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Apart from both starting with the first letter of the alphabet, AGL and AMP have more in common than you might think. They were once both “blue-chip” stocks, household names, held by thousands and thousands of retail investors. Textbook studies for bottom fishing investors of “don’t catch the falling knife”, their market cap today is a fraction of what it was at their peak. Both are targeting demergers of key businesses, set to be completed by 30 June. And both reported earnings results last week, which the market initially judged to be beats.
Let’s take a closer look and attempt to answer these two burning questions – “if I own them, do I hang on?”, and potentially, “do I buy more, or invest for the first time?”
The highlight of AGL’s half-year result was that it marginally upgraded guidance by raising the bottom of its earnings forecasts. EBITDA for the full year is now expected to come in between $1,275 million to $1,400 million (previously $1,200 million to $1,400 million), and underlying profit at $260 million to $340 million (previously $220 million to $340 million).
Earnings in the first half were better than forecast, with EBITDA at $723 million (down 21% on 1H21) and profit $194 million, down 41% on the corresponding period. The fall in wholesale electricity prices, and the non-recurrence of insurance proceeds, partially offset by lower opex, were the main drivers.
The second half will be weaker than the first half because of summer generation costs and fixed price sales contracts. But the outlook for electricity prices is improving, and if prices are sustained, AGL expects to see this reflected in future earnings beyond FY22. Further, because AGL owns and has long term contracts for the supply of coal in place, it is well-positioned to win if commodity price rises are reflected in the wholesale electricity price.
AGL is, of course, primarily a producer of “dirty” coal-fired electricity. 84% of the electricity it generated in the half-year came from its coal-fired power stations (Bayswater, Liddell and Loy Yang), 3% from gas and oil, and 13% from renewable sources (mainly wind).
And that’s behind the demerger which it hopes to complete by June. The “dirty” business (mainly the coal and gas-fired power stations) will be renamed Accel Energy, and the “clean” business (renewables generation, plus the retail distribution of electricity, gas and other services ) will be renamed AGL Australia. Accel Energy, which accounts for roughly two-thirds of the earnings, will also own 15% of AGL Australia.
The new AGL Australia will be Australia’s largest multi-product energy retailer, with 4.5 million consumer and business customers. It will also have an energy portfolio of flexible generation and storage (gas-fired peaking, hydro, solar and battery storage). It will be carbon neutral for scope 1 and scope 2 emissions, with a clear pathway to carbon neutrality for all electricity supply. It will own 20% of Tilt Renewables.
But while demergers are often catalysts for long term share price appreciation, the short term price impact can sometimes be negative because holders suddenly find that they own a business they just don’t want to own. This demerger will be particularly interesting because of the potential ESG implications – arguably positive for AGL Australia, negative for Accel.
The major brokers are marginally positive on the stock, with most raising their target price following the results. The consensus target price is now $7.62, 10.7% higher than the last ASX price of $6.89. The following table shows individual targets and recommendations:
Morgans’ take on AGL is interesting: On forecasts, the brokers have AGL trading on a multiple of 14.3 times FY22 earnings and 9.3 times FY23 earnings. Total dividends of 32c per share are forecast for this year (a prospective yield of 4.6%, unfranked) rising to 60c and a yield of 8.7% in FY23.
“AGL remains a difficult investment proposition ahead of its demerger, the broker suggests, with its component parts likely to attract investors who have environmental priorities that are at polar opposites.
Unfortunately in this scenario, neither set of investors is likely to place much value on the assets of the respective unwanted businesses. The broker suggests investors may wait until after the demerger to re-rate the two entities.”
And I guess that is where I come out on AGL. The demerger should be a positive but could be quite messy in the short term. The combined AGL looks cheap when you look out to FY23 and I guess that makes it a hold. But I can’t see a re-rating by the market in the short term, so at current prices, my answer would be “prefer others”
Hold, but not a buy.
AMP’s full-year result of $356 million in underlying NPAT beat analysts’ forecasts and was up 53% on FY20. The increase was assisted by improved earnings in AMP Bank from volume growth and a writeback of bad debt provisions, cost reduction initiatives and performance fees in AMP Capital. On a statutory basis, the company lost $252 million in FY21 compared to a profit of $177 million in FY20.
With its reputation still seriously challenged, the Australian Wealth Management business suffered net cash outflows of $1.1bn in the final quarter of FY21, notwithstanding continuing growth in its flagship North platform of almost $1bn. Market movements meant total assets under management actually grew, up $4.3bn to $151.5bn. AMP Capital largely held its ground with assets under management of $83bn.
While many in the market (me included) expected that because of the reputation damage, it was just a matter of time before the AMP was broken up into different pieces. Hence, the only way to value AMP was as a “sum of the parts”.
The new management team at AMP, led by Alexis George, is determined to keep AMP going, although they are following part of the script. Gone already is AMP Life Insurance, the Global Equities and Fixed Income business that was part of AMP Capital, and the infrastructure debt platform.
The “new” AMP will comprise AMP Bank, Australian and NZ Wealth Management (retail investment platforms and financial advice), and the multi-asset group from AMP Capital. A new company, to be called Collimate Capital and led by CEO Shaun Johnson, is the private markets part of AMP Capital. It will have about $50bn of assets, mainly real estate and global infrastructure equity, and service 492 institutional clients. It will rank in the top 8 for Australasian real estate managers and in the top 10 for global infrastructure equity managers.
When the demerger of Collimate is completed in June, AMP will retain a 15% shareholding. On a proforma basis (using FY21 underlying profit), Collimate will have earnings of $108 million and AMP $259 million.
The major brokers are very cautious about AMP. With a majority of the ratings in the ‘neutral’ camp, the consensus target price is $1.08, about 6% higher than Friday’s close of $1.025.
Morgan Stanley, which has a target of $1.12, sums up AMP as follows: “The current valuation is fair and retains the Equal-weight rating though cautions the company offers a wide risk-reward scenario, with a broad range of potential outcomes. Industry View: Attractive.”
UBS on the other hand says: “It sees little reason to change its cautious view regarding AMP’s core businesses and thus retains its Sell rating and price target of $0.90. The broker is equally not convinced the announced demerger plan for PrivateMarketsCo will unlock value for shareholders, adding there will be no resumption of paying dividends on the immediate horizon.”
Looking ahead, the brokers feel that FY22 will be another tough year for AMP, with only Australian Wealth Management set to deliver much in the way of earnings growth. The demerger will lower costs, but probably not in 2022. On consensus, the brokers have AMP (that’s the whole business still combined) trading on a multiple of 13.6 times FY22 earnings and 11.0 times FY23 earnings. Dividends aren’t expected until FY23.
So, how to play?
I reckon that if you have worn this much pain on your shareholding, you hang on. The fund’s outflows aren’t as bad as many had feared, costs are being removed and at about $1.00, AMP is in “the value” range. A “speculative buy” for others on the basis that the “sum of the parts” is more than the whole.
All prices and analysis at 14 February 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.