One of the things I like most about AGL Energy Ltd (ASX: AGL) is its focus on the future. AGL has recognised that as an incumbent it faces two challenges:
- New technologies and players nibbling away at its business lines
- The virtual certainty that new technology will replace existing generation assets like coal
To that end, AGL has committed to closing all its coal power stations by 2050 and increasing its focus on clean or renewable generation opportunities. While this is an admirable long-term goal, the medium-term investment case reflects a business facing significant challenges.
The What
- Revenue up 2.2% to $1,067m
- Statutory Net Profit After Tax (NPAT) down 61% to $218m
- Underlying NPAT up 12.1% to $630m (more on this below)
- Net cash flow of $1,044m, up $345m on 2014
- Dividends of 64 cents per share for the year (3.8%), up 1 cent on 2014
- Gearing of 28.6%, down 1.2% on 2014
So What?
AGL's result was a bit of a mixed bag. First, the increase in underlying Net Profit After Tax appears to be almost entirely due to the Macquarie Generation acquisition, which added $112m in earnings (beating previous guidance of $75m) and also constituted most of the increase in net cash flow. By way of comparison, AGL's underlying profit last year was $562m.
Consumer electricity volumes fell 4.4% during the year – its third such year of decline – while gas volumes increased 9.6% to 63 PetaJoules (PJ), slightly above AGL's five-year average gas sales of ~60PJ. A variety of factors including competition, less power-intensive devices and user practices and a steady switch to renewables appears to be behind AGL's decline in electricity volumes.
Readers may have noticed the stark difference between Statutory and Underlying NPAT figures released by AGL. This is mostly due to non-cash write-downs on gas assets recently identified as non-core, while the remaining difference is made up from costs such as stamp duty associated with the Macquarie Generation acquisition.
While these are technically 'one-off' costs it is important to note that they reflect a legitimate loss to AGL, who will be selling assets like Cooper Gas for less than they paid for it. It's a bit like failing an exam only to claim that on a 'one-off basis, stripping out significant items to allow for a truer accounting of results' you actually passed.
Now What?
Well, AGL did experience strong cash-flow during the year and has identified a reported $170m of savings to be achieved in 2016 and 2017. A further $100m will be trimmed from the capital expenditure bill to further bolster company cash-flow, while a number of assets are also marked for sale which should lead to an influx of cash in 2016.
Continued technological development should improve cash-flow and hopefully increase customer numbers and retention; AGL has identified maintaining margins as a key focus of the 2016 financial year. Guidance for the full-year 2016 will be made available at the Annual General Meeting on 30 September 2015.
I don't believe that AGL Energy is a buy at current prices. Despite management's belief that the slowdown in electricity demand has come to a halt I believe that the company faces too many challenges to be an outstanding buy at its current price.
Over the medium to long term I am more optimistic that the company's focus on innovation will deliver benefits but in the meantime there are better opportunities out there.
