Are AGL & ORG in a death spiral?

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Question asked 22/04/2021

Are AGL & ORG in a death spiral?

Dear James,

Could I ask you your opinion about utilities companies AGL and Origin from a macro perspective. I am not so much concerned with their share price (as bad or good news continually surrounds any company). However, it is alarming that both of these companies are now on a similar trend (both having sudden downgrades in earnings). Is this just a passing phase? Or, are these companies simply on a gradual path of losing relevance as major players in the utilities sector?

Kind regards Jack

Answer

HI Jack,

I think the issue with both AGL and ORG is less about the Macro environment and more about what’s happening in the domestic energy market at the moment. In simple terms, both AGL and ORG are locked into buying energy at high rates and this is hurting their margins and thus earnings. ORG for instance, downgraded earnings again on the 19^th April as a consequence of this issue.

As we have suggested before, at the moment we simply think there are too many uncertainties in both ORG and AGL, and while both look cheap there is very low levels of predictability about their earnings over the next 6 months or so.

However to your question, are they losing relevance? The simple answer is no, they will be around for many years to come, and this tough patch will pass and the stocks will ultimately bounce, the question is from what level. We are neutral / bearish both.

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Origin Energy (ORG)

LAST UPDATED 21/04/2021 14:04

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