The AGL Energy Ltd (ASX: AGL) share price has been falling. Over the past month, it has dropped by around 15%. But after this sizeable fall, is the company in the buy zone yet?
It has been a tricky time for AGL with its profit being challenged and the company going through a demerger process that shareholders ultimately voted against.
The company also revealed a number of other factors to investors in its FY22 result, so let's remind ourselves of what was recently reported.
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FY22 earnings recap
AGL told investors that its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 27% to $1.22 billion and its underlying net profit after tax (NPAT) sunk 58% to $225 million.
AGL said that the fall in underlying profit reflected the "expected step down in trading and origination electricity earnings due to lower realised contracted and wholesale customer prices, increased costs of capacity to cover periods of peak electricity demand and the absence of the Loy Yang unit 2 insurance proceeds recognised in FY21".
The total AGL customer services and total generation volumes were "broadly flat", the company said.
It has been working on reducing its costs so that it can be more profitable. AGL reported that over $150 million of targeted operating cost reductions were delivered in FY22 and it's on track to deliver $100 million of sustaining capital expenditure reductions by the end of FY23. This could be helpful for the AGL share price.
Fallout of the demerger
AGL decided to withdraw the proposed demerger and announced a review of its strategic direction. It's reviewing four things: its existing strategies, its decarbonisation objectives, the optimal energy mix, and the capital structure.
Progress on this review is "continuing" and an update on the initial outcomes is expected at the end of September.
It's also "well advanced" in selecting a new chair. The company expects to announce its new chair before the annual general meeting (AGM). It has also commenced a global search for a managing director and CEO.
Outlook for AGL and the share price
AGL said it believes FY23's earnings will "remain resilient" through the current challenging energy industry and market conditions. Management explained why it thinks AGL can safely get through this period:
The strength of AGL's large and diversified customer base, low-cost baseload generation position supported by strong fuel supply arrangements, robust risk management, with prudent margin management ensuring retail strength and stability in a highly volatile market.
The company thinks that it's well positioned to benefit into FY24 from sustained higher wholesale electricity pricing as historical hedge positions progressively roll off.
Broker ratings on the AGL share price
Interestingly, with AGL shares currently sitting at $7.26, it's at a 12% discount to the takeover price offered by Brookfield and Grok Ventures (Cannon-Brookes' investment vehicle) earlier this year. It'll be interesting to see if anything further comes from the consortium.
Morgans rates AGL as add, even though the broker thinks that FY23 could be another difficult year for the electricity market. The price target is $8.63, implying a possible rise of almost 20% over the next year.
Ord Minnett is even more optimistic. It rates AGL as a buy, with a price target of $10, implying a possible rise of close to 40%.
However, UBS is neutral on the business and the price target is $8.15, which still implies a possible increase of more than 10%. It's expecting a slower recovery in electricity, though gas could make up some of the difference.
