Broker gives its verdict on the AGL share price post-coal exit plans

Is it time to buy AGL's shares?

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The AGL Energy Limited (ASX: AGL) share price is defying the market weakness and pushing higher on Friday.

In afternoon trade, the energy company's shares are up 3% to $6.80.

This compares favourably to the ASX 200 index, which is down 1.1% this afternoon.

Why is the AGL share price outperforming?

Investors have been buying AGL's shares on Friday after a number of brokers responded positively to the company's coal exit plans.

For example, according to a note out of Morgans, its analysts have upgraded the company's shares to an outperform rating with an $8.20 price target.

Based on the current AGL share price, this implies potential upside of 20% for investors over the next 12 months.

Morgans is also expecting a 5% dividend yield in FY 2022, which brings the total potential return on offer to 25%.

What did the broker say about AGL's coal exit?

The note reveals that Morgans is positive on the company's coal exit and believes its target of 2035 is achievable. It commented:

We think the strategy in today's announcement is sound. Bringing forward Loy Yang's closure date is an acknowledgment that inflexible brown coal plants will struggle as more and more variable renewables enter the grid. AGL has set itself an achievable timeframe to make the transition and, in our view, correctly identified that storage and firming assets will be the key investments needed to retain some form of competitive edge as the grid decarbonises.

In addition, the broker notes that electricity futures prices are strong, which bodes well for its earnings in the coming years. Morgans explained:

We've lifted our forecast for EBITDA in FY24 onwards due to the continued strength of futures prices and making some allowances for battery investments. This is partially offset by higher coal plant rehabilitation costs in later years. Overall this leads to an increase in our valuation and price target of 2% to $8.81ps.

All in all, Morgans appears to believe that the beaten down AGL share price is great value at current levels.

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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