The ASX energy share AGL Energy Group Ltd (ASX: AGL) could still be a good investment after its impressive rise in 2024 to date. It has gone up by 17% this year (as shown on the chart below), compared to a rise of less than 8% for the S&P/ASX 200 Index (ASX: XJO).
Investors were expecting a strong FY24 result in August from AGL, and that's what happened. It reported that underlying operating profit (EBITDA) rose by 63% to $2.2 billion, and underlying net profit soared 189% to $812 million.
The company benefited from improved power generation availability, a solid earnings contribution from the Torrens Island battery, and higher wholesale electricity pricing compared to prior periods.
Now the dust has settled after the result, I think it's worth asking whether the AGL share price is a buy.
Cons
Firstly, the most important financial figure for AGL is normally its profitability.
AGL provided guidance for its FY25 earnings, which is expected to show a decline.
FY25 underlying operating profit is expected to be between $1.87 billion to $2.17 billion. That implies a possible decline of up to 16%.
The underlying net profit is forecast to be between $530 million and $730 million. This implies the bottom line could drop by between 10% to 35%.
The combination of a higher AGL share price and forecast lower earnings has pushed up the forward price-earnings (P/E) ratio.
According to UBS estimates, the broker's numbers put the current AGL share price at approximately 12x FY25's estimated earnings. What multiple of earnings should a business trade at if its profit is estimated to decline? Not as much as it would if the profit is rising, in my view.
Another negative, which is hard to quantify, is the overall challenge of the energy transition. AGL is investing billions in various energy initiatives – it's an expensive exercise, with no guarantee of how much profit the ASX energy share will make on that spending. Can AGL replace the earnings of its coal power stations after they close?
I'll also point out that in FY25, broker UBS is wary of unplanned outages, higher retail transformation costs and/or higher growth capital expenditure.
Pros about AGL shares
While the short-term profit generation is uncertain, the company may be able to grow its profit in the longer term.
Broker UBS suggests that AGL may be able to grow its net profit each year between FY26 (where the estimated profit is $658 million) and FY29, when it could make $923 billion of net profit.
UBS said that AGL positively surprised the market in its FY24 result with its gas portfolio margins again, "benefiting from a favourable mix shift as it reduced its portfolio by 30PJs" supplied to lower margin customers, increasing exposure to the higher margin mass market. The broker lifted its forecast gas margins, expecting resilience in the margin for approximately three years until legacy gas supply expires in December 2027.
The broker suggested there could be a positive surprise for AGL if there are higher electricity and/or gas prices.
In the future, electric batteries and hydro 'batteries' could allow AGL to sell higher-priced energy at night that has been generated and stored during the day.
I'm also excited by the prospects of the Kaluza acquisition, a tech platform that, according to AGL, "digitises and simplifies energy billing, reduces cost to serve and enables faster product innovation to facilitate the energy transition". Kaluza currently services more than 6 million meters at OVO Energy in the UK.
Overall, I think there are stronger positives than negatives for AGL shares. It's trading on a relatively low earnings multiple despite the fact it's predicted to grow profit over the coming years.
