c) | 108 | 100 | 8 |
PER | 14 | 15 | n/a |
DPS (c) | 33 | 32 | 3 |
Dividend yield (%) | 4.1 | 3.9 | n/a |
Franking (%) | 100 | 100 | n/a |
Perhaps it was that view that propelled AGL to buy smaller peer APG for $103m during the year. A serial discounter, APG is representative of new competition that has blighted both AGL and Origin’s cosy duopoly. APG was reported making heavy losses and the offer from AGL was greedily accepted.
AGL will gain over 300,000 new customers to its account at low cost and it expects to reduce costs by offering its own billing system and reducing bad debts.
We remain unconvinced by the deal. APG’s customers are low value and flighty. Only by lowering costs will AGL profit from the purchase and the removal of a serial discounter will benefit competitors as much as AGL itself.
Market in turmoil
The coalition’s victory at the polls will have an impact on the business. If carbon pricing is repealed, annual cash payments made to AGL (as compensation for being a hideous polluter) will cease and profits will fall next year. Yet without a carbon price, the value of the Loy Yang A generator increases enormously. The purchase of Loy Yang may yet be a master stroke.
Despite this, we have concerns. AGL’s gas deficit may be costly to fill and falling electricity consumption appears to be more than a transitory trend. Without an equivalent of Origin's APLNG project, AGL is uncomfortably exposed to a market in turmoil. Although the share price is down slightly since 01 Mar 13 (Avoid – $16.02), current prices offer no opportunity. AVOID.
Note: Our Income and Growth portfolios own shares in Origin Energy.