Home Articles Why AGL Shares (ASX AGL) Are A Stock To Buy

Why AGL Shares (ASX AGL) Are A Stock To Buy

Home Articles Why AGL Shares (ASX AGL) Are A Stock To Buy

Why AGL Shares (ASX AGL) Are A Stock To Buy

by Henry Fung - Partner Managing Director

Australian energy juggernaut AGL shares (ASX AGL) has delivered stellar growth over the past financial year. However, while prices may have peaked, the price of electricity and power for householders has soared – leaving a bad taste in the mouths of consumers.

AGL stock’s statutory interim profit after tax surged by an incredible 91% in the second half of 2017, according to its February release as reported by the ABC.

With various generation assets in its portfolio, energy utility and retailer AGL has saved big bucks on purchasing costs thanks to higher margins and higher prices in electricity generation.

AGL Shares Involvement In The Virtual Power Plant Initiative

The focus at AGL is currently on smart energy innovation including the VPP (virtual power plant) development, an innovative collaboration with Tesla and LG Chem. The groundbreaking VPP concept situated in South Australia is in the process of being upgraded with next-generation technology the company – with the battery storage technology adding an extra $622 million to their bottom line.

Partnering with global clean energy giant Tesla, efficient solar panel specialist LG Chem, and SolarEdge, AGL Energy shares has initiated the country’s biggest Virtual Power Plant backed by the South Australian government, with consumers using their home battery systems to store excess energy produced by their solar systems – dramatically cutting grid bills.

High Energy Prices Have Had a Negative Effect On Consumers

While the results are exciting news for AGL stock, there has been a small decline in customer markets due to the rise in power and electricity prices.

ASX AGL shares Chief Executive Andrew Vesey has stated he is well aware that high energy prices are having an effect on customers and they are working to deliver further solutions to offer the lowest possible energy in the future.

Interestingly, although ASX AGL stock share price soared, the share price was met with a drastic downturn. Underlying strong financial growth, wholesale electricity and gas constitute too large a proportion of the net profit, sending the share price downward.

The decline in residential and business customers’ sales volumes cannot be neglected and the fact of the matter is that AGL Energy shares half-yearly profit results are largely due to spiked power prices, as Australian producers export more gas.

Should governmental efforts enforce a lower retail price, AGL stock profit margin would be lowered. It’s a case of wait and see for the big energy utility and retailer, with the 91% drop on the previous corresponding period has been closely watched by both consumers and investors.

VPP Leads The Gradual Transition To Renewables

Australia’s electricity industry has been experiencing consequential transformation and AGL Energy shares participation in new generation plants signals a changing of the guard in renewable energy retailing.

Renewables represent the lowest cost investment in new electricity generation and signify a competitive cost of energy over the medium to long-term. Electricity sourced from wind and renewables are predicted to flourish in next 2 years with industry revenue-boosting 35.3%.

AGL has started construction on a 900 megawatt of new generation plant in Bayswater NSW (less than five kilometres from the Liddell coal-fired power station that is closing in 2022) and also has a 210 MW gas-fired generator on Torrens Island near Adelaide.

While the half-year profit signals lower volatility in the energy market, with over $2 billion of supply projects under development or in the works, the company is working to address the impact of high energy prices and focus on delivering renewable energy that works to lower environmental impact and reduce energy costs.

Storage Solution Shapes the Energy Industry

Renewable energy has a variable and uncertain output. Without adequate storage, renewables capacity will be limited. Pumped hydro is by far the most prevalent form of energy storage worldwide, making up 99 percent of the market.

Australia’s largest pumped hydro system is also its oldest: the 600MW Tumut 3 Power Station, built in the Snowy Mountains in 1973. However, it’s important to note that transmission lines and drought may adversely impact operations for the hydro system in the future.

Without battery technology to store excess energy, solar households that sell back to the grid add to peak strain. Energy storage could work to reduce demand during the winter months, a key storage solution that could signal the end to energy poverty.

According to a recent KPMG census ‘The Rise of Energy Poverty In Australia’ published on 11th December 2017, the real victims of energy poverty are large, low-income families on low incomes. Australia’s chief scientist Dr Alan Finkel points out that if customers are properly empowered and financially incentivised they can make a key contribution to lowering energy prices through effective demand management. To realise this, consumers need a transparent understanding of energy expenditure, especially with the aid of mobile apps and smart meters.

AGL Shares (ASX AGL)

AGL Energy Shares Outperforms Peers in Financial Performance

PE ratio of ASX AGL shares is currently 17.09, lower than that of AusNet Services Ltd (ASX AST) by 21.51 and Spark Infrastructure Group (ASX SKI) by 39.89. Compared to the industry PE ratio of 23.2, AGL stock is more inexpensive than the market and would be an incentive to investors. Compared to ASX SKI (-26.06%) and ASX AST (-6.01%), AGL leads the EPS growth (113.78%).

ASX AGL stock current ROE stands at 10.5%, followed by Infigen Energy (ASX IFN) at 9.04%, ASX AST at 7.74% and ASX SKI at 3.76%. Underlying profit after tax increased by 27.73% for the 6-month period ending 31 December 2017. Although the profit margin of AGL stock (6.43%) is lower than that of ASX SKI (30.69%) and ASX IFN (18.86%), AGL outperforms the market (-321.44%). Major financial indicators are shown in details below.

PE ratioEPSProfit MarginROE
AGL17.09133.78%6.43%10.9%
Spark Infrastructure51.49-26.06%30.69%3.76%
AusNet Services21.51-6.01%14.52%7.74%
Infigen Energy14.126.23%18.86%9.04%

Potential Growth in AGL Energy Shares

Evolving dynamics and expectations coupled with rapidly changing technology and consumer demands continue to create both uncertainty and opportunity in the energy industry. Carbon tax and the cost of coal has made the industry cut down on non-renewables. Although political uncertainties linger, the government is strongly behind renewable energy expansion. The transition should be carefully planned to achieve the balance between reliability of supply, energy affordability and emissions reduction outcomes.

Following Powershop and Diamond Energy, AGL ranked No.5 in ‘Most Improved Retailer’, according to Greenpeace. ASX AGL shares gives investors confidence in its strong profitability (a 32% increase) and high interim dividend (54 cents per share). Being a ‘gentailer’ (generator and retailer), AGL is capable of cost control and passing on value to its customers. Investors should pay close attention to how AGL Energy shares VPP plays out with some of its best-in-class industry partners.

What are your thoughts? Leave us a comment below.

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This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.

Henry is a co-founder of MF & Co. Asset Management with over 12 years experience as a trader, investor and asset manager. Henry’s focus is on High Net Worth Wealth Management and using algorithmic quantitative trading systems to invest for his clients. Henry also trains new Interns and Advisers on trading and risk management.

Henry is a co-founder of MF & Co. Asset Management with over 12 years experience as a trader, investor and asset manager. Henry's focus is on High Net Worth Wealth Management and using algorithmic quantitative trading systems to invest for his clients. Henry also trains new Interns and Advisers on trading and risk management.