-No guidance update, weak electricity pricing outlook
-Offtake agreements between the two critical to value
-How can
As it looks to the future and mulls what to do with outdated coal-fired generation,
AGL will divide its business into retail, working title NewAGL, and generation,
There is little financial information regarding the capital structure, offtake (a contract is expected to be struck between the two entities) and final asset allocations, which make it difficult to assess just how investors will greet the decision.
Macquarie suggests AGL is tapping into the growing need for "green", as being a coal-fired generator it is becoming compromised. Separation ensures there are strong ESG (environmental, social & governance) credentials for NewAGL.
Yet
So this would leave the latter exposed to spot pricing. Furthermore, the exposure to coal, leverage to wholesale prices and weak spot prices currently makes it difficult for the broker to envisage how
Morgans notes AGL did not update earnings guidance at the announcement and conditions remain weak. The draft default market offer prices for eastern states other than Victoria are softer for FY22 and futures prices are well below levels of FY19.
The broker had anticipated that if AGL wanted to split its assets it would need to tie the two businesses through an offtake agreement and this is considered critical to determining the value of each entity. Nevertheless, the broker believes the strategy makes sense, although the devil will be in the detail as to how much
Downside risks are envisaged by Goldman Sachs, with increasing capital intensity for NewAGL as well as cost duplication and declining vertical integration. Corporate appeal may increase for NewAGL while the reverse could occur for
Meanwhile, AGL has also bought a 51% stake in
NewAGL
Over time,
The carbon footprint will drop dramatically for NewAGL as the only emissions will come from peaking generation. Macquarie points out this should immediately expand the investor interest as AGL was considered un-investable in some segments because of the coal portfolio.
Moreover, the shift to firming from just earning baseload generation means the new company is no longer as sensitive to the forward curve. Carbon price risk becomes immaterial. In addition, unplanned outages to the gas fleet will be lower as these are relatively new and more reliable. Profitability will stem from selling variable volume at fixed price and buying variable priced volume.
Earnings growth will come from corporates that explicitly target 100% renewables as well as Victorian and
The broker also points out the structural changes will require NewAGL at least to maintain an investment-grade credit rating. To this end, asset sales of
Yet Crib Point LNG import terminal plans have been rejected by the Victorian government, which Goldman Sachs suggests will probably require AGL to re-position its gas strategy. AGL has estimated total committed expenditure to date is
Morgans asserts that at current futures prices, NewAGL will need to effectively transfer value to
So, what's in the deal for
Index funds will remain key investors as long as the business stays in the ASX100. Customers will include large retailers such as AGL, aluminium smelters and some very large industrial users.
The business is also likely to benefit from the bulk of cost savings, as lower minimum operating levels and potentially idling of generation should lead to lower costs. A growth path is less obvious, although AGL has emphasised the latent value in existing sites where batteries and additional gas capability can be added.
It may be able to negotiate risk-sharing contracts for closure, based on the precedent set by Yallourn for 2028.
If AGL is successful in its separation, moreover, the broker anticipates further thermal generator carve-outs will occur in the industry, but highlights the challenges of limited debt and equity appetite.
Based on current modelling,
Goldman Sachs, not one of seven stockbrokers monitored daily on the FNArena database, envisages increased uncertainty for investors and continued downside risk to earnings into FY22, retaining a Neutral rating and lowering the target to
There are three Hold ratings and three Sell on the database. The consensus target is
See also, How Can AGL Energy Broaden Its Appeal? On
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