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AGL Energy Ltd profit drops: Should you buy?

What: After a tumultuous year for its share price in which investors could not decide whether to love or hate AGL Energy Ltd (ASX: AGK), the 2014 results report provides the perfect opportunity to settle the question.

Here are the main points from the four announcements released today.

Highlights:

  • There will be a 1 for 5 pro-rata renounceable entitlement offering at $11 a share to raise $1,232 million for purchase of Macquarie Generation (new shares not entitled to FY14 final dividend)
  • MacGen acquisition to give AGL low-cost large scale power generation and increase total registered generation capacity by 82%
  • Acquisition to be earnings accretive from 2015
  • Total proven and probable gas reserves rose 9.4% to 1,891 Petajoules over past 12 months (despite gas sold during that period)
  • Revenue down 1.8% to $9,543 million
  • Underlying profit down 3.9% to $562 million
  • Underlying EPS down 5.2% to 100.8 cents per share
  • Total dividend of 63 cents per share (approx 4.3% yield)
  • Integration of APG retail business grew customer base to 3.8 million

So What?

The Macquarie Generation acquisition is expected to add an extra $75 million to underlying profit in FY15, an increase of approximately 13%, assuming that current underlying profit stays the same.

With shares available at $11 each – a 24% discount on yesterday’s price –  for existing investors as part of the acquisition, I recommend that investors stock up.

Although I have previously been cautious about the dilutory effects on earnings and long-term prospects of the MacGen acquisition, a share price of $11 makes the deal a lot more appealing from an investment viewpoint.

Now What?

In fact, if the wider market price of AGL trends down to $11 I would consider the shares as being in ‘buy’ territory, even though the overall earnings per share of the company are likely to decrease next year.

A 13% increase in underlying profit may be outweighed by the 20% dilution (1-for-5 share issue) of total issued shares, but the discounted price combined with earnings increases over the long term should largely neutralise this problem.

The MacGen acquisition really deserves an article to itself, and readers can expect to receive a better review on AGL’s prospects once it comes out of its trading halt.

In the meantime if you’re after a great growth share to pick up at a bargain valuation, I recommend checking out The Motley Fool’s free report on our Top Stock for 2014.

It’s a company with growing profits and long-term tailwinds, as well as an impressive past record of earnings and dividend growth.

If you’re interested, simply click on the link below and enter your email address – it takes less than 30 seconds – and we’ll send it to you, completely FREE!

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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