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

Oil worker using a smartphone in front of an oil rig.
Energy Shares

Does Macquarie rate Woodside Energy shares a buy, hold or sell?

Let's see what the broker is saying about the energy giant.

Read more »

Coal miner standing in a coal mine.
Energy Shares

Up 62% since April, what's happening with Whitehaven shares today?

Whitehaven shares have enjoyed a strong rally since April despite weak coal prices.

Read more »

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

Why Macquarie sees Paladin Energy shares as a buy in the dip opportunity

This uranium stock could be a buy according to the broker.

Read more »

Happy man working on his laptop.
Energy Shares

Opportunity knocks: 2 ASX stocks ready to surge

Analysts expect big things from these shares.

Read more »

Two businesspeople walk in opposite directions on a staircase with arrows under their arms, one pointing up and one pointing down.
Energy Shares

3 largest ASX uranium shares move in different directions amid fresh developments

Here's what is happening with Paladin Energy, Deep Yellow, and Boss Energy shares on Thursday.

Read more »

Bored man sitting at his desk with his laptop.
Energy Shares

Guess which ASX 200 share is sinking 6% on shock CEO exit

Investors are reacting negatively to this surprise news.

Read more »

Businessman working and using Digital Tablet new business project finance investment at coffee cafe.
Energy Shares

Should you buy Paladin Energy shares after the selloff?

Let's see what Bell Potter is saying about the uranium stock.

Read more »

A smiling woman puts fuel into her car at a petrol pump.
Energy Shares

Guess which ASX 200 energy stock is leaping higher on earnings growth

Investors are sending the ASX 200 energy stock sharply higher on Wednesday.

Read more »