Mixed reactions from analysts to AGL Energy plan to split
Analysts have mixed feelings about AGL’s break-up and want more detail about how the new retail business will support its generation business.
AGL Energy’s plans to split in two and spin off its coal power plants into a separate business have received mixed reactions from analysts, saying that the restructure makes sense but is dependent on the detail of the separation and energy price movements.
On Tuesday the $6bn electricity retailer and generator said it would split, forming a retail business called New AGL and a generation business called PrimeCo. The move is a step towards a possible demerger of the two businesses.
New AGL will provide electricity, gas, internet and mobile services to 30 per cent of households, while targeting eventual carbon neutrality, while PrimeCo will become the nation’s largest electricity generator and greenhouse gas emitter, powered mostly by coal.
PrimeCo will account for 20 per cent of supply in the national electricity market and retaining the nation’s biggest fleet of coal output.
JP Morgan cut the company to a neutral recommendation, with energy and utilities analyst Mark Busuttil saying PrimeCo would be a difficult sell to investors due to its exposure to commodity and electricity spot prices and a lack of clarity on whether New AGL would shoulder some of the price risk.
“The notable lack of financial information regarding capital structures, offtake arrangements, final asset allocations … makes it difficult to assess how palatable the demerger will be to investors,” he said.
“With its exposure to coal assets, leverage to wholesale prices and currently weak spot prices, it is difficult to see how PrimeCo will be attractive to investors as a stand-alone entity.”
Macquarie analysts also said details like contracting between the businesses had to be finalised but hailed the ESG benefits of the split.
“(New) AGL’s carbon footprint drops dramatically as its only emissions come from peaking generation, thus negligible compared with other generators and the current AGL,” they said.
“It immediately expands its investor universe, where in some regions AGL was considered un-investible given the coal generation portfolio.
“Creation of the New AGL and PrimeCo ensures New AGL has strong ESG credentials yet the flexibility to move quickly in a rapidly changing electricity market to capture new growth opportunities.”
Goldman Sachs analysts said the split would carry downside risks including increasing capital intensity of New AGL, a lower capacity to take on debt and cost duplication from declining vertical integration.
They also said PrimeCo’s status as a significant contributor to the National Electricity Market would hurt its ability to attract foreign investment.
“PrimeCo has potential to be considered critical infrastructure limiting foreign ownership options for the business, while this carbon intensity of the portfolio will also likely limit appeal for Australian institutional/pension fund investors,” they said.
Morgans analyst Max Vickerson said the split made sense but warned “the devil will be in the detail of how much Prime will need to lean on New AGL before it can be self- sustaining”.
“In the short term we think that Australia’s electricity market weakness will continue to dominate the earnings profile of both parts of the business,” he said.
AGL shares closed at $9.65 on Wednesday, down 1.63 per cent.
