AGL Energy Limited (ASX: AGL) dropped substantially despite a positive numbers delivered by the company in FY2019 amid its reduced guidance over the future earnings. The stock of the company witnessed a gap down opening on 8 August 2019 and plunged to the level of A$18.740 (Day’s low on 8 August 2019), down by over 6 per cent against its previous close of A$20.000 on ASX.
Financial Year 2019:
During FY2019, which ended on 30 June 2019, the Underlying EBITDA of the company stood at A$2,285 million, up against the previous year Underlying EBITDA of A$2,236. The Underlying Profit after tax for FY2019 stood at A$1,040 million, up by 2 per cent as compared to the FY2018 Underlying Profit after tax of A$1,018 million.
The electricity portfolio margin of the company contributed significantly for the Underlying Profit after tax as electricity portfolio margin stood at A$1,989 million, up by A$83 million as compared to FY2018; however, the gas portfolio margin of the company dropped by A$9 million to stand at A$719 million in FY2019.
(Source: Company’s Report)
Revenue and Expenditure:
AGL managed to secure a total revenue of A$13,246 million during FY2019, up by over 3.35 per cent as compared to the previous year total revenue of A$12,816 million. However, the expenses also witnessed an increase, increased cost of sales contributed substantially.
The total expenses for the financial year 2019 stood at A$11,236 million, up over 14 per cent, out of which A$9,440 million accounted to the cost of sales, which could be justified with higher plant costs and increase in coal prices.
The total electricity generation by the company stood at 43.7 Terawatt-hour (or TWh) in FY2019, up by 0.6 TWh as compared to FY2018; however, the customer sales volumes remained flat during FY2019.
The large business customer sales remained flat at 9.8 TWh in FY2019, while the wholesale customer volumes witnessed a gain of 0.1 TWh in FY2019; however, the benefits were offset by the volume loss of 0.2 TWh from consumer customers.
The company diverted the higher generated volumes in FY2019 to the pool.
(Source: Company’s Report)
High Price Realisation:
The high gain in electricity generation margin was attributable to the improved performance from consumer and eco markets.
Despite an overall positive performance, the share price of the company dropped marginally in a single trading session, so what went wrong?
New DMO and the Future Outlook:
The new Default Market Offer (Or DMO) and Victorian Default Offer (or VDO) are in effect from 1 July 2019, which as per the company could reduce the consumer base, as it will move consumers toward competitive offers.
However, AGL plans to grow the customer base through targeted new products, and the company further plans to build customer loyalty and help reduce costs.
Reduced FY2020 Guidance:
AGL reduced the future guidance for Underlying Profit after tax, and the company estimates the Underlying Profit after tax to be in the range of A$780 million to A$860 million in FY2020.
The company specified a few reasons for the reduction in future expectancy and cited the impact of the outage of Unit 2 at Loy Yang until December 2019 as one of the causes. The company anticipates that the disruption would impact the Underlying Profit after tax between A$80 to A$100 million. However, the indication from the company does not come as a surprise, since AGL had previously given the indication of a reduction in future earning in June 2019.
AGL further expressed that the impact on the Underlying Profit post-tax would mark a year-on-year increase to approx. A$70 million amid depreciation expense, which in turn, reflects the recent capital invested by the company along with the capital of significant program, which includes barker Inlet Power Station and the Customer Experience Transformation program.
The ongoing headwinds in the markets such as lower wholesale electricity prices in Australia, higher fuel costs, re-regulation of retail standing offer electricity prices via the new DMO and VDO, etc., would drag the Underlying Profit on a post-tax basis ahead.
The company ended the FY2019 with a final dividend of 64.0 cents a share, which was 80 per cent franked. The last dividend distribution took the total dividend of FY2019 to 119.0 cents a share, up by 2 cents a share as compared to the previous financial year.
Outage at Loy Yang:
AGL made a public announcement on 7 June 2019, in which the company mentioned that it completed an assessment of the impact of an outage at Unit 2 at the Loy Yang A power station, Latrobe Valley.
The company mentioned in the announcement that it anticipates the impact of the outage to stretch to seven months, which would impact the FY2020 results materially. The unit went out of service in May 2019 amid an electrical short internal to the generator, which in turn, damaged the stator and rotor of the generator.
AGL initially anticipated that the repairing would take around two to four months; however, upon following the rotor removal, the company realised that the damage was severe than what was initially anticipated.
The Capital Investment for the Perth Energy Acquisition:
In an announcement made public by the company yesterday, Infratil Limited (ASX: IFT) mentioned that it entered an agreement with AGL over the sale of Perth Energy.
The acquisition of Perth Energy (the prospect) is a strong strategic fit for AGL as it allows the company to expand in Western Australia.
Perth Energy commands an enterprise value of A$93 million and is the third-largest electricity retailer to business customers, with a 1,400 Gigawatt-hour (or GWh) of electricity sales along with 1.1 petajoules of gas sales to business customers.
The prospect contains 120MW power station- Kwinana Swift Power Station, and the prospect would provide greater flexibility to the company with Western Australia gas portfolio, which in turn, could strengthen the competitive position of the company in gas retailing in Western Australia, where AGL currently supplies 43,000 residential gas customers.
In a nutshell, despite a positive financial year 2019, AGL stock took a jab in the market amid the gloomy future outlook; however, the company seems to have the contingency plans, which could soothe the market participants.
The market seems to be discounting the headwinds of the Australian domestic market, which includes greater transparency for retail customers to compare the rates of different retail energy suppliers provided by the new Default Market Offer and Victoria Default Offer.
While AGL is yet to report the FY2020 first quarter, international group-CLP has already lost a significant amount of profit amid new DMO in Australia. The wholly-owned subsidiary of the CLP Group- EnergyAustralia profit margins have declined significantly amid weaker domestic conditions in the energy market, and the Hongkong giant also predicts the profit margins to get narrow over time.
The shares of the AGL ended the day’s session today (9 August 2019) on ASX at A$19.270, up by 0.996 per cent as compared to its previous close.
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