AGL Energy Limited (ASX: AGL) shares have done well over the past year, rising by around 30%. Can the ASX energy share have another good year in FY24? We're going to take a look at that in this article.
The last few years have been tricky as profit has decreased significantly for AGL. But, things are now finally looking up.
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Profit growth expected
The end of FY23 has been positive – in a recent update AGL increased its underlying net profit after tax (NPAT) guidance from a range of $200 million to $280 million, up to a range of $255 million to $285 million.
This profit guidance increase reflects an improved second half thanks to "increased generation due to improved plant availability and a reduction in forced outages, and higher customer margin due to disciplined margin management and an increase in customer services."
What's most exciting to me from that update is the amount of profit it's expecting to make in FY24.
The company guided that underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is now expected to be between $1.875 billion to $2.175 billion while underlying NPAT is expected to be between $580 million to $780 million.
That underlying NPAT figure suggests that net profit could be somewhere between double to triple over 12 months, which is a good tailwind for the AGL share price.
AGL explained that this profit jump was down to a couple of key factors.
The first is "sustained periods of higher wholesale electricity pricing, reflected in pricing outcomes and reset through contract positions."
The other positive AGL noted was "expected improved plant availability and flexibility of the asset fleet, including the commencement of operations of the Torrens Island and the Broken Hill batteries, and the non-recurrence of forced outages and market volatility impacts from July 2022" of around (pre-tax) $130 million.
AGL changed its dividend payout ratio policy to a range of between 50% to 75% of underlying net profit, rather than a payout ratio of 75% of underlying profit. This is to ensure that AGL maintains a good balance sheet and that it can invest in the energy transition.
What could this mean for the AGL share price?
We've already seen investors send AGL shares higher over the last few weeks and months.
If AGL's profit continues to look promising, then the AGL share price could keep rising. Share prices often follow the direction of earnings over time.
I certainly don't think that the valuation is stretched. Using the estimates on Commsec, the AGL share price is valued at just 10 times FY24's estimated earnings.
If AGL manages to hit the top end of its guidance range, then it's valued at only 9 times FY24's guided underlying earnings.
Customers will pay more for their energy, but AGL's bottom line will benefit.
Adding in the potential dividends, I think AGL's total returns can outperform the S&P/ASX 200 Index (ASX: XJO) over the next year as it regains the confidence of investors.
