AGL

The AGL result was strong, with material margin uplift across customer markets and the integrated energy segments.

That margin uplift appears sustainable, according to management, which is a pleasing structural uplift in earnings. The below question-answer snippet highlights this view.

To the bad news, which was also the good news, but on net led to some of the markets’ disappointment in the result.

The below chart, from the result, shows the big step up in electricity pricing, with the dotted line indicating the average realised price over the year. That’s great, driving earnings sharply higher. That’s the good news.

However the words on the right “FY25 in line with FY24 pricing” suggests that there’s no sequential step up, no multi-year tailwind to be expected, to cause positive consensus earnings revisions.

The below question-answer snippet draws that idea out more fully. Whilst perhaps it might seem or feel a bit obvious (this idea that the price doesn’t keep ratcheting higher and higher over time, the futures curve “is what it is, is how it looks”) it is still seemingly a source of analyst surprise. Read the below for a sense of that disappointment.

Our choice of words here (e.g. “obvious”, in the above) is probably unfair, there is nothing remotely obvious about how how the forward curves, which differ mightily in their commercial applicability, because of liquidity (meaning perhaps nothing transacts at those prices on various points of the curve) or because of hedging (how much was sold, at what price point) translate into an actual earnings estimate in an analysts model. It’s all very opaque, and often the company themselves are unsure, leading to divergence.

But, on net, that’s the key downside surprise, mgmt highlighting the uplift in a level sense, but not a rate of change sense (e.g. not a long term faster growth rate).

The other slightly negative angle on the above Q&A example is the milder winter, leading to less nat gas consumed. Winters are warm, now.

More broadly, the Q&A session focused in on some of the classical “AGL negatives”. If summer proves extremely hot, will AGL profit (or worse, somehow wind up being “caught short” and wearing a margin impact, which based on the track record is a warranted concern).

The other “classic utilities concern” is the level of churn and competition. There’s a lot of discounting out there, there’s a lot of movement from customers trying to reduce their bill, and often there’s a lot of fixed costs which incentivises firms to discount to drive volume that leaves the sector (usually) overall worse off. Rising bad and doubtful debts from defaults or late payments, as households and business’ struggle just adds to the dynamic.

Lastly, there’s the vague uncertainty about the share register (e.g. MCB/Grok) and what precisely big holders intend to do, and whether that’s creating an overhang. At the very least, MCB continues to emphasize the “profit” part, in the below comments re: AGL’s carbon footprint, meaning he remains constructive/commercial in his endeavors.

As are his observations about the company more broadly, and where its core competencies lie.

Our thoughts, yes, all valid, however overall AGL is still pretty cheap, a sizeable discount to the broader market multiple, it has a degree of “earnings certainty” over the next year thanks to those forward curves, with pricing somewhat “locked in”, and is a good inflation hedge, e.g. if natural gas, oil, coal prices go up, so to eventually do AGL’s prices, which consumers can’t do much about.

In our current, fairly unstable market, those defensive characteristics are valuable, certainly over reporting season, where we expect plenty of “hand grenades” to go off. It seems that those positive traits are priced in, but that is okay for now, paying fair value is acceptable, as a starting point.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

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

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