One of the leading electricity generators and service providers, AGL Energy Ltd (ASX: AGK), could be in a good spot for investors. Following a strong year of earnings growth, its half year result was disappointing, sending its share price sideways. It has been flat over the past three months while the S&P ASX All Ordinaries Index (ASX: ^AORD) gained about 1.8%.
This short-term weakness is happening around other factors that could propel revenue and earnings in the mid-term. Value investors look for potential buying opportunities of stable, growing companies having temporary setbacks. The market may be forward-looking, but it can equally be short-sighted.
Here are four things that investors need to know about AGL Energy and what could happen from here.
1) Low end of historic PE averages
Its price/earnings ratio is 14.9, a little lower than its sector average, but more importantly it's toward the lower end of its past average PE ratio range. The lower share price makes its dividend yield an attractive 4.4% fully franked.
2) Consolidating market position (APG acquisition)
The company acquired APG (Australian Power and Gas Company) in October 2013, so the full benefits of the acquisition to revenue and earnings were not complete in the first half. AGL Energy expects improved financial performance in the second half, helping full year results. Thanks to the acquisition, the company's customer base is now 3.85 million.
3) Potential acquisitions
NSW state government wants to sell its Macquarie Generation company assets, which generates about 13% of the electricity used in the eastern states and 40% in NSW. AGL Energy's bid was accepted by the state, but the ACCC has blocked the sale on competition grounds. If the company can win an appeal of the decision, it would go far for future revenue and earnings growth. Watch for further developments.
4) AGL's LNG gas projects
The company has four LNG gas projects in Queensland and NSW using coal seam gas technology to unlock the resource. It estimates that by 2018 these gas projects will be supplying about 20% of NSW's energy needs.
Due to the LNG export business starting up over the next twelve months, gas prices may rise greatly because it will be priced in relation to international gas prices. Having more of its own supply will help manage future costs and surplus gas could be sold into the foreign market.
