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Why power retailers like AGL Energy Ltd (ASX:AGL) can rebound from their $2bn sell-off

Shares in our listed power companies suffered a blackout yesterday with around $2 billion in value wiped from the sector on worries the government will impose stricter rules to limit the growth of the biggest industry players.

The share price crash of AGL Energy Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG), while understandable, is probably an overreaction for a few reasons and I’ll get into that later.

I can’t remember a time when so many sectors are under close government scrutiny – but then again, we have an upcoming election and a federal government that is ruling with the thinnest of margins.

Shareholders in the country’s two largest listed power generators AGL and Origin are feeling the heat with their shares plunging 7% and 3.6%, respectively.

I also don’t need to point out the loss in value among our largest financial institutions like Commonwealth Bank of Australia (ASX: CBA), AMP Limited (ASX: AMP) and Westpac Banking Corp (ASX: WBC), which could be dealing with their own regulatory demon soon enough.

The news of recommended controls on power generators by the ACCC follows new allegations that the nation’s biggest toll road operator Transurban Group (ASX: TCL) is fleecing motorists. I am expecting the company to come under regulatory scrutiny as well given the climate of anger among consumers that is driving fear through the ranks of the political elite.

But coming back to AGL and Origin, the big thing from the ACCC’s recommendation is not what the regulator is encouraging, but what it’s discouraging. The competition watchdog doesn’t believe a forced break-up of the market dominant power generators (which includes privately owned Energy Australia) is the right way to go.

Such an outcome would be devastating for the sector. Instead, the ACCC is recommending a range of measures to curb the dominance of the three and to encourage real competition among vertically integrated players (meaning those who generate the power and who sells it to end-users).

This includes limiting their ability to make acquisitions or forcing them to offer hedging contracts to increase competition.

Losing market power is never a good thing for any company, but the magnitude of the sell-down in both AGL and Origin doesn’t look justified to me. The fact is, both stocks are not priced as though they are oligopolies.

Consensus forecast for FY19 puts AGL and Origin on price-earnings (P/E) multiples of around 13 times. That’s cheap for an industrial company operating in an open market and certainly not one that is seen as a price setter.

It’s also worth noting that their P/Es are at around the lowest levels in the last five-years, according to data on Reuters.

Further, the 3% sell-off in shares of rival ERM Power Ltd (ASX: EPW) shows that investors are selling first and asking questions later.

Shares in ERM should have been heading the other way as the ACCC recommendations would benefit smaller power generators.

I can’t say when the share prices of AGL or Origin will recover given the risk-off environment we find ourselves in at the moment, but the drop in their share prices looks like a buying opportunity to me.

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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Transurban Group. The Motley Fool Australia has recommended ERM Power Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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