Broker tips AGL share price to leap higher

AGL shares could be charging higher on valuation grounds according to Morgans…

The AGL Energy Limited (ASX: AGL) share price has been under pressure in recent sessions.

So much so, the energy company's shares have now lost over 8% of their value since this time last week.

This share price weakness followed the release of the energy company's full year results for FY 2022 last week.

Man wearing green shirt and pink watch flexes his muscle. representing the strength in ASX shares at the moment

Image source: Getty Images

Is the AGL share price weakness a buying opportunity?

Although the team at Morgans was disappointed with AGL's commentary for FY 2023, it has seen enough value on offer to remain positive on the investment opportunity here.

According to a note, the broker has retained its add rating but reduced its price target from $9.67 to $8.63.

Based on the current AGL share price of $7.78, this new price target still implies potential upside of 11% for investors over the next 12 months.

And that's before dividends. Morgans is forecasting a 30 cents per share fully franked dividend next year, which equates to a 3.9% dividend yield.

What did the broker say?

Morgans has reduced its earnings estimates for FY 2023 materially to reflect another tough 12 months for its wholesale electricity business. It has also reduced its estimates in future periods on the belief that rises could take longer to come through.

We significantly lower our expectations for FY23 underlying profit (-37%) given the likelihood of another year of wholesale electricity performance. We had hoped for a higher degree of optionality in its electricity derivatives and faster roll over of older hedging and customer pricing. Given the language used to couch the outlook we suspect this is not the case.

We also reduce our FY24 earnings forecast to allow for a longer period of time for pricing increases to flow across all areas of the business. We also allow for less of a decline in FY25 given the likelihood that spot prices moderate but this should also take some time to impact customer prices.

However, due to its attractive valuation, the broker remains positive on the AGL share price at the current level. It concludes:

We retain our ADD rating on valuation upside but upside catalysts unlikely this half.

Motley Fool contributor James Mickleboro 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 Scott Phillips.

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