The share price of Origin Energy Ltd (ASX: ORG) is taking a hit with the integrated energy group’s doubling of net profit failing to mask what is essentially a profit downgrade.
The stock is in freefall as it shed 7.1% to $9.02 in lunch time trade, making it the second worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index after funeral operator InvoCare Limited (ASX: IVC).
Origin unveiled a full-year underlying net profit of $838 million compared to FY17’s figure of $400 million as net cash flow from operating and investing activities surged 92% to $2.65 billion thanks to higher wholesale electricity prices aiding its Energy Markets division and the contribution from its Australia Pacific LNG (APNG) joint-venture bolstering its Integrated Gas division.
But it’s an all-round disappointing result. The net profit jump missed consensus expectations and the FY19 outlook appears to be much weaker than expected.
Prepare for a series of downgrades from brokers!
Management warned that underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for its Energy Markets business will fall to between $1.5 billion and $1.6 billion for the current financial year compared to FY18’s 21% increase to $1.81 billion.
Intense competition, its inability to pass on higher costs in New South Wales and the way it has to account for electricity hedge premiums were blamed for the profit warning.
The issues facing this division are similar to those impacting on AGL Energy Ltd (ASX: AGL) but with one key difference – AGL pays a decent dividend, while Origin pays nothing. It may restart paying a dividend in FY19 but that’s not set in stone.
If the news wasn’t bad enough, the outlook for its Integrated Gas division is also disappointing. Integrated Gas is the growth engine of Origin and it sets the stock apart from its underperforming peer AGL as it gives Origin exposure to rising oil and gas prices.
But output from APLNG (the only cash producing asset of note in this division) will largely be flat this financial year with management forecasting output of between 660 petajoules (PJ) and 690 PJ. That’s disappointing after APLNG enjoyed an 11% increase in output to 676 PJ in FY18.
Sure, gas prices could rise further and that could deliver some top-line growth, but that may be eroded by rising costs with management highlighting higher one-off costs, increased exploration, and higher infrastructure spend.
What all this means is that you probably should not expect Origin to meet consensus earnings per share (EPS) growth of 46% in FY19.
I think Origin will be very lucky to book profit growth that is half of that rate.
I would sell Origin shares as I think it will need to fall under $8 to attract bargain hunters. There are more reasons to hold AGL shares than Origin – and that says a lot!
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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited. The Motley Fool Australia has recommended InvoCare 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.