AGL

AGL has been through a lot. Difficult markets, unprecedented volatility, regulatory intervention…

…, shareholder activism, attempted takeovers, and thwarted demergers.

Look at all the divisional names that aren’t there anymore.

Some massive losses rolling through the P&L statement, around an otherwise semi-respectable history, given it is an infrastructure company, loosely speaking (gentailer, half generator, half retailer, no network and transmission).

The market ascribes very little to those coal-fired generation plants, and arguably very little to the business has a whole. I think (on our value weighted measures) it is in the top decile by value factor on the ASX 300.

Cashflow needs to normalise, in the next half, which management state it will/should/one-hopes (note the teeny 37, that your eye might otherwise miss).

It all hinges on whether you think plant flexing, and modestly higher wholesale prices (including not being forced into the market at crazy prices when short production vols due to outages) mean 10% is the margin to run with, or, something less (asymptote to zero to some!).

Brokers certainly think the former, rather than the later.

On our numbers, if AGL merely doesn’t implode (i.e., earnings collapse) it should fairly easily produce a “market like” rate of return (something in excess of 7.5%). The expectations are very, very low.

The market definitely has a foot in both views, which doesn’t quite work for us. Either it won’t grow, can’t grow, isn’t responding to climate change, OR, isn’t going to get a good return on growth capex if it does try, is what the market thinks (we think).

Dammed if you do, dammed if you don’t.

We think it a good opportunity here, given those bifurcated views. They can’t go it alone, and need lots of 3rd party capital to achieve their ambitions. But the management changes, board changes, culture and strategy changes, suggest this might be easier to do now than earlier.

Lastly, although the below is not a perfect map at all, it is still worth noting the AGL pre-implosion share price peak was back in 2017, at the time electricity prices were considered out of control, and every politician and their dog was lining up to intervene. Same setup as now, but now AGL is at the other extreme.

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Please note that past performance is not a reliable indicator of future performance.

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