Is AGL Energy (ASX:AGL) undervalued?

Summary

  • AGL Energy is Australia’s leading private electricity generation company with more than 4.2 million customers.
  • The company holds a track record of strong performance and has been consistently creating value for the shareholders.
  • The stock has been trading at the lower end of trading range despite witnessing strong growth prospects in the renewable sector.

AGL Energy (ASX:AGL) is the leading operator of Australia’s largest private electricity generation portfolio on the National Electricity Market (NEM) and comprises an impressive suit of operating assets, including coal and gas-fired power plants, renewable energy sources, and gas production and storage assets.

AGL has a strong track record of investing in affordable and low-emission energy targets in the renewable energy sector. The company has a customer base of more than 4.2 million and holds above 180 years of legacy in the industry.

Also Read: ASX companies gearing up to meet green energy targets

How did AGL perform in H1 FY21?

During the first half of FY21, AGL has recorded a statutory loss of AU$2,287 million after tax, which included a loss of AU$2,697 million after tax from asset impairment and a gain of AU$93 million after tax from the changes in the fair value of financial instruments.

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The company's operating cash flow before tax and interest stood at AU$763 million, down AU$436 million from the prior corresponding period (pcp). The net decrease in cash and cash equivalents decreased to AU$40 million, AU$138 million lower than pcp.

Must Read: Why the share price of AGL Energy Limited (ASX:AGL) is dipping

AGL’s financial health:

The investments on companies with weak financial position may lead to significant losses and may even pose risk on the investment capital. That's why it is very important to understand and analyse a company's financial health before making investments.

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The Cash-to-debt ratio and interest coverage are two important parameters to understand the financial health of an organisation. As per the company's FY21 first half-yearly results, AGL has a cash-to-debt ratio of 0.21, which lies in the middle range of companies dealing in the sector.

The company appears to be in a strong financial position. AGL holds total assets of AU$14,710 million with net debt of AU$2,723 million in the financial year 2020. The company has a strong track record of holding assets greater than AU$14,458 million dollars in the last five financial years. AGL had the lowest value assets in the financial year 2017.

Also Read: AGL shares drop on CEO’s resignation

AGL’s profit track record:

Investments made to profitable companies are less prone to lose capital and poses less risk. The companies which performed consistently in the past and have demonstrated growth over the long term are less risky to invest. A company with a higher profit margin is also a good option for safer investment than the one with low margins.

AGL Energy has made a good profit in nine years out of the past 10 years. In the last financial year, the company made a revenue of AU$12.16 billion. Underlying profit after tax for the last financial year was AU$816 million. In the past five years, the company has made a robust track record with at least AU$701 million underlying profit after tax in each financial year.

Source: Company Annual Report (FY20)

Shareholder’s Value:

Creating shareholder's value is very important for a listed company. If the company's vision and management are determined to create value for shareholders, there are a few chances that the company will face any investment challenge in the future. Increasing shareholders value is of the prime importance of the board of a company so, the management must prioritise the interest of shareholders while making strategic decisions.

The records of AGL clearly depicts that creating shareholders value is the company's primary objective. In the financial year 2020, the company had declared a dividend of AU$0.98 with a payout ratio of 75%. Statutory earnings per share for the financial year were AU$0.158, which was significantly higher than the FY19 value of AU$0.138.

Underlying earning per share landed at AU$0.127 in the most recent fiscal year compared to AU$0.158 value of the previous financial year, whereas the payout ratio was the same.

Good Read: Which resources company pays the most dividend?

The profitability of the company can also be calculated by comparing the return on investment, which measures how well a company generates cash flow relative to the capital it has invested in the business. The energy sector player has provided a return of 8.7% on capital investment, which is slightly lower than the previous year return of 10.7%. Additionally, AGL has provided a return of 10% on equity in the 2020 financial year, whereas the return was 12.5% in the previous financial year.

Source: Company Annual Report (FY20)

Conclusively, AGL Energy appears to be highly undervalued with strong growth prospects. However, the performance of the company was not up to the mark in the last financial year due to COVID-19 restrictions and dampened electricity demand, but the prices are going to recover in longer terms with the rise of gas prices, closing of coal-fueled power plants and lower renewable energy supplies.


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