Analysts rethink prospects for AGL Energy, profit headwinds predicted
AGL Energy faces profit headwinds with the collapse in wholesale electricity prices and concern over its ageing coal-fired power stations.
Analysts have warned AGL Energy faces profit headwinds with the collapse in wholesale electricity prices and the prospect of more outages across its ageing fleet of coal-fired power stations.
The comments follow AGL slashing its profit forecast just before Christmas and warning of a potentially tougher outlook for 2022 with an earnings hit from a fire at its 50-year-old Liddell coal-fired power plant in NSW.
The Liddell accident, which has increased the potential for power blackouts during heatwaves this summer, and low wholesale power prices have combined to cut AGL’s underlying profit after tax for the 2021 financial year to $500m-$580m, a sharp fall from the previous guidance range of $560m-$660m.
The outage at the Liddell power plant is the second major generation plant outage AGL has suffered recently, following its Loy Yang coal plant in Victoria being down for several months last year.
Brokerage Citi said AGL is facing a period of “earnings volatility” particularly as the company is facing government pressure to extend the life of its coal-fired power stations for as long as possible.
“With the Liddell fire and Loy Yang A outage in 2019, we see ongoing risk of reliability issues for late-life coal generation assets leading to earnings volatility,” Citi analyst James Byrne said in a note to clients. “Complicating this is the reality that late life coal assets are increasingly less capable of receiving insurance for operational incidents. We contend that this should see continued contraction of the earnings multiple.”
Citi has a neutral rating and a $12.16 share price target on AGL. This compares with the company’s last closing price on Thursday at $12.06. AGL shares are down more than 40 per cent on the year.
Brokerage Morgans said even with the subdued outlook AGL’s balance sheet could still support dividends, although payouts are likely to be smaller.
Given the lack of growth opportunities in the electricity market, the company has strong near-term free cashflow, even after accounting for the softer financial year 2021 outlook.
But Morgan’s analyst Max Vickerson said, it was “hard to find much room for optimism” towards AGL in the short term.
“For electricity prices to recover we think coal (generation) closures will need to accelerate and gas prices will need to rise.
“While we think both are possible in the medium term but not in the next 12 months”.
Morgans has a “hold” rating and a $11.18 target price for AGL.
