The AGL Energy Ltd (ASX: AGL) share price put in a fine performance last week, gaining 7.6%. Over the past month, it has risen by around 20%, as we can see on the chart below.
Last week, the energy generator and retailer released a profit update for both FY23 and FY24 which was very encouraging.
Profit update
AGL said its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) for FY23 is expected to be between $1.33 billion and $1.375 billion. This compares to its previous guidance of $1.25 billion to $1.375 billion. While the top of the range hasn't changed, the mid-point has increased.
It also reported underlying net profit after tax (NPAT) is expected to be between $255 million and $285 million, up from the previous range of between $200 million and $280 million. Both the mid-point and top end of the guidance range have increased, which is helpful for boosting AGL shares.
AGL explained there was "increased generation due to improved plant availability and a reduction in forced outages, and higher customer margin due to disciplined margin management and an increase in customer services".
Even more pleasingly, AGL's underlying net profit is expected to at least double in FY24 to a range of $580 million to $780 million. The company predicts underlying EBITDA to come in between $1.875 billion to $2.175 billion.
There were two main areas fuelling expectations that FY24 profit will significantly increase. First, there is a sustained period of higher wholesale electricity pricing, reflected in pricing outcomes and reset through contract positions.
The company also said it's expecting improved plant availability and flexibility of its asset fleet. This includes the start of operations of batteries at Broken Hill and Torrens Island.
AGL also said it was changing its dividend payout ratio policy to be in a range between 50% to 75%. Its previous dividend payout ratio was 75%. The lowered ratio range will help fund the energy transition and maintain a good balance sheet, the company said.
Is this a good time to buy AGL shares?
Earlier this year, I suggested that AGL shares could double an investor's money. Since then, AGL shares are up 37%, plus there was a dividend payment of 8 cents per share.
I think AGL shares can continue to rise. Using the underlying profit guidance, AGL is valued at between eight times to 11 times estimated profit for FY24. That still seems quite low to me.
I wouldn't be surprised to see AGL shares deliver total shareholder returns of at least 20% from now until the end of FY24, considering the low price/earnings (p/e) ratio. Stronger profits can mean stronger dividends, even if the dividend payout ratio is reduced.
