AGL flags big fall in earnings, announces buyback
AGL shares dived as its outlook was dimmed by a Loy Yang outage, lower electricity prices and higher fuel costs.
AGL Energy has flagged a steep fall in its 2020 earnings as an outage at its Loy Yang coal plant, combined with lower electricity prices and higher fuel costs, dampen the outlook for Australia’s largest power supplier.
After announcing annual underlying profit after tax for 2019 of $1.04 billion, just beating a consensus estimate of $1.01bn, AGL signalled a steep profit fall of up to 25 per cent this year to a range between $780 million and $860m.
That guidance at the $820m midpoint is seven per cent lower than RBC’s forecast of $881m.
AGL shares dived by 6 per cent to $18.80 as investors digested the downbeat earnings outlook.
Along with the plant, price and cost hits it also blamed higher depreciation following a hike in capital and the re-regulation of retail standing offers, which also hit rival EnergyAustralia’s half-year earnings on Tuesday.
AGL acknowledged the tougher test ahead after describing its 2019 financial performance as setting “a high watermark for our profitability”.
However, chief executive Brett Redman said the company remains positive on its outlook and growth opportunities, referencing a $650m share buyback announced today and its $93m deal to buy West Australian power retailer and generator Perth Energy.
“Despite this lower earnings outlook, AGL’s operating outlook remains strong. We have entered the new financial year in a robust financial position, meaning we can invest back into the business and execute our growth strategy at the same time as we undertake the on-market share buyback we have announced today.”
Mr Redman said he was not surprised by the reaction of investors after AGL’s sharers sank.
“I’m not surprised because you get a sense of what people are saying shortly before you release your results, so we expect there is a little bit of disappointment in the outlook,” Mr Redman said. “It is clearly beneath consensus so that is not a surprise.”
Citi retained its sell rating based on the earnings contraction.
“AGL hasn’t quantified the earnings headwinds that they have identified, we think it’s possible the biggest miss may be an earlier repricing of legacy gas contracts and roll-off of cheap legacy gas contracts,” Citi said in a client note. “We have rated AGL as a sell as we expected earnings contraction was not being fully appreciated by the market, and this view has only been strengthened with this result.”
Mr Redman said the earnings outlook was a “glimpse of the future” and a reflection of the changing market.
“There’s an element of getting to the future faster in the outlook that we’ve got here. Beyond a year or so, a lot of analysts were forecasting a greater decline and I think what we’re seeing is a timing thing rather than we’re getting it wrong or a point of difference with others.”
The market had likely modelled different numbers for depreciation charges and the Loy Yang outage, according to the AGL chief.
“What a lot of people clearly under-baked was the depreciation change which pre-tax was a $100m step up. That was missing in a lot of the forecasts that we were seeing. That and the Loy Yang impact is towards the high end of what we previously said whereas I think a lot of people were leaning towards lower. All those things have combined in that miss on guidance compared to consensus.”
Pressure has been growing on Mr Redman to diversify AGL’s core earnings into new markets with a raft of regulatory and market headwinds in the power sector emerging this financial year, crimping its earnings outlook.
The company dumped an ambitious $3.1bn takeover of telco Vocus in June after a short period of due diligence, foiling an attempt to create a new revenue stream tapping retail data and broadband revenue streams.
Still, RBC tips the company to keep examining deal options in the sector, noting the creation of a Futures Business team as part of a focus on providing data services to customers.
“The push by AGL into broadband now looks inevitable as AGL looks to expand from its core electricity and gas energy offering,” RBC analyst James Nevin said today. “As we have said before we think a move into retail broadband is an incremental step out from AGL’s core expertise that makes sense, while we thought the move into owning and operating fibre infrastructure represented a much bigger risk and is harder to justify.”
The main drivers of AGL’s bumper 2019 profit were higher wholesale electricity prices.
Net profit fell 43 per cent to $905m reflecting changes in derivatives contracts while revenue rose 2.4 per cent to $13.25bn from $12.81bn.
AGL, facing legal action over the wind power shutdown which crippled South Australia in 2016, will pay a final dividend of 64c a share taking total dividends to 119c per share, just ahead of a 116c consensus estimate.
AGL’s chairman Graeme Hunt said the company was focused on building trust with all stakeholders amid policy uncertainty and said it was focused on managing the responsible closure of power stations approaching retirement including its Liddell plant in NSW, which was last week extended until 2023.
“We are still in the early stages of a multi-decade transition from an energy landscape dominate by base-load thermal power to a future of cleaner, more distributed energy generation and storage,” Mr Hunt said. “As with any major transition there remains uncertainty, price volatility and some debate as to the best path forward.”