Australia | Jun 16 2006
By Greg Peel
Merrill Lynch is not convinced that leading gas supplier Australian Gas Light (AGL) should be investing upstream. However, the analysts believe AGL’s venture into the PNG gas project and accompanying pipeline is what will provide shareholders with the greatest upside potential.
Along with PNG, AGL is looking to develop its generation portfolio and is also looking for further acquisitions in retailing in Australia, Merrills reports. These elements are behind the company’s organic growth forecast of 40% over the next four years.
Merrills has increased the value of AGL’s stake in PNG from $570m to $630m due to the company having locked in oil exposures at US$67/bbl and due to an improved outlook for gas through-put volumes.
Like all construction projects, timing of completion and risks along the way must be considered – a factor which analysts are always at pains to point out and the market often disregards. Call the market optimistic or call the analysts anal, or both, but Merrills is playing it safe with only 11% of its AGL valuation presently reflecting PNG. Once the capex program starts, says Merrills, PNG will become increasingly important.
PNG is still a medium term driver. Merrills notes AGL’s other plans to increase retailing in Queensland and WA will take time and probably prove to be expensive. The short term will be dominated by the timing of the Alinta (ALN) transaction which is currently expected in October.
Merrills rates AGL as Neutral in the short term, and as such provides no target price. Within the FN Arena database, only JP Morgan rates the stock a Buy seeing good things from the Alinta merger. SB Citigroup (Sell) is concerned about rising bond yields and their affect on utilities. Credit Suisse also recommends Sell, but the analysts have been quiet since January.