Energy

AGL guides to 18% lower earnings following coal breakdown

By Market Index
Mon 02 May 22, 12:43pm (AEDT)
AGL

Key Points

  • AGL is guiding to lower annual earnings/profit following the breakdown of a major coal unit
  • The most recent outage is not recoverable via insurance
  • The financial impact from the shutdown will be split between FY 2022 and FY 2023

AGL Energy (ASX: AGL) shares were down -3.5% at the open following revelations the power retailer will incur a $73m hit to its profit and is guiding to lower annual earnings following the breakdown of a major coal unit at its Loy Yang A power station in Victoria's La Trobe Valley.

Today guidance update follows revelations 15 April that Unit 2 at AGL’s Loy Yang A Power Station, the state's largest power station, had been taken out of service due to an electrical fault with the generator, leaving it without a quarter of its capacity.

Changes to guidance announced today include:

Underlying earnings (EBITDA) for FY22 to be between $1,230 and $1,300m, down from the previous guidance range of between $1,275 and $1,400m.

Underlying Profit after tax for FY22 to be between $220m and $270m, down from the previous guidance range of between $260m to $340m.

Investors should note that the original guidance, provided at last August’s full-year results, was already a decline on the figures for fiscal 2021, with the company grappling with the inflow of cheap renewable energy into the system.

History repeats

Unlike 2019 when Loy Yang A experienced a seven-month break – and subsequently recovered $100m in lost earnings from business interruption insurance – AGL notes that the most recent outage is not recoverable via insurance.

What’s in store

At this stage, AGL expects the unit to return to service by 1 August 2022, which is late in the peak winter demand season.

Overall, the financial impact from the shutdown will be split between FY 2022 and FY 2023.

$60m of the $73m charge will be recorded in FY22 financial year, or $41m after tax, with $13m or $9m after tax is expected in 2023.

Missed opportunity

AGL’s coal plant breakdown clearly represents a missed opportunity to capitalise on the spiralling wholesale electricity prices.

Wholesale futures spot prices have tripled to $176 per megawatt hour for the second quarter of 2022 - from an average of $57MWh for the fourth quarter of 2021.

In an attempt to soften the impact of the unit outage on its market position the company is reviewing whether it can delay some upcoming planned maintenance shutdowns at other units to help.

Meantime, later this week CEO Graeme Hunt is expected to update investors on demerger plans.

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AGL Energy share price over five years.

What brokers think

Having previously pre-empted an expected reduction in net profit due to Loy Yang A, Ord Minnett recently (21/04/22) downgraded AGL to Accumulate from Buy. (Price target 9.30).

Two weeks earlier (05/04/22) Morgans upgraded AGL to Add from Hold and expects wholesale market conditions for electricity and gas to result in strong earnings for AGL Energy in FY24-25. (Price target $8.83).

Based on the brokers that cover AGL (as reported on by FN Arena) the stock is currently trading with a -3.3% downside to the target price of $8.37.

Consensus on AGL is Hold.

Based on Morningstar’s fair value of $12.74, the stock appears to be undervalued.

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Market Index

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