The Australian Prime Minister, Mr. Scott Morrison recently outlined four market intervention measures which are designed to force down the electricity costs. The first measure is to force power companies to offer default price contracts which will ensure customers are not being exploited to pay higher prices for electricity. These default offer prices will be set independently by the Australian Energy Regulator and they will applied in each network distribution region.
The second measure involves forced divestment of power companies and if they don’t comply it could result in a royal commission. The Australian Competition and Consumer Commission disagree with this measure and called it an extreme measure to take in any market. The third measure is to force the energy companies to contract or buy ahead to make sure that there is sufficient reliable power in the system and it will be done by encouraging the states to implement the reliability mechanism of the otherwise defunct National Energy Guarantee.
This move by the federal government has increased the uncertainty in the market for companies like AGL Energy and Origin Energy. As a result of these measures of forcing down the power prices, it is expected that AGL Energy Limited’s (ASX: AGL) earnings could reduce by 16 percent and Origin Energy’s (ASX: ORG) earnings could decline by 12 percent. On 24 October 2018, AGL shares decreased by 0.912 percent and Origin Energy’s shares declined by 3.439 percent. It is expected that AGL’s earning will be more affected as Origin has more customers on standing offers than AGL.
Australia’s Federal Energy Minister- Mr. Angus Taylor has invited AGL’s Interim chief executive Mr. Brett Redman and Origin’s CEO Mr. Frank Calabria to a "roundtable" meeting to discuss the reductions in their standing offers which they will be required to make for January 1, 2019. In the letter he mentioned that if the industry start focusing on customers and their interests, the government could return to the light touch reduction.
It is expected that AGL's 2020 earnings before interest, tax, depreciation and amortization could decrease by $361 million from the current estimate of $2.291 billion if the customers received a 10 per cent price reduction. According to the Interim Chief Executive of AGL, Mr. Brett Redman, any move to cap retail tariffs would trigger alarm bells with investors and it could reduce the power sector investment and according to him the investment certainty will be threatened. He further added that the company supports the move for reference or comparative pricing, but the details on the impact are yet to be ascertained fully.
In the last six months, AGL’s share prices decreased by 7.72 percent as on 23 October 2018, and it traded at a PE level of 7.710 x. AGL’s shares traded at $18.480 with a market capitalization of Circa $12.23 billion as on 24 October 2018. The group has a decent dividend yield of about 6.27 percent.
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkinemedia.com and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.
Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.
As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.