AGL Energy Ltd (ASX: AGL) shares have gone through a huge rise over the past six months, with a rise of more than 5%
After everything that has happened in the last half-year period, I'm going to look at whether the energy business is an opportunity or not. Just over six months ago, I suggested that AGL could make a return of 100% in four years – it's done half of my projected returns in just half a year. Time will tell whether it has gotten ahead of itself.
Why are investors excited about the business?
Energy prices have been increasing and AGL's outlook is now looking a lot better as customers and contracts roll onto seemingly more expensive rates.
FY24 will include a couple of positive elements, which are expected to mean that AGL can generate much stronger profits. AGL said it's forecasting:
Sustained periods of higher wholesale electricity pricing, reflected in pricing outcomes and reset through contract positions.
Expected improved plant availability and flexibility of the asset fleet, including the commencement of operations of the Torrens Island and Broken Hill batteries, and the non-recurrence of forced outages and market volatility impacts from July 2022.
Due to this, the business is expected to deliver underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of between $1.875 billion and $2.175 billion.
Underlying net profit after tax (NPAT) is projected to finish between $580 million to $780 million in FY24. That would represent year over year growth of between 106% to 178%. Don't forget that the FY23 underlying net profit was 25% higher than FY22. The company is on a roll.
It also said that "wholesale electricity forward curves currently observable in the market for FY25 are broadly in line with FY24 pricing levels", though market conditions can change.
Any business that's expected to grow its net profit by more than 100% in a year is likely to attract positive investor attention.
Are AGL shares still an opportunity?
It's clear the market now understands how much better operating conditions are for AGL, and the business will probably need to deliver on its guidance to impress the market in the next 12 months.
If AGL delivers on the bottom of its guidance, then it's valued at 12.5 times FY24's estimated earnings, and the top of the guidance would represent a forward price/earnings (P/E) ratio of 9 times.
AGL shares still don't seem expensive at all based on the P/E ratio and it could easily justify a valuation that's at least 10% higher than it is today. Commsec estimates currently suggest the business could pay an annual dividend per share of 55 cents, which would represent a dividend yield of 5%.
The business has a lot of investing to do over the next decade as it makes the transition to renewable energy generation, so a dividend payout ratio of approximately 50% would probably be fair between rewarding investors now, and investing profit for the future. I think AGL shares can outperform over the next couple of years, particularly if it hits the higher end of its guidance, but it's not as attractive as it was earlier this year.
