Origin Cuts Guidance, Brokers Stay Positive

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This story features ORIGIN ENERGY LIMITED.
For more info SHARE ANALYSIS: ORG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

 – Origin lowers earnings guidance
 – Green energy obligations and regulatory uncertainty contribute to changes
 – Earnings estimates and price targets revised
 – Brokers remain positive

By Chris Shaw

An increase in green energy obligations and regulatory uncertainty in retail tariffs have forced Origin Energy ((ORG)) to lower earnings guidance for FY13. The company now expects net profit after tax for the full year will be down 5-10% from FY12, against previous guidance of a flat result.

As Deutsche Bank notes, part of the cut to guidance reflects an increased obligation on the part of Origin to purchase electricity from rooftop solar panels and other small scale renewable generators. As well, JP Morgan notes there is evidence of sliding demand, as well as an increase in the rate of costumer switching between providers in October.

The updated guidance from Origin has prompted cuts to earnings estimates across the market. JP Morgan has lowered its net profit after tax forecasts by an average of 7% through FY15, while Deutsche now expects a 9% decline in net profit, having previously forecast a flat outcome for FY13. 

Consensus earnings per share (EPS) estimates for Origin according to the FNArena database now stand at 80.1c for FY13 and 84.8c for FY14.

The changes to forecasts have impacted on price targets, with Citi's target falling to $15.30 from $15.75 and JP Morgan's to $14.25 from $16.15. The consensus price target according to the database is now $15.31, down from $15.65. 

Looking forward, Deutsche sees valuation upside in Origin at current share price levels but points out this is offset by declining earnings and higher risk leading into the first contributions from the APLNG project. The broker retains a Hold rating.

Citi and JP Morgan remain more confident and continue with Buy ratings on Origin. JP Morgan accepts there are near-term challenges such as stabilising market expectations and delivering on revised guidance, while the sell-down of a stake in APLNG is also becoming more important from a balance sheet perspective.

As JP Morgan notes, the downgrade in earnings guidance and potential changes to S&P's hybrid criteria make it increasingly likely Origin will face a one-notch cut in credit rating to BBB. With $1.6 billion in headroom over and above remaining APLNG capex needs and any project overruns that may be encountered, JP Morgan suggests Origin's balance sheet issue is a funding mix one driven by credit rating.

A sale of part of its stake in APLNG would alleviate the balance sheet issues, JP Morgan taking the view if this is not achieved an equity raising would be more likely to address tighter debt metrics.

Allowing for this, JP Morgan suggests the longer-term value on offer in Origin remains intact given more than 30% upside to the broker's revised price target. This is enough to justify an Outperform rating, even though share price outperformance is unlikely to be realised in the coming months. Most in the market agree as the FNArena database shows Origin is rated Buy six times and Hold once. 

Shares in Origin today are down slightly in line with the market and as at 12.00pm the stock was 6c lower at $10.36. Over the past year Origin has traded in a range of $10.15 to $15.08, the current share price implying upside of more than 40% relative to the consensus price target in the FNArena database. 

 
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