Share Tip AGL Energy Limited

AGL Energy (AGK)AGL Energy Limited (AGK) listed as an asx share tip on October 14th is Australia’s second largest retailer of electricity and gas behind Origin Energy (ORG).

It services over 3.3 million retail electricity and gas customers in the eastern and southern Australian states representing a 27% market share.

The company is Australia’s largest private owner, operator and developer of renewable generation assets.

AGK has major investments in hydro and wind, as well as ongoing developments in key renewable areas including solar, geothermal, biomass, bagasse and landfill gas.

Key Points:

Good FY13 Results:

>>Revenue came in at $9.72 billion, a 30.3% increase on the prior year’s results. The growth was mainly the result of the acquisition of power plant Loy Yang A, but the retail division did make a solid contribution
>>The increased revenue translated to an underlying profit of $598.3, a 24.1% climb on the FY12 results
>>The higher earnings and a focus on working capital helped operating cash flow climb around 30% over the year to $602 million
>>Gearing (Net Debt/Net Debt + Equity) at the end of the financial year was 27.8%, this was higher than the previous year, but the result of the worthwhile Loy Yang A acquisition
>>The solid financial year saw the group increase its total dividends payment to 63 cents a share, fully franked, a 3.3% increase on FY12

Peer comparison

>>Over the last two years AGK has traded on a PE discount of around 17% to its major rival ORG
>>That discount now sits at 29% and given the solid FY13 result by AGK we don’t think it is justified
>>The groups forecast dividend yield of 4.2% is also superior to ORG’s 3.5%, which we think will play a factor in narrowing the valuation gap


AGK has not yet provided any specific guidance for FY14 with the group usually choosing to do this at its Annual General Meeting (AGM) which is scheduled for 23 October 2013.

We are expecting the company to forecast for mid-single digit growth, and we think this would be reasonable give the maturity of AGK’s business.

Overall we expect further share price gains to be driven by the closing of the valuation gap between AGK and ORG.

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