Should I buy AGL shares at under $7 each?

Can AGL shares charge up returns at the current valuation?

| More on:
A woman holds her finger to the side of her lips in contemplation as she looks upwards to an array of graphic images of light bulbs above her head, one of which is on and glowing.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The AGL share price has dropped over 10% since the start of 2023
  • Its profit slumped in the first half of FY23
  • I think it could be a cheap buy because of the expected earnings recovery in FY24 and FY25

The AGL Energy Limited (ASX: AGL) share price has sunk lower again. It's down 14.5% since the beginning of 2023.

It has been a difficult time for the business over the last few years. Its leadership team have been replaced, profit has been falling and the AGL share price has declined by almost 70% since the start of 2020.

Created with Highcharts 11.4.3Agl Energy PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

But, while the AGL share price has fallen, it's worthwhile noting that, at some point, the AGL share price may become undervalued. It could already be at that point.

What's been going wrong for AGL shares?

The latest result was an excellent example of the types of things that are going wrong for the business.

In the first six months of FY23, AGL reported that its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 16% to $604 million, while underlying net profit after tax (NPAT) declined 55% to $87 million.

AGL reported a statutory loss after tax of $1.075 billion, including $706 million of impairment charges after tax.

The impairment charges related to the carrying value of the AGL energy generation fleet cash-generating unit, largely as a result of the decision to accelerate the targeted closure date of AGL's thermal coal generation assets.

AGL's statutory result was also impacted by a negative movement in the 'fair value of financial instruments', to the tune of $622 million, which primarily reflected the "impact of a drop in forward prices for electricity relative to AGL's hedging of its electricity generation position".

The business has also suffered from outages of its power generation.

AGL shares can be impacted by its guidance because the market is forward-looking. AGL's underlying NPAT for FY23 is expected to be between $200 million to $280 million. It's expecting more energy generation in the second half, with an improvement in the customer margin.

Is the AGL share price a buy right now?

AGL thinks the outlook beyond FY23 is "positive", with wholesale pricing remaining "elevated compared to prior periods with AGL expected to benefit as historical contract positions are reset in FY24 and FY25."

On top of that, "sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes."

AGL is on a path to investing heavily in renewable energy to replace coal. That will help its green credentials and, while there's a hefty price tag, AGL will generate earnings from its green energy assets.

Analyst estimates suggest that AGL could generate much higher earnings in the coming years. In FY25, AGL could generate earnings per share (EPS) of 97 cents and pay a dividend per share of 70 cents, according to Commsec.

That puts the current AGL share price at 7 times FY25's estimated earnings, with a possible dividend yield of 10.2%, excluding the effect of franking credits.

While it's not the most exciting business around, the prospect of much-improved earnings in FY24 and FY25 is compelling and the current valuation could prove cheap.

Valuation snapshot

According to the ASX, the AGL market capitalisation is $4.6 billion.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Energy Shares

A young man punches the air in delight as he reacts to great news on his mobile phone.
Energy Shares

Macquarie tips 23% upside for this ASX All Ords mining stock

Let's see why the broker thinks this stock could be a top buy.

Read more »

a group of three electricity workers stand smiling wearing hard hats and high visibility vests in front of an array of high voltage power equipment.
Energy Shares

Macquarie raises price target on Origin Energy shares

The broker just raised it's price target. Here's why.

Read more »

A smiling woman holds a Facebook like sign above her head.
Energy Shares

Bell Potter says this ASX 200 uranium stock is a top buy

Let's find out why the broker is feeling bullish on this stock.

Read more »

Worker on a laptop at an oil and gas pipeline.
Energy Shares

Boss Energy shares have surged 93% since April. Here's what Macquarie expects now

Boss Energy shares remain a favourite for ASX short sellers. Are they in a for a payday or headed for…

Read more »

A young man wearing glasses writes down his stock picks in his living room.
Energy Shares

3 reasons to buy this beaten down ASX 200 coal stock today

A leading expert forecasts a big potential rebound ahead for this quality ASX 200 coal stock.

Read more »

Female miner uses mobile phone at mine site
Energy Shares

Here are the latest growth forecasts for the Pilbara Minerals share price

Can investors charge up their returns with this ASX lithium share?

Read more »

An oil worker in front of a pumpjack using a tablet.
Energy Shares

Top 5 ASX 200 energy shares of FY25 amid a challenging year for sector

The energy sector was the weakest of the 11 market sectors in FY25.

Read more »

An oil worker on a tablet with an oil rig in the background.
Energy Shares

Buying Woodside shares? Here's the latest oil price forecast from Goldman Sachs

Here’s what Goldman Sachs is forecasting for the oil price in the year ahead.

Read more »