After disappointing investors with its performance in 2014, management at AGL Energy Ltd (ASX: AGK) has reiterated its outlook for a substantially better FY15.
Underlying profit is expected to rise between 2.5% and 11% to $575-$635 million, up from $561 million last year.
While this may appear to be a positive development for a company trading within inches of its lowest price all year, there is one major question mark hanging over the announcement that readers should be aware of.
Management states that six major factors will affect its result this year, and I have included the approximate $ estimates from AGL's FY15 outlook update on 17 July where available for additional clarity:
- Repeal of carbon tax (-$186 million to EBIT)
- Closure of LPG extraction plant at Kurnell (-$14 million to EBIT)
- Growth in wholesale gas margins (figures not available)
- Return to more normal winter weather in July and August (not available)
- Continued softness in customer demand (not available)
- Sale of Moranbah gas assets (no profit on sale assumed for purposes of guidance)
The overall negative impact of the carbon tax and LPG refinery closure is expected to be largely offset by 'very strong growth' in other areas of AGL's business, including new gas sales in the Queensland market.
However one factor not explicitly mentioned in the FY15 outlook (though it is included in the guidance figure) is the impact of the Macquarie Generation acquisition, which is expected to provide roughly $75 million in earnings this year.
While the complexity of forecasts defy accurate armchair prediction, subtracting $75 million from AGL's guidance of $575m-$635m this year would seem to indicate that AGL's profit pre-MacGen could actually be substantially lower than last year's figure of $561 million.
This may mean that only the MacGen acquisition is driving earnings, since the withdrawal of carbon-tax related financial assistance and the reduction in profitability of renewable assets due to wholesale falls in the price of power can reasonably be expected to continue for the short term.
In general terms it is difficult to figure precisely how AGL is performing since the multi-faceted combination of 'very strong growth', normal winter weather, improved gas margins, removal of government assistance, soft power markets, predicted falls in the wholesale price of power, dilution from a capital raising and the purchase of a major coal asset doesn't exactly lend itself to transparency.
For investors dead set on owning AGL Energy, today's release shows nothing major to warn you off, while those watching the development with interest are offered no particular reason to dive in right now either.
A watch and wait strategy may be the best way forward for investors in both camps.
Importantly, you don't need to spend time predicting the vagaries of power supply, demand and government policy over the next decade to earn a decent return on your investment.
One of The Motley Fool's favourite shares – one I also own – recently reported substantially better results than AGL Energy, and boasts a considerably clearer pathway to future earnings growth as well.
These factors and others combined with a proud and reliable growth record have seen this small company declared The Motley Fool's Top Dividend Stock of 2015, and we think this is just the beginning.
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