Shareholders in our two largest power retailers beware! The ACCC is coming after AGL Energy Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG) as the competition watchdog wants to reimpose regulated pricing on electricity, according to the Australian Financial Review.
The share prices of both AGL and Origin are suffering on the news with the stocks falling around 0.7% each in late afternoon trade when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 0.6%.
The push by the ACCC for a "default" tariff is aimed at improving pricing transparency and lowering electricity bills by around a quarter, particularly for AGL's and Origin's most loyal and profitable customers.
AGL and Origin aren't the only ones facing regulatory pressure. Toll road company Transurban Group (ASX: TCL), airport operator Sydney Airport Holdings Pty Ltd (ASX: SYD), wealth manager AMP Limited (ASX: AMP) and the big banks like Commonwealth Bank of Australia (ASX: CBA) are also under a dark cloud.
Coming back to the electricity market, the ACCC's recommendation will have a big impact on the bottom lines of AGL and Origin with Morgan Stanley estimating that the move will cut the companies' FY19 earnings before interest, tax, depreciation and amortisation (EBITDA) by 11% to 25%.
"However, using the ACCC's price dispersion data, we think the changes, if implemented, will be manageable, with AGL having slightly more flexibility vs. ORG," said the broker.
"We estimate that billing utilities would need to reduce discounts by less than 300bps across the board, to recoup the one-off price cut."
You might think that lowering discounts will leave both companies in a weaker position to win market share, but the ACCC's move will lower the level of competition in the industry.
This means that AGL and Origin could very well lower the level of discounting without losing customers.
But this doesn't mean the companies are out of the woods. The proposed regulatory change will hang over the stocks until the government makes a decision on the ACCC's recommendation.
This could hurt the share price of AGL more given its larger exposure to the retail market. Unlike Origin, AGL also won't benefit from the rising oil price and I can't see other catalysts for AGL on the immediate horizon that could break the stock out of its funk.
Origin, on the other hand, will rally if the oil price stays firm or resumes its ascend as most experts are predicting.
Origin is one of the joint-venture partners in the APLNG project, the largest producer of natural gas in eastern Australia.
This is the key reason why Origin has outperformed AGL over the past year with the former chalking up a 36% price rise compared to AGL's 12% drop into the red and the ASX 200's 10% gain.
I don't think there's a need to sell either stock on the back of the ACCC's move and I would rate AGL a hold while Origin looks like a buy on the oil price outlook.
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