The AGL Energy Ltd (ASX: AGL) share price is currently up after the energy business announced its HY22 result showing a big profit drop.
AGL is currently a major energy business that has two key segments – energy retailing to Australians and businesses, and energy generation.
AGL’s HY22 profit difficulties
There weren’t many positives from the AGL FY22 half-year result for the six months to 31 December 2021.
- Underlying EBITDA dropped 21% to $723 million
- Underlying profit after tax fell 41% to $194 million
- Statutory profit after tax was $555 million
- Total AGL service customers were flat at 4.5 million
- Total energy generation was flat at 20,619 GWh
- Interim dividend of $0.16 per share
The underlying underlying profit decline wasn’t as bad as a 41% drop. Last year, AGL received a one-off insurance payout of $105 million. After taking that out, underlying profit after tax ‘only’ declined by 23%.
So, why did underlying profit still fall pretty hard? It reflected the impact of lower wholesale prices over the past two years as it has progressively re-contracted the hedging positions from previously higher prices.
Cost cuts
Whilst things are a bit tricky for AGL’s profit, it’s working on improving things.
AGL said that it’s on track to deliver at least $150 million in operating cost reductions for FY22 and a $100 million reduction in ‘sustaining’ capital expenditure by FY23.
Energy prices to rise?
AGL said that with the rose of energy and commodity prices across the globe, AGL Energy is well-positioned to benefit from improving wholesale electricity prices. If the price increases are sustained AGL expects to see this reflected in future earnings beyond FY22 as hedging positions roll off.
Power stations to close sooner
AGL said that the soon-to-be-demerged Accel Energy (the energy generator segment) will provide reliable, low-cost energy with a strong focus on repurposing existing thermal generation sites as low carbon industrial energy hubs as it brings forward its coal closure dates to no later than 2033 for Bayswater Power Station (previously 2035) and 2045 for Loy Yang A Power Station (previously 2048).
As a result of these changes, emissions from Accel Energy’s electricity generation assets will be reduced by a further 90 million tonnes over the period FY23 to FY50 compared to the modelled outcomes from previous commitments.
The readiness of the entire energy system to operate without the baseload generation will determine whether the earlier, more ambitious targets within the range can be reached. With Liddell scheduled to close by April 2023, Accel Energy will deliver a reduction in annual emissions of 18% to 27% between FY25 to FY34 and by 55% to 60% in annual emissions between FY35 to FY46 compared to FY19.
With a worldwide goal of net zero by 2050, these types of changes are welcome and probably essential.
Demerger update
AGL said that it’s well progressed with the plan to implement the proposed demerger by 30 June 2022, subject to various approvals.
The organisational structures for both proposed entities have been completed.
Consistent with AGL Energy’s previous communication with the market, it is proposed that AGL Australia will pay as a dividend 60% to 75% of underlying net profit. Accel Energy will pay 80% to 100% of free cashflows after servicing net finance costs.
Outlook and my thoughts on the AGL share price
The AGL profit guidance has now narrowed and the mid-point of the guidance has increased.
Underlying EBITDA is now expected to be between $1.275 billion to $1.4 billion, up from guidance of between $1.2 billion to $1.4 billion.
The underlying net profit after tax guidance is now $260 million to $340 million, up from the previous guidance of between $220 million to $340 million.
It’s looking a bit more promising for AGL, particularly if energy prices rise. AGL shares have risen almost 50% since the middle of November. It’s not as much of a cheap value play now as it was then, but it could still be an opportunity. However, I don’t see it as a long-term compound growth opportunity.
