The AGL Energy Limited (ASX: AGL) share price is down heavily compared to pre-COVID times. But, I think there's a fair chance that it could deliver very good returns in the next few years.
Yes, the last few years have been ugly for shareholders. Over the last four years, the AGL share price has dropped by over 60%.
This year could see another year of a hit to profit, after outages and market volatility. Underlying earnings are also expected to be hit in FY23 by the onerous contract provision adjustments in FY22.
FY23 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $1.25 billion to $1.45 billion, while underlying net profit after tax (NPAT) is expected to be between $200 million to $320 million.
FY24 could be the start of a recovery
The amount of negative sentiment surrounding the business is understandable. Earnings have dropped, the management board have gone through enormous scrutiny and the future of Australia's domestic energy is somewhat uncertain.
However, I don't think investor sentiment will always be negative about the business.
AGL has acknowledged that FY23 is challenging for the energy industry and market conditions. However, management believes the business is "well positioned from FY24 to benefit from sustained higher wholesale electricity pricing as historical hedge positions progressively roll-off."
Earnings are expected to significantly recover over the next few years.
Commsec forecasts suggest that the business could generate around 40 cents of earnings per share (EPS) in FY23, meaning it's currently valued at 19 times FY23's estimated earnings.
However, after that, AGL earnings are projected to significantly increase, to 91 cents in FY24. This would put the AGL share price at 8 times FY24's estimated earnings.
The early projection for FY25 is that AGL could make $1.13 of EPS. This would mean that the energy business is priced at under 7 times FY24's estimated earnings.
With the recovery in earnings, AGL could start paying good dividends to investors again. According to Commsec, in FY24 AGL could pay a dividend yield of 7.7% (excluding franking credits). In FY25 that dividend yield could be 10%, excluding franking credits.
I think that the combination of very good dividends from FY25 onwards (of a yield of 10%), as well as the market recognising that AGL's profit path is improving, could lead to a total return (dividends plus capital growth). The total return could be around 100% (or more) if profit jumps and the AGL share price trades on a mid-teen price/earnings (P/E) ratio in 2025.
Renewables to attract investor attention?
Some businesses that are working on expanding their green credentials are getting more investor attention, in a positive way. I think AGL could receive more positive attention from the market as it replaces its coal power generation with new renewable energy.
AGL does have a huge investment path ahead of it. It has been estimated that it could cost up to $20 billion which will be delivered in the 12-year lead-up to its targeted exit from coal-fired generation.
But, AGL will hopefully not need to come up with all that funding itself. It said it will "evaluate various sources of funding, which includes a mix of AGL's own balance sheet, entering into offtakes, or through partnerships utilising third party capital."
If AGL's earnings and dividends can rebound, I think the business is on course for a promising future with a greener-focused strategy.
