AGL Energy (AGL) – Flex Appeal

AGL Energy recently hosted an investor day at its Baywater power station and Liddell Battery assets at Muswellbrook in the Hunter Valley, from which Ord Minnett came away with greater confidence in our already positive view on the company’s investment proposition. A highlight of the day was seeing how AGL’s investment of more than $800 million in recent years has allowed the development of flexible generation capacity of 3.3 gigawatts (GW) at Bayswater, with trials in October successfully taking coal generation units offline and then putting them back online within five minutes, thereby matching the flexibility inherent in gas-powered electricity generation.

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In effect, these developments mean AGL can optimise margins by shutting down and restarting its generation units between demand peaks as required. According to the company, testing during October showed that applying the new operating pattern across four generation units for 100 similar days equated to circa $25 million in annualised earnings. AGL expects Bayswater to remain the lowest-cost generator in NSW given recent spot coal contracts struck by the company, its additional flexible capacity, and high availability rates. This position, and new pricing for supply to the Tomago aluminium smelter from 2028, indicates material upside to earnings forecasts.

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The company has demonstrated solid momentum over recent times with the Tilt renewable asset sale, flexible capacity development at Bayswater, progress in its Western Australia operations and a series of power purchase agreements (PPAs), and we see further drivers to come from revaluation of its 20% stake in energy management platform Kaluza, a closure of Energy Australia’s Yallourn power station that will push Victorian wholesale prices, and thus AGL earnings, higher, and repricing of Tomago supply contracts.

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Post the investor day, we have raised our FY26 EPS estimates by 6.1% to incorporate wider electricity margins partially offset by higher growth capital expenditure, while our forecasts for FY27 and FY28 are trimmed 0.5% and 0.2%, respectively. Our target price on AGL has been upgraded to $13.00 from $12.00, and we reiterate our Buy recommendation.

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