Why the AGL Energy Ltd share price fell despite a jump in profit

Is it a good idea to buy shares in AGL Energy Ltd (ASX:AGL)?

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Australia's largest retail energy generator and seller reported its full year results to the market this morning. Despite a massive statutory loss, AGL Energy Ltd (ASX: AGL) posted a significant lift in underlying profits thanks to cost cutting and higher wholesale energy prices.

Here's what you need to know:

  • Revenue rose 4.4% to $11,150 million
  • Statutory loss of $408 million due predominantly to write-downs and changes in the fair value of financial instruments
  • Underlying profit after tax up 11.3% to $701 million
  • First full year contribution from Macquarie Generation coal stations contributed to higher energy generation
  • 6% decline in consumer electricity consumption volumes, 4.1% decline in business electricity consumption
  • $252 million cash at bank, total liquidity of $800 million including available debt
  • Total debt of $3.1 billion, interest cover 6.6 times
  • Final dividend of 36 cents per share, 68 cents total for the year (approximately 3.4%, fully franked)

So What?

It was a surprisingly good result from AGL Energy, which I had mentally condemned to mediocrity despite its updated guidance a few months ago. Cost-cutting was the order of the day and lower expenses contributed to wider electricity margins, which resulted in higher profits. They also resulted in a notable detriment to AGL's employee satisfaction score which may or may not be temporary – kudos for AGL for including that chart as it could have easily been omitted and no-one would have noticed.

As advertised, AGL also stuck with its commitment to exit natural gas, and these assets caused the bulk of the $640 million in impairments incurred by AGL. A further $400 million in solar assets are classified as 'held for sale', with AGL intending to sell them to the 'Powering Australia Renewables Fund' ("PARF"), a fund recently established by AGL.

Negotiating with the little guy

AGL also noted that it's launched a digital transformation program to move all aspects of its customer experience (sign up, billing, issue resolution, moving house etc) online. If the focus of this program is similar to that of Telstra Corporation Ltd (ASX: TLS) it'll result in better customer service as well as higher productivity – and probably lower staff numbers. On the topic of Telstra it's worth comparing AGL's customer churn rate of 15% (which mercifully stayed static) to Telstra's 10%, which shows the difference between electrical and telecom customers.

AGL is also 'modernising' its Enterprise Bargaining Agreements (EBAs) at its Loy Yang and Macquarie power stations, which could potentially result in an increase in wages. Reading between the lines I'd say there's been a few disruptions to AGL's workforce recently, which is why employee engagement dropped. AGL mentioned it has put all of its staff on 'new flexible working arrangements' and this combined with staff empowerment initiatives might improve employee engagement.

Now What?

I struggle to see much growth in AGL's future, which is perhaps why shares dropped 5% at the open today. Although margins widened, it was due to cost cutting and with electricity consumption falling and an increasing use of batteries and solar generation (which AGL itself is investing in) it's tough to see big wins coming from this area in the future.

There's potential for further cost cutting if AGL can automate its customer interactions and lift employee productivity, but there are also risks in the form of ongoing competition and the EBA renegotiations. It's not an expensive company, but nor does it deserve to be and I think there are better options out there for investors.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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