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AGL Energy Calls It Quits on Coal

ESG Focus | Oct 04 2022

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

Bringing forward its already planned coal exit, AGL Energy has announced the closure of its Loy Yang A project by 2035 as the company focuses on renewable energy.

-AGL Energy has committed to an exit from coal and the closure of its Loy Yang A coal project
-The company will pursue additional renewable and firming capacity in place of its coal assets
-The long-dated nature of the decarbonisation plan leaves it at risk of change, or an (even) earlier exit

By Danielle Austin

AGL Energy ((AGL)) has brought forward its coal exit, committing to an earlier closure of its Loy Yang A coal project by 2035 as it remains focused on the energy transition. The announcement follows a strategy review from the company that resulted in it committing -$20bn to new generation investment.

Near-term, the company targets an additional 5 gigawatts of new renewable and firming capacity by 2030. Analysts largely agree these targets will be funded through operating cash flow. Longer-term, and following its coal exit, the company intends to increase its renewable and firming capacity by 12 gigawatts by 2036 to replace coal assets.

The earlier than expected exit of the Loy Yang A operation will see AGL Energy recognise a -$700m non-cash impairment charge, but the power station will remain open through to 2047, consistent with contractual obligations with Loy Yang B owner Alinta Energy. In the near-term, AGL Energy should continue to benefit from elevated electricity pricing and margins.

Long-dated plans leave room for change, clarity likely to come with commencement of new executives

With all six database brokers reporting on AGL Energy’s coal exit, three brokers are equivalent Buy rated, and two equivalent Hold rated, with an average target price of $8.53 and a range of $8.01-$9.50. Only Macquarie has refrained from providing a recommendation or target price given research restrictions.

Finding AGL Energy’s strategy update sound, Morgans (Add, target price $8.81) considers the earlier closure of Loy Yang A to be an acknowledgement that inflexible brown field coal plants will increasingly come under pressure as more variable renewables enter the grid.

The broker also finds the timeline set by the company to be achievable, and likes that AGL Energy has identified key investments that will allow it to keep a competitive edge.

UBS (Neutral, target price $8.15) is supportive of AGL Energy’s reinvigorated appetite for firming assets, and particularly planned investment in batteries.

This broker models a pathway to attractive returns on battery investment of 12-15% post tax. UBS expects further detail as to the capital demands of the decarbonisation plan and financing strategies to come with the commencement of new executives.

Given the long-dated nature of AGL Energy’s coal exit, Ord Minnett (Buy, target price $9.50) still sees potential for plans to change. This broker also highlighted the sixteen conditions the company has placed on its decarbonisation pathway, which include changes in weather and climate and government intervention.

Macquarie similarly sees potential for AGL Energy to pursue closure of its coal operations earlier than 2035, particularly if the momentum for energy transition increases. Macquarie expects the company’s earlier coal exit is a reflection of evolving government policy and AGL Energy’s ongoing adoption to the changing landscape.

Based on announced projects, Credit Suisse (Outperform, target price $8.20) anticipates AGL Energy needs -$400m in growth capital expenditure annually through to 2030, a notable increase on the -$200m in expenditure the company anticipates in FY23.

Despite this higher spending burden, Credit Suisse expects AGL Energy will deliver a large free cash flow surplus in the same years.

Largely in agreement with other brokers, Morgan Stanley (Equal-Weight, target price $8.01) attributes the stock’s recent share price underperformance to energy market volatility and carbon intensity. This broker expects clarity around key issues to underpin a more constructive outlook.

FNArena's consensus forecasts, based on the brokers mentioned, suggest AGL shares are offering 4% in dividends for FY23, but 7.8% for FY24. Earnings per share are expected to tumble in the year ahead, but more than double in the following year.

The consensus price target of $8.53 suggests 22% upside ex-dividends from today's share price.

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