Treasure Chest: Origin And Evolution

This story features ORIGIN ENERGY LIMITED. For more info SHARE ANALYSIS: ORG

By Greg Peel

In the wake of Origin Energy’s ((ORG)) full-year result release, Macquarie summed up opinion by suggesting FY14 was quite simply a “terrible year” for the utility.

A quick look at a one-year chart shows Origin’s share price from FY13 result to FY14 result was largely unchanged, compared to around a 7% rise over the same period for the ASX200, notwithstanding a lot of rocking and rolling in between. Origin was at $14 last August and roughly the same heading into this August result season, having seen $13 late in 2013 and almost $15.50 in June.

Origin’s suffering has all been related to the domestic downstream electricity business. So stiff did the competition between Origin and other electricity providers, such as listed rival AGL Energy ((AGK)), become, that legislation was enacted to end household harassment from door-knocking backpackers and students tasked with converting the unfaithful to a rival utility and/or amalgamating electricity and gas services under the one banner, at a discount. Irrespective of the annoyance of households, Origin and AGL were quite simply discounting both their businesses to death.

FY14 was also the second year of Julia Gillard’s carbon tax.

Origin’s share price is today trading close to $16. The carbon tax has been repealed, which is one plus, but the post-result rally mostly reflects the fact the electricity business component of Origin’s result met expectations for the first time in eighteen months, evoking considerable market relief. But are the bad times now behind electricity providers?

As far as Morgan Stanley is concerned, electricity dynamics remain poor. The fact ORG management did not provide any FY15 guidance at the result does nothing to help conviction either, the broker suggests. But if the MS analysts were running Origin, they would suggest that none of the company’s growth options lie in electricity. They all lie in gas.

The flipside to Origin’s domestic electricity business is its LNG export business. Or at least it will be, from around the middle of 2015. The long and rocky road to commissioning of the company’s Asia Pacific LNG facility in Queensland, which it shares with minority stakeholders ConocoPhillips and Sinopec, has almost reached its destination. APLNG remains on track and on most recent budget according to the update provided with the result announcement.

Origin’s gas business is evolving into major domestic and export business, Morgan Stanley notes, in contrast to domestically constrained and challenged electricity. Once APLNG is up and running, investment risks will attenuate and stable and predictable LNG incomes, provided by long term customer offtake contracts, will offer diversity. Gas incomes will prove a lot more reliable than volatile electricity related incomes.

Beginning FY16, APLNG drives a “step-wise change” for origin, the broker declares.

Morgan Stanley is hardly Robinson Crusoe on this front. FNArena database brokers UBS, Macquarie, Citi, BA-Merrill Lynch and JP Morgan all retain Buy or equivalent ratings on ORG, all citing the APLNG start-up as a reason the stock is a must-have. The dead-weight provided by electricity division just means a cheaper entry point.

Those on Hold ratings – Credit Suisse, Deutsche Bank and CIMB – are simply being cautious. While confidence should start to build one year out from what’s been a decade-long development and construction process for APLNG, one more year to go means there still could be problems, cost blow-outs and/or gas sourcing issues. APLNG does not make widgets. LNG conversion is a highly complex and expensive business.

But all of the cautious concede one point. Assuming APLNG sails smoothly into commissioning, look out. FY15 may not be a major year of earnings growth for Origin but FY16 certainly could be.

Morgan Stanley has now upgraded its rating on Origin to Overweight. The broker is forecasting a doubling of earnings per share and dividends per share from 2014 to 2017, a rising net asset value and falling debt position, all of which will drive a sustained re-rating in the broker’s view. MS has lifted its 12-month target price to $18.50 from $15.50.

The FNArena database target sits at only $16.07, not much above the current trading price. But while there is no database broker rating a Sell, the variance between the believers and the agnostics (Buys and Holds) is significant. UBS, for example, lines up alongside Morgan Stanley with an $18.42 target. CIMB, on the other hand, has set $14.52.
 

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