AGL faces tough sell for demerger plan: analysts
AGL’s coal-laden Accel business will struggle to get support from the vast majority of institutional investor mandates, says Morgan Stanley.
AGL Energy faces difficulties receiving investor support for its coal arm Accel Energy while the balance sheets of both its generation and retail businesses will be stretched under the company’s proposed demerger, analysts say.
The power giant will proceed with a historic split, with its main retail business to be demerged into a new company, AGL Australia, with Accel to house its coal plants and wind portfolio.
Analysts believe Accel, which will include the Loy Yang A and Bayswater coal stations, will struggle to receive support from the vast majority of institutional investor mandates, given its high emissions and pressure on banks to boost their climate record.
“We anticipate that Accel will be excluded from many institutional mandates in view of its carbon intensity with 90 per cent of earnings from fossil fuels, we estimate,” Morgan Stanley analyst Rob Koh said. “Our industry channel checks suggest that the lack of identified decarbonisation additionality will remain a near-term pressure, particularly from the non-government organisation sector - the demerger results in no actual extra emissions reductions or renewables investment.”
The outlook for AGL was revised down to negative from stable by rating agency Moody’s on Wednesday night, concerned that AGL’s new profile as Accel would undergo a “structural weakening” given the loss of business diversity and rising carbon risks connected to its coal plants and volatile power prices.
Accel may be worth between $3.4bn-$3.6bn or an equity value of $2.6bn-$2.8bn with the company seen trading on a similar earnings multiple to Whitehaven Coal, JP Morgan noted. That equates to $4.13-$4.49 a share.
Still, the retail-focused AGL Australia with a strong green focus may win a rerating among investors.
“With exposure to renewables growth and Scope 1 & 2 carbon neutrality - but not Scope3 via Accel offtake - AGL believes New AGL will benefit from fewer environmental, social and governance exclusions compared to current AGL,” Mr Koh said.
AGL Australia could have an enterprise value of $4.2bn-$4.8bn but its debt burden will result in an equity value of between $2.2bn-$2.8bn implying $3.53-$4.49 per share, JP Morgan estimates.
Accel will retain a 15-20 per cent stake in AGL Australia following the demerger. While AGL’s interim boss Graeme Hunt said there was no lockup on keeping the shareholding, JP Morgan questioned whether it could ever sell the shares given it provides asset security against bank debt.
“It does imply that Accel will not likely be able to sell its stake in AGL Australia,” JP Morgan analyst Mark Busuttil said.
Investors had been worried AGL may have to consider a capital raising of up to $1bn to fund its growth plans. Instead, the company abandoned a special dividend to free up $400m-$500m in cash for the companies‘ respective balance sheets.
Still, both companies face constraints according to UBS.
“Based on the capital structure of both entities we see limited balance sheet capacity for AGL and Accel to pursue its growth ambitions given earnings headwinds facing both companies in FY22 and soft returns for targeted wholesale markets growth projects (grid scale batteries, additional renewables and pumped hydro,” UBS analyst Tom Allen said.
Accel over the long-term plans to develop Loy Yang, Bayswater and Torrens Island into major energy hubs spanning hydrogen through batteries. UBS said it was sceptical of earnings growth from its development pipeline.
“We support the concept to co-ordinate the development of these industrial hubs to create synergies across supply chains. However, it is unclear what the returns achieved will be from these hubs,” Mr Allen said. “Based on the projects in Accel’s development pipeline - grid scale batteries at Loy Yang and Liddell, Bells Mountain Pumped Hydro and 1.6GW of wind development projects - we remain sceptical of earnings growth from Accel’s development pipeline.
“Grid scale batteries are a key growth area planned for Accel Energy however we believe asset internal rates of return for grid batteries are likely to be less than 5 per cent in most Australian states, until further coal fired plant exits the market.”
The utility is being battered by a storm of low wholesale electricity prices as cheap renewables continue to flood onto the market, while moves by both state and federal governments to underwrite new generation has also contributed to a tough outlook.
AGL has tipped a tough 2022 performance due to low power prices and UBS said it expects net profit after tax to fall 42 per cent to $313m with the utility to miss out on some of the bounce in prices after it forward sold its generation exposure.
“While near-term baseload futures prices have increased over the last two months and pool /spot prices have spiked in key markets, AGL has near no exposure to near term higher pool prices having heavily hedged / forward sold its generation portfolio,” Mr Allen said.
AGL shares rose 1.3 per cent to $8.31 after plunging 10 per cent on Wednesday.
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