AGL Energy’s first half result was better than expectations, but the company is still far from safe ground. Principal among the issues to be resolved is the stretched balance sheet.
1H22 underlying EBITDA was $723 million which benefited from a strong generation and trading performance. Excluding the non-recurring $105 million insurance proceeds received, underlying net profit of $194 million was down 23% on last year reflecting lower wholesale prices.
AGL narrowed its FY22 guidance for EBITDA to $1,275-1,400 million implying 2H22 EBITDA of $552-677 million. This still looks to be a tough ask. The same applies to the revised net profit guidance range of $260-340 million for FY22.
As per previous guidance, allocating 60% of corporate costs to AGL Australia would have delivered 1H21 EBITDA of about $205 million with big year-on-year declines in wholesale gas and consumer electricity. When annualised at around $410 million, this compares to $820 million back in FY19 indicating the gap to be bridged.
AGL Australia looks set to demerge with a balance sheet burdened by a net debt to EBITDA ratio of more than 4x, even assuming a recovery in AGL EBITDA through to FY23. That is an impossible level of gearing for a self-titled growth stock. Accel Energy can only take about $800 million of the AGL group debt which pushes the balance of approximately $1.9 billion back to AGL Australia.
Accel Energy may face a difficult 2H22 but FY23 will begin to see some benefit from higher wholesale electricity prices. Challenges persist here with Victorian prices still soft, inflexible coal plants being able to reap the benefits of higher average prices and risks from ever higher self-insurance.
The interim dividend of 16cps is to be fully underwritten, as previously guided.
Investment view
As the demerger approaches, there is an air of optimism from AGL which is to be expected. But the details remain tucked away from sight at this point, leaving some big questions unanswered. We point to the balance sheet issue as the biggest of these. The tide may be slowly turning on the earnings front, but investors will not get their toes wet for some time yet given the extent of the decay in recent years.
Risks to investment view
AGL is working towards a demerger into two companies – AGL Australia and Accel Energy. AGL Australia will be the retail energy business and Accel Energy will be the generation business. The demerger process presents the primary risk facing the company. Changes in wholesale electricity and gas prices present operational earnings risk.
Recommendation
We have retained our Hold recommendation.
