Morgan Stanley's pick of the Aussie utility companies

Wed 02 Aug 23, 10:54am (AEST)
Utilities power pole in the background
Source: Shutterstock

Key Points

  • Morgan Stanley prefers Origin and AGL Energy heading into reporting season
  • APA Group and Cleanaway could surprise to the upside
  • Near-term catalysts for utilities companies include energy price trends, as well as the recent Victorian government ban on gas connections will be prevalent in results call discussions

With reporting season rounding the corner (and with it, Livewire's exclusive reporting season coverage) we are starting to see an influx of pre-earnings analysis. Morgan Stanley has provided one of the latest summaries of key dates and themes, the information below relating specifically to Australian utility companies.

Several themes are expected to be present across the utilities industry this reporting season. In the long term, there is likely to be a focus on emissions reduction and the energy transition. In the shorter to medium term, catalysts including energy price trends, as well as the recent Victorian government ban on gas connections will be prevalent in results call discussions.

In this wire, I'll break down some of the key themes related to each of the covered stocks, as well as some high-level ideas to watch in Utilities this August. 

AGL Energy (ASX: AGL)

Reporting: 11 am on Thursday 10 August 2023

Screenshot 2023-08-01 at 3.54.14 pm
1-year price chart via Market Index

The Victorian government recently announced a ban on gas connections to new homes as of January 2024, to meet emissions targets and manage health concerns. Although AGL has not yet commented on the matter, Morgan Stanley's view is that AGL will seek to "Embrace ESG, including targeting growth from electrification".

Morgan Stanley also expects to see price tailwinds for both the electricity and gas industries, alongside both an increase in customer retention and a decrease in discounting. There is also an expectation that the presentation of the results will deal with key themes of plant reliability, fuel costs, and customer hardship mitigation.

Origin Energy (ASX: ORG)

Reporting: 9:30 am on Thursday 17 August 2023 

Screenshot 2023-08-01 at 3.55.10 pm
1-year price chart via Market Index

Origin Energy will benefit from the same energy price tailwinds that AGL features. Morgan Stanley anticipates that energy markets will recover in the near term as retail repricing occurs. An upside is expected as a result of de-carbonisation and renewable themes in the industry.

In addition, Morgan Stanley believes "Origin has also made steady progress on new energy initiatives". This includes $70m Federal Government funding for the proposed Hunter Valley Hydrogen Hub, as well as the acquisition of a NSW Wind Farm site.

APA Group (ASX: APA)

Reporting: 10.30 am on Wednesday 23 August 2023 

Screenshot 2023-08-01 at 3.55.57 pm
1-year price chart via Market Index

Moreso than other companies featured in this wire, Morgan Stanley expects APA to be affected negatively by the Victorian Governments incoming ban on new gas connections. That being said, they hold the view that this ban has been flagged in advance, and was not a surprise to the industry. As a result, no noticeable financial effect is expected in the near term.

Several topics are expected to be covered in the results call, particularly an update on the Kurri Kurri pipeline project, its likelihood of continuing, and the capex commitment. Other details are expected to be touched on, including tariff escalation.

Overall Morgan Stanley believes that APA features defensive and diversified earnings, with a sound balance sheet. Yet to play out are key themes relating to leadership transition, and uncertainty related to fossil fuels and the clean energy transition.

Cleanaway Waste Management (ASX: CWY)

Reporting: 9:30 am on Thursday 24 August 2023 

Screenshot 2023-08-01 at 3.57.03 pm
1-year price chart via Market Index

Morgan Stanley is expecting elevated earnings for Cleanaway, backed by contracts protected against CPI, as well as system growth and a contribution from the recent acquisition of composter GRL. 

CWY has faced several headwinds, although Morgan Stanley is hopeful that progress against these will have been made. In particular, wins are hoped for amongst labour hiring and retention costs, as well as in the space of operational efficiency. Some such optimisations have been flagged in previous investor days, but are yet to be included in guidance. 

Continuing on the environmental theme throughout this analysis, an update is expected on greenhouse reduction plans, particularly related to emissions derived from the usage of trucks and landfills.

The upshot

Overall, Morgan Stanley believes the above stocks provide opportunities for exposure to positive pricing trends, although much remains to be seen in the respective results calls. Within the grouping, Morgan Stanley prefers ORG and AGL, although APA and CWY may surprise.

To keep up with reporting season as it happens, make sure to check out our coverage.

This article was first published for Livewire Markets on Wednesday, 2 August 2023.

Written By

Will Heine

Content Editor

Will is a Content Editor at Livewire Markets and studies Actuarial Studies & Mathematics (Honours) at UNSW. Previously he worked in the analytics team at Fitch Ratings covering residential mortgage and asset-backed securities.

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