The AGL Energy Ltd (ASX: AGL) share price has fallen almost 10% in August, losing steam after a strong run in the prior months. At this lower price, should investors be looking to buy into the ASX energy share?
AGL impressed investors in June with its comments about improving market conditions and a potentially better FY24. On 16 June 2023, the company gave a strong profit guidance update for the 2024 financial year. The AGL share price is still up 14% since 15 June 2023, despite its recent decline.
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Analyst ratings on AGL shares
According to analyst ratings collated by Commsec, AGL has five buy ratings, while six brokers rate the company as a hold. It's fairly evenly split, whereas there were just two holds three months ago, with the rest of the ratings being buys. The AGL share price has lifted 18% in three months, so it's understandable that some analysts are a little less bullish at this higher valuation.
There's a lot for investors to look at with the company. It's clear the company has seen a profit recovery, but there is also the question of the energy transition and AGL's large investment plans. Let's take a look.
Profit on the rise
FY23 was a messy year for AGL's financials, with impairment charges and negative movements in the value of financial instruments, which led to a $1.26 billion net loss. Excluding those negative one-offs, underlying net profit after tax (NPAT) rose 25% to $281 million.
FY24 looks like it could be another year of profit. In fact, management expects extraordinary underlying profit growth in the current financial year.
The 2024 financial year earnings before interest, tax, depreciation and amortisation (EBITDA) is guided to be between $1.875 billion to $2.175 billion. The company projects underlying net profit to reach between $580 million to $780 million. Therefore, underlying net profit could rise between 106% to 178% in FY24.
There probably won't be many S&P/ASX 200 Index (ASX: XJO) shares that at least double their net profit in FY24, in my opinion.
According to AGL, profit is expected to increase because of "sustained periods of higher wholesale electricity pricing, reflected in pricing outcomes and reset through contract positions".
Another positive is the "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".
Can AGL be an attractive ASX dividend share?
AGL's current dividend policy is a target dividend payout ratio of between 50% to 75% of underlying net profit after tax (NPAT), which will be "franked to the extent possible".
This policy reflects AGL's "commitment to maintaining a Baa2 investment grade credit rating and enables the flexible deployment of capital, to strengthen the core business and realise timely opportunities through the energy transition, all whilst maximising returns to shareholders".
According to Commsec, the ASX energy share is predicted to pay an annual dividend per share of 53 cents in FY24 and 62 cents in FY25. This translates into forward dividend yields of 4.75% and 5.6%, respectively. Those seem like solid yields.
AGL shares have recovered a lot of ground in the last few months. I'm not sure if they will keep rising this year, but the outlook for profit growth over the next year or two appears promising.
I believe the company is still good value considering it's only priced at 11 times the mid-point of the underlying net profit guidance range for FY24. If it's able to hit the top end, it may be viewed as cheap.
