The AGL Energy Group Ltd (ASX: AGL) share price has been on a powerful run in the last few months. It's up 13% in a month and around 60% in six months. Today it hit a new 52-week high of $12.37. Let's look at the chart since the start of 2023.
A lot of the investor excitement seems to be regarding the company's commentary that it's going to be able to generate more profit in the medium term.
Profit expectations for FY23
AGL is currently expecting its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to be between $1.33 billion and $1.375 billion in FY23.
Underlying net profit after tax (NPAT) is estimated by the company to finish between $255 million and $285 million. Profitability is often a key measure that can support, or hurt, the AGL share price.
These numbers would be based on an improved second half, thanks to increased energy generation due to improved plant availability and a reduction in forced outages, according to AGL. A higher customer margin is also expected because of "disciplined margin management and an increase in customer services."
On Commsec, the current estimate is that AGL could generate earnings per share (EPS) of 40.5 cents in FY23. That would put the business at 30 times FY23's projected earnings.
Why has the AGL share price been rising?
A price/earnings (P/E) ratio of 30 seems high for a utilities business. That's only looking at FY23 – the company is expecting to report a very large jump in profit in FY24.
In FY24, the company has guided that underlying EBITDA is expected to be between $1.875 billion and $2.175 billion. It's also expected to make between $580 million and $780 million of underlying net profit.
Using the mid-point of the FY23 guidance and the mid-point of the FY24 guidance, we're talking about a potential rise in net profit of around 150%. But, if it were to achieve $780 million of net profit in FY24, that could represent an increase of around 190% from the mid-point in FY23.
It would be an enormous improvement if that's what the company achieves.
AGL put the increase in profit down to two key areas. First, sustained periods of higher wholesale electricity pricing are reflected in "pricing outcomes and reset through contract positions."
Second, it's expecting improved plant availability, including the commencement of operations of the Torrens Island and Broken Hill batteries. It's also expecting there to be no more forced outages.
When we look at the P/E ratio for FY24, it seems much more reasonable. According to Commsec, it's valued at under 12 times FY24's estimated earnings.
