Morgan Stanley's top utilities pick is tipped to perform despite a risky outlook

Mon 16 Jan 23, 12:56pm (AEST)
File photo: generic image of solar panels
Source: File photo: generic image of solar panels

Key Points

  • The biggest short-term risk facing Australia’s utility market is downward price pressure from policy intervention.
  • Medium and longer-term outlooks indicate market volatility favours battery investment and variable renewable energy is becoming increasingly competitive and attractive.
  • Morgan Stanley upgraded Origin Energy to Overweight from Equal-weight and maintained AGL as an Equal-weight.

There have been many good reasons to be cautious on Australian utilities in recent years, given high volatility linked to pricing, interventionist government policies, weather patterns and geopolitical events. 

While maintaining this caution, Morgan Stanley also sees a number of opportunities in the coming years and say they are becoming more constructive on the industry.

Key risks and opportunities ahead

Morgan Stanley anticipates the coming year to hold challenges for the utilities industry. Prices may face downward pressure off the back of proposed government policy intervention, while risks for upward pressure like unplanned outages or delays in plant development are also possible.

The proposed government policy intervention, or Energy Price Relief Plan aims to put pricing caps on gas and coal prices, while also offering funding relief to eligible households and businesses. Further to this, the proposal includes a scheme for $10m in private and public investment in renewable energy generation and storage. 

Electricity prices on policy intervention
Morgan Stanley anticipates policy intervention placing downward price pressure on electricity prices.

On a longer term basis, Morgan Stanley views the energy transition as offering significant opportunities. It favours battery investment as part of the solution, viewing this as a beneficiary of market volatility.

Rooftop solar continues to be attractive to consumers and renewables and battery technology are becoming increasingly competitive as technology advances and scale means prices are coming down.

In fact, Morgan Stanley estimates that a halving of battery costs could see a grid-connected electric-only household reach 80% self-sufficiency. It also estimates a 10-year payback for a Victorian household to retrofit to electric-only.

Market energy earnings multiples
Consensus estimates of market energy earnings multiples.

Rob Koh, Equity Analyst at Morgan Stanley stated, “ we see Australia's bipartisan support for decarbonisation, with legislated targets, boosting the prospects for energy transition investment. Key success factors include access to capital, and the capability to deal with the complexity.”

An upgrade for Origin Energy and hold on AGL

Morgan Stanley believes that both Origin Energy (ASX: ORG) and AGL (ASX: AGL) are well positioned in terms of scale and scope to manage short-term volatility this year.

It believes Origin Energy has better access to capital to deploy for opportunities in the energy transition so has upgraded it to Overweight.

“ORG has achieved its deleveraging targets, energy market trading conditions are benign, the Asia export LNG market remains one of our favoured hydrocarbon markets globally, and our new analysis reveals a faster and more attractive energy transition than before,” said Koh.

It remains neutral on AGL, maintaining an Equal-weight rating, as the company finalises key financial settings such as dividend policy.

Across the energy sector

Morgan Stanley prefers Origin over AGL in terms of Australian Utilities and over Santos Ltd (ASX: STO) in terms of Australian Energy.

Its top pick for Australian Energy stocks remains Woodside Energy Group (ASX: WDS) which it has an Overweight rating on.


Written By

Sara Allen

Content Editor

Sara is a Content Editor at Livewire Markets and Market Index. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and Macquarie Group. She also holds a degree in psychology which drives a continued fascination with how human behaviour drives and is driven by investments and market activity.

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