AGL is doing what it said it would do, and the market likes what it sees

Without context, AGL Energy's (ASX: AGL) $1.26 billion statutory loss is a devastating result. But that number, while important, is a minor blip in a much larger success story. 

AGL is arguably Australia's lead actor in the transition away from legacy fossil fuels towards renewables, and on that count it's tracking well - and the market is starting to get on board.  

That's according to James Gerrish, author of Market Matters. 

Case in point - AGL's statutory loss was due to flagged write-downs on its coal power generation. 

So when viewed in aggregate, and the $281 million net profit announced today, things are looking promising for the energy producer.  

“AGL’s financial result for FY23 reflects a strong second half following a challenging start to the year, which was impacted by volatile energy market conditions and forced plant outages," said AGL Managing Director and CEO, Damien Nicks.  

"We expect this positive momentum to continue into FY24, as indicated by our earnings guidance which is unchanged from our announcement in June 2023.”

In this wire, Gerrish picks apart the results to show why AGL is losing its status status as a market "dog" to instead find itself at the forefront of Australia's energy transition. 

AGL Energy Full Year Key Results

• Underlying Net Profit after tax: $281 million, up 25% on FY22
• Underlying EBITDA: $1,361 million, up 12% on FY22
• Statutory Loss after tax: $(1,264) million
• Final unfranked dividend of 23 cents per share ; total dividend for FY23 of 31 cents per share
• Guidance range for FY24 Underlying Net Profit between $580 and $780 million

Key Company Data

In one sentence, what was the key takeaway from this result?

It's the first in-line result in ages. They reconfirmed guidance provided in June, so no surprises.

What was the market’s reaction to this result? In your view, was it an overreaction, an under-reaction or appropriate?

Rating: Appropriate

The market's flat on the update because there wasn't a lot of new news. They held their held their investor day in June, and provided earnings guidance and spoke to the progress towards renewables, and how they're going to build and fund it. So there wasn't much revealed today that investors didn't already know. 

Do you believe that this is the peak for AGL's earnings this cycle?

It's hard to know because it's going to be dictated by wholesale energy pricing. Right now, FY25 pricing is aligned with FY24 pricing, but we'll get more information around that in early calendar year 2025. If pricing is favourable then their earnings can continue to climb. 

It's a huge transition period for AGL. The one thing now clear is that AGL can now fund the development into new [energy] generation with their current cashflow

And there's probably room now to comfortably fund it. So that's been a big change regarding how the market is viewing the company - namely, the company's ability to replace the earnings AGL was getting from coal-fired generation via renewables. 

Were there any major surprises in this result that you think investors should be aware of?

No, and that's a good thing. It was very much aligned with what they articulated on their strategy day. Bigger picture aligned and earnings guidance has been reconfirmed. 

At the margin, underlying NPAT in the second half of 2023 was probably slightly better. The market expected $182 million and AGL has done $184 million. 

And the dividend was slightly ahead. So FY23 earnings were slightly better, but this is all about 2024 and beyond. 

Would you buy, hold or sell AGL on the back of these results?

Rating: HOLD

They're a HOLD because it's hard to put your finger on what's going to drive the share price in the short term. We're probably a couple of months away from getting more information on wholesale pricing that will drive any future earnings growth into FY25. 

What’s your outlook on the energy sector? Are there any risks to this company and its sector that investors should be aware of?

AGL is a little bit unique in what it's tackling from here. I think it's really favourable. We bought this stock sub $7 when the market hated it because we thought there was an opportunity to change the rhetoric from being this unloved huge emitter of carbon into Australia, into a company that's at the forefront of this transition into renewables. They put targets out there and they've incrementally gained acceptable from the market of what they're doing, and that they can fund the transition. So they're going to be a big player in the transition. 

In terms of the sector, I'd highlight regulation as the biggest risk. Government interference in market pricing would be a considerable risk because that would affect earnings and the ability to fund this transition. 

Moreover, it's a sector that's in a building phase. And when you build, and it's not stuff that's been built a lot before, there's the possibility for cost overruns. 

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX right now? Are you excited or are you cautious about the market in general?

Rating: 3

I'm always excited about the market. The backdrop for investing is really good. And the backdrop for being more stock specific rather than owning the market as a whole. When you get more discrepancies in the macro environment, then you get more divergence in company results and how they're faring, so you get more divergence in stock prices. 

10 most recent director transactions