AGL is pivoting towards renewables to deliver a more diversified energy mix (Credit: PV Tech)

AGL Energy Ltd (ASX:AGL) is a diversified energy producer, which operates across natural gas, traditional power sources and renewable energy. Determining which source of energy is most profitable is heavily dependent on government policy towards subsidising renewables, in addition to where coal prices sit. Some investors are attracted to AGL since it has a broad exposure to a number of energy sources. This means that the company will always have exposure to whichever source of energy is in vogue, preventing a large decline in AGL’s earnings if it pivots its business completely in one direction. This helps justify its earnings multiple of 13.7 in the eyes of some investors.

The company recently announced full year results, recording underlying NPAT of $1.04bn. the 2% growth was mainly driven by their portfolio of electricity assets, and also resulted in a 2c dividend increase. AGL did unfortunately issue lacklustre guidance for FY20, forecasting underlying profit after tax to be in the $780-860m range. The main headwinds come from wholesale electricity and LREC prices, which are likely to lead to margin compression within the business.

One interesting development in the business is their acquisition of Perth Energy. They bought the company out on an enterprise value of $93m and believe that the new business will position them effectively to compete in the West Australian market. This helps them to achieve a key business priority, which is a long term plus for shareholders. They are also investing in developing reliable and flexible energy supply, where AGL can use its scale to gain a competitive advantage in the market. They have a pipeline of $2bn of new energy supply projects, which helps them pivot towards renewable energy sources. This would help the company compete in ensuring flexible energy supply that delivers a more balanced energy mix. This is particularly badly needed in South Australia, where energy supply is often temperamental.

 

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This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

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September 10, 2019