The AGL Energy Limited (ASX: AGL) share price has gone through a lot of pain since April 2017, dropping by over 70%. It has fallen over 60% since the start of the COVID-19 pandemic.
That's a shocking fall considering the utilities sector is usually thought of as a defensive sector with consistent cash flow and typically solid dividends.
Shareholders have seen their shares sink in value over time.
But, with a plan now in place to decarbonise and re-energise the business, could the company be a good turnaround opportunity for contrarian investors?
Bumpy road ahead
AGL's new CEO Damien Nicks was recently talking to The Australian about the job that the energy business faces in the years ahead. He became the chief financial officer of AGL in August 2018.
The company will reportedly need to find $20 billion of funding to achieve its decarbonisation plans, install 12GW of renewable energy generation and end coal usage.
Speaking to The Australian, Nicks said:
There are going to be bumps on the road. This is not going to necessarily be a purely smooth ride for the whole market. But for us it's about having clarity about how we deliver. We've got deep plans over the next seven years to 2030. And we'll continue to refine those plans, and then continue refining those plans out to 2035 as well.
There are going to be challenges, but we need that co-ordinated approach across the market, not just AGL. It needs to be co-ordinated and that's what we're driving particularly hard. And that's where we can play that leadership role.
Earnings recovery expected for AGL shares
AGL said in its recent annual general meeting (AGM) that it's "well positioned from FY24 to benefit from sustained higher wholesale electricity pricing as historical hedge positions progressively roll-off".
In FY23 it's looking to reduce its sustaining capital expenditure by more than $100 million compared to FY23. It's also hoping for guiding underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to be between $1.25 billion to $1.45 billion, while underlying net profit after tax (NPAT) guidance to be between $200 million to $320 million.
Using Commsec numbers, it's projected to generate 39 cents of earnings per share (EPS). This puts the AGL share price at around 20 times FY23's estimated earnings.
Then, EPS could jump to 91 cents in FY24 and $1.27 in FY25. This would translate into forward price/earnings (P/E) ratios of 8 and 6 respectively.
Is the AGL share price a buy?
Talking about the task ahead for the energy company and the new CEO, major investor VanEck's Jamie Hannah said:
He has a massive job ahead. From staffing to financing to the roll out of the new initiatives and to the changes to the company and winding down of existing assets. If you wrote down all the things that they need to achieve over the next five years, it's a somewhat overwhelming task. So he's not going to be able to do it himself. Obviously, he just needs to set the agenda. And make sure he gets the right staff.
I don't know how he's going to go on something this big. But I don't think he's the wrong person for the role. He certainly knows the company and knows what it can achieve. So I'm more than happy to give him a fair chance at this and see how he performs.
According to analyst opinions collated by Commsec, there are six buy ratings and four hold ratings, with no sell ratings. It may well be a decent contrarian ASX share idea for brave investors.
