Airlie Funds Management has given five reasons why the Origin Energy Ltd (ASX:ORG) share price could be a buy.
Origin is one of the largest businesses in the ASX 200. It's a energy retailer, producer and generator – it's a large integrated energy company.
Here are the five reasons to own Origin that Airlie published on Livewire:
Material change in financial strength
Airlie said Origin is entering a phase of large free cashflow generation driven by the interest in the APLNG project in Queensland, which will likely lead to rapid deleveraging of the balance sheet in FY19 and could result in an attractive large dividend.
Resilient in any broader economic downturn
The energy retail segment of Origin that sells electricity and gas to customers should be able to provide cashflow and earnings that can withstand a dip in the economy.
LNG cost out opportunity
Origin and its business partners at the APLNG project think they can reduce operating costs by 10% to 15% by June 2019, which would mean the project can be cash break-even at a lower oil price.
Broader cost opportunity
Origin is also looking to reduce costs across its entire business. The management have identified cost opportunities amounting to more than $150 million, which is around 10% of net profit after tax (NPAT).
Compelling valuation
Origin is trading with a forward FY19 price/earnings ratio of around 10, with a potential 60 cents per share dividend in FY20, which could offer a 9% dividend yield assuming the oil price and currency stay around where they are now.
Foolish takeaway
There are some compelling reasons to choose Origin today. But, Airlie did point out it's not risk free. The government is targeting the energy retail industry after big price rises, which could lead to reduced earnings by 10% to 15%.
Origin isn't personally my type of investment, I am steering clear of energy retailers and resource businesses, but it could be a medium-term market-beater at this price.
