Down 24% since July, are AGL shares a cheap buy?

Is this stock capable of energising returns?

| More on:
A woman holds her finger to the side of her lips in contemplation as she looks upwards to an array of graphic images of light bulbs above her head, one of which is on and glowing.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The AGL Energy Limited (ASX: AGL) share price has taken a painful 23.54% tumble since July 2023, as seen on the chart below.

It has seen a lot of volatility with the changing energy prices, as well as the unpredictability of the strength of Australia's summers and winters.

But, AGL shares have been on the rise in recent weeks. We recently heard from the Australian Energy Regulator that in the first quarter of 2024:

Average quarterly prices were higher than the preceding quarter in all regions. Prices ranged from $69/MWh in Tasmania to $137/MWh in Queensland. Weather was a key price-driver, with heat causing higher demand while a severe storm in Victoria caused network outages.

…Heat and humidity drove record maximum demand in Queensland (11,055 MW) while Victoria and South Australia had record minimum demands for a Q1.

Is the AGL share price a buy?

Energy generators and energy retailers are facing significant change in the coming years with an expectation that coal power can be largely replaced by renewable energy over time

The business has grown its development pipeline to 5.8GW in pursuit of its goal of 12GW by 2035, with an interim target of 5GW by 2030.

AGL said as it builds its pipeline, it will "periodically review market dynamics, customer demand and development options and seek to accelerate options and the decarbonisation pathway where possible."

It also has 800MW of new grid scale batteries in operation, in testing or under construction. The 250MW Torrens Island battery became operational in August. Construction is underway for the 500MW Liddell battery at its Hunter energy hub in NSW, following the final investment decision in December.

AGL sees growth potential as it helps customers like Microsoft, CSL Ltd (ASX: CSL) and NBN Co electrify and decarbonise.

The broker UBS thinks AGL shares are a buy, with a price target of $11.25. UBS said:

With the lowest cost generation portfolio in the market, we expect AGL to deliver a strong earnings profile over FY25-28e. If AGL continues to maintain solid generation availability (as it has over the past 12 months), we believe earnings could surprise to the upside, particularly following other (higher cost) thermal generators exiting the market.

While earnings may fall in FY25 according to UBS, AGL is projected to make earnings per share (EPS) of $1.24 in FY27 and $1.32 in FY28. That would put the current AGL share price at under 8x FY27's estimated earnings and 7x FY28's estimated earnings.

The UBS forecasts also suggest AGL could pay a dividend yield of 8.25% in FY27 and 8.8% in FY28, which is before any potential franking credits.

Bonus tailwind

One thing that could be a real (extra) boost in demand for energy is AI and data centres.

As reported by the Australian Financial Review in April, a boom in data centre demand could mean a tripling of demand for the poles and wires company (Endeavour Energy) that services Sydney's western suburbs. Endeavour Energy has 16 data centres in its distribution area, 19 applications for connection and 18 additional inquiries.

In a submission to the Australian Energy Market Operator, Endeavour Energy said:

If realised, we expect data centres alone to reach a peak demand…representing over 250 per cent of our total network demand today.

While I'm not expecting a large increase in energy prices, I think the data centre-fuelled demand could be enough to make AGL shares more attractive than the market is suggesting right now.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Microsoft. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended CSL and Microsoft. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Energy Shares

Man holding Australian dollar notes, symbolising dividends.
Share Gainers

How a $9k investment in this ASX All Ords stock ballooned to $35,234 in just 3 years!

Shares in the ASX All Ords stock have rocketed even as it’s paid out market-beating dividends.

Read more »

A man sees some good news on his phone and gives a little cheer.
Energy Shares

Guess which ASX uranium stock is charging higher today

This stock is avoiding the market weakness on Friday. But why?

Read more »

A woman wearing a hard hat holds two sparking wires together as energy surges between them. representing the rising Li-S Energy share price today
Energy Shares

How much could a $10,000 investment in Woodside shares be worth in 12 months?

Here's what sort of returns one leading broker is expecting from the energy giant.

Read more »

Oil worker using a smartphone in front of an oil rig.
Energy Shares

Buying ASX 200 energy shares? Here's the latest IEA oil forecast

What can ASX 200 energy shares like Woodside expect in the year ahead?

Read more »

uranium mining, uranium plant, uranium worker
Energy Shares

Will ASX uranium shares run higher on this 'historic' supply ban?

The United States President has signed fresh uranium policy into law.

Read more »

A little girl stands on a chair and reaches really, really high with her hand, in front of a yellow background.
Share Market News

Is the Woodside share price at a stretched valuation right now?

Some are still optimistic on the energy giant, despite softer oil prices.

Read more »

Worker inspecting oil and gas pipeline.
Energy Shares

ASX 200 energy shares slip as cracks appear in OPEC unity

Woodside and Santos shares are both underperforming the ASX 200 on Monday. But why?

Read more »

Happy man standing in front of an oil rig.
Energy Shares

Guess which ASX energy shares are buys and could deliver huge 12-month returns

Morgans sees scope for these energy producers to rise materially from current levels.

Read more »