AGL Energy Ltd (ASX: AGL) has experienced a 12% decline in its share price since August 1, 2023. However, the share price is still up by approximately 34% since the beginning of the year. The energy company has witnessed a notable turnaround in profitability, contributing to increased investor confidence.
Outlook for November and Beyond: In its FY23 results, AGL maintained its underlying earnings guidance range. The company anticipates that underlying earnings before interest, tax, depreciation, and amortization (EBITDA) could increase to a range between $1.875 billion and $2.175 billion. Underlying net profit after tax (NPAT) is projected to double to at least $580 million and could potentially reach $780 million.
Two significant factors underpin the expected increase in AGL's earnings for FY24. Firstly, AGL highlighted sustained periods of higher wholesale electricity pricing, reflecting favorable "pricing outcomes and reset through contract positions." The other key factor is the anticipation of improved plant availability and greater flexibility in the asset fleet. This includes the commencement of operations of the Torrens Island and Broken Hill batteries and the absence of forced outages and market volatility impacts that occurred in July 2022.
UBS Optimistic on AGL: UBS, a prominent brokerage firm, is bullish on AGL shares. It suggests that energy prices could remain strong due to several factors, including the potential exit of some or all of Origin Energy Ltd's (ASX: ORG) Eraring Power Station capacity in mid-2025. Additionally, factors like the forecast of an El Nino weather system leading to warmer weather and lower generation availability from competitors may contribute to the strength in energy prices.
UBS forecasts an 8% increase in earnings before interest and tax (EBIT) for FY25 compared to its estimate for FY24. This is attributed to stronger electricity margins and a full year of additional capacity from the Rye Park wind farm. The broker emphasizes that AGL's continued improvement in generation availability and enhanced flexibility at power stations could offer further upside to its outlook.
Valuation and Price Target: In terms of valuation, UBS estimates that AGL could generate $1 of earnings per share (EPS) in FY24, increasing to $1.12 in FY25. If these projections materialize, the AGL share price would be valued at 11x FY24's estimated earnings and below 10x FY25's earnings.
UBS currently rates AGL as a buy and has set a price target of $12.15. This suggests a potential increase of 12% over the next year, though it's important to note that this is an analyst's estimate.
Conclusion: AGL's outlook for November and beyond is promising, with anticipated earnings growth and favorable market conditions. The company's focus on improving generation availability and flexibility, coupled with the supportive energy market, could position AGL for continued success.