2015 has so far been a great year for shareholders in power retailer and generator, AGL Energy (ASX:AGL). An enthusiastic response by the market to its "Strategic Roadmap", saw shares surge over 6% yesterday, taking gains for the year to a very healthy 27%.
The gains are, however, far from typical for the beleaguered utility; though it's proven a very reliable payer of dividends, lacklustre growth has meant shareholders' total returns have been relatively unimpressive in the past half-decade — about 6.5% per annum. In fact, dividends have really been the only saving grace for investors; the recent rally in share price still leaves it below highs achieved back in early 2007.
Challenges ahead
Excess generation capacity, depressed wholesale electricity prices and declining volumes have provided meaningful headwinds for the business, but new CEO Andy Vesey is hopeful that asset sales and cost cutting will help position the company for a better future.
It will be no easy task. The structural changes underway in the electricity industry are big — very big — and the incumbents face the serious threat of disruption.
The rise of roof-top solar and ever-increasing efficiencies of household appliances have seen per capita power demand wane, a trend likely to continue and which could potentially be seriously exacerbated by new technologies such as home battery storage and smart-grids. Further, if carbon pollution is ever taxed, which seems likely at some stage, the competitiveness of traditional generators will further decline.
Power plants represent a very significant fixed cost for generation companies, and it doesn't take much of a fall in wholesale prices for profitability to plummet. Although AGL has the advantage of being the lowest cost thermal electricity producer, any sustained drop in power prices will certainly hurt.
The company seems well aware of the challenges it faces, and seems hopeful it can turn things around. AGL is betting that changes to its organisational structure — making it leaner and more adaptive — will allow it to better take advantage of new opportunities. It says it will embrace the changes underway in the industry and invest in areas that exploit new technologies, while at the same time divesting itself of non-performing assets.
The market certainly showed a positive response to the strategic plan, though upbeat profit guidance for the current year almost certainly played a big part.
