The much-maligned energy company has experienced a significant re-rate higher in its shares since we originally purchased the stock 4 months ago, with the position showing a nice paper profit of ~60%. Last week they provided re-cut FY23 earnings guidance that was ahead of the market’s expectations, while they released FY 24 earnings & dividend projections which confirmed our original thesis, that after a tough few years and a lot of negative attention, their earnings were set for a strong recovery enabling them to self-fund the large investments needed to retire thermal coal-powered generation. In essence, the business is now on a more sustainable footing with strong prospects for multi-year growth. Higher margins for gas and electricity drive higher earnings and a lower valuation, with AGL now trading on an Est PE for FY24 of 10.96x, which is still historically cheap.
Given we hold the position in the Income Portfolio, the dividend is important, and while they cut their payout guidance from 75% of underlying earnings to a range of between 50-75%, this allows AGL to maintain more balance sheet flexibility, ensure it’s important credit ratings remain solid, and importantly, grow the dividend over time, which UBS forecast to be 5.2% in FY24 (unfranked), jumping to 5.9% in FY25 & 6.9% in FY26 with franking likely from FY25 onwards, if not before.
- Brokers universally upgraded AGL post their strategy day and refreshed guidance, with Barrenjoey the most bullish on the stock with a $13.24 price target.
MM remains long & bullish AGL in the Income Portfolio
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