Own AGL (ASX:AGL) shares? JP Morgan is overweight, tips 23% upside in 2022

Could 2022 be the year of recovery for the energy giant?

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Key points

  • AGL shares surged in the first week of trading and have now shot back to 3-month highs
  • JP Morgan is overweight AGL and values the company at $8.70 per share
  • The broker feels there is a chance AGL can upgrade its FY22 guidance as well
  • The AGL share price is off to an impressive start in 2022 and finished the week at $7.30

Shares in energy giant AGL Energy Limited (ASX: AGL) have rocketed out of the gates in 2022 and are now up more than 21% since January 1.

AGL shares surged in the first week of trading and have now shot back to 3-month highs of $7.30 as of Friday’s close.

With the recent upside, the team at JP Morgan have become constructive on AGL and reckon the energy player could be a buy right now. Let’s take a look.

Is AGL a buy right now?

JP Morgan reckons so, having reiterated its overweight posture on the stock in a recent note. The broker said it remains positive on AGL “despite recent performance of the stock”.

However, analysts at the firm also note that AGL has been “one of the strongest performers in the ASX200 in recent months”, alluding to its 21% gain in the last month versus the S&P/ASX200 Index (ASX: XJO) at 1.5%.

The broker reckons this performance “is likely attributable to stronger wholesale forward prices”. In fact, JP Morgan notes that it revised commodity prices for AGL in an update last week, “resulting in material increases to earnings estimates and valuation”.

It also reckons that Accel Energy is now a “significantly more palatable asset” given its cash flow outlook at such strong spot prices.

With this kind of fundamental momentum, JP Morgan even goes as far as to say that AGL could upgrade guidance during its earnings results penned in next month.

Company guidance is for $220–$340 million NPAT, however, the firm notes that “average wholesale price is up A$24/MWh since that guidance”.

“We would finally suggest that there remains the possibility that AGL could upgrade full-year NPAT guidance at the interim result next month. While most forward electricity sales are completed ahead of the fiscal year, it is possible (and likely) that some generation is unsold and therefore exposed to spot prices”, it said.

In the long-term, JP Morgan sees value in AGL seeing that it is “Australia’s largest private owner, operator, and developer of renewable generation assets”.

In that view, the broker feels the market is undervaluing AGL shares, and values the company at $8.70 per share, indicating around 23% upside potential at the time of writing.

“Notwithstanding reduced corporate appeal, we remain positive on AGL given much better electricity prices and compelling value”.

How’s AGL performing so far in 2022?

The AGL share price is off to an impressive start so far, after regaining momentum towards the end of 2021. The chart below shows AGL’s performance against the benchmark index from June 2021 to date. Note how shares bounced off a 6-month low of $5.10 in November and have reclaimed territory to now trade back above 3-month highs.

In fact, the performance gap between AGL and the index is converging at a rapid pace and at this momentum could hit a crossroads should the trend continue.

But, AGL has a long way to go for longer-term shareholders, with shares sliding more than 38% over the past 12 months, and tumbling from a high of $27.70 back in 2017.

TradingView Chart

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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