Are AGL shares the most underrated ASX 200 stock opportunity?

This one could be a contrarian turnaround opportunity.

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Key points

  • AGL shares have suffered heavily over the past three years
  • But, earnings are expected to rebound in FY24 and FY25, according to analysts and company commentary
  • It could also pay a solid dividend yield of more than 6% in FY24

The AGL Energy Ltd (ASX: AGL) share price has dropped by around 60% since February 2020. It has been one of the worst S&P/ASX 200 Index (ASX: XJO) stocks over that period.

AGL is an ASX energy share that is facing turbulent times as it looks to succeed in a world that is decarbonising.

It's a tricky situation for the business because not only is it planning to close its coal power plants, but it's also planning to invest heavily in renewable energy and batteries to replace that lost power generation, which could take a lot of capital.

But, sometimes the market can be overly pessimistic about a company, which could mean the AGL share price is a contrarian opportunity.

Low earnings expected in FY23

AGL reported a statutory loss of $1.08 billion in the first half of FY23, including $706 million of impairment charges (after tax) because of its accelerated decarbonisation plan.

The FY23 half-year underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was $604 million, down 16%. Underlying net profit after tax (NPAT) dropped 55% to $87 million.

In FY23, the ASX 200 stock is expecting underlying EBITDA to be between $1.25 billion to $1.375 billion while underlying NPAT is guided to be between $200 million to $280 million.

But, AGL has provided commentary that the outlook beyond FY23 remains positive.

The company recently said with its HY23 result that wholesale electricity pricing "remains elevated compared to prior periods with AGL expected to benefit as historical contract positions are reset in FY24 and FY25. Additional, sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes, and the Torrens Island and Broken Hill batteries are anticipated to commence operations in mid-2023."

Is the AGL share price good value considering future earnings?

Earnings per share (EPS) could soar in FY24 and FY25, according to the current estimates.

Forecasts on Commsec currently suggest possible EPS of 83.5 cents in FY24 and 97 cents in FY25.

Those estimates put the AGL share price at 10 times FY24's estimated earnings and 9 times FY25's estimated earnings.

For a defensive sector like energy retailing, I think the above price/earnings (P/E) ratios look quite low for the ASX 200 stock. It wouldn't surprise me to see the AGL share price rise by at least another 20% over the next 15 months.

On top of that, the business is expected to pay an annual dividend per share of 56.3 cents in FY24, according to Commsec, which would be a dividend yield of 6.5%. The dividend could then grow to 70 cents per share, which would be a dividend yield of 8.1%.

The business is advancing its planned 500 MW Liddell battery and 250 MW, 8-hour storage for Muswellbrook pumped hydro.

I think the promising earnings rebound in the short term and the plan to invest in renewable energy generation make AGL a compelling contrarian idea.

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.

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