Origin Energy (ORG) - Tax and depreciation trade-offs
November 21, 2024
Origin Energy is an energy utility that provides gas, electrical and renewable power generation at both wholesale and retail levels. The company also produces liquefied natural gas (LNG) for sale in Australia and internationally.
Origin Energy reported first quarter FY25 (1Q25) Australia Pacific LNG (APLNG) sales revenue of $726 million, a 9% beat compared to our estimates and 7% above consensus estimates. We attribute the beat to stronger domestic gas prices and a higher proportion of sales directed towards liquefied natural gas (LNG).
Meanwhile, gas and electricity volumes in its energy markets division were largely in line with expectations but skewed towards higher-margin retail operations.
The company’s guidance for lower depreciation and amortisation expenses in FY25 is likely to drive consensus upgrades to earnings estimates, in our view, although one-off free cash flow outflows for tax payments will increase period-end net debt.
In our view, the slight revenue beat and the new outlook –Origin guided to lower depreciation and amortisation expenses in FY25 – suggest consensus earnings upgrades of around 10%, albeit with higher net debt at yearend due to timing lags in tax payments.
We increased our FY25 EPS forecast by 2% based on 1Q25actuals but reduce our FY26 and FY27 estimates by 4–5% due to higher tax expenses from APLNG and the Octopus Energy arm, partially offset by a lower energy markets depreciation charge.
Our price target has been reduced to $11.00 per share, mainly due to a $500 million cash tax payment catch-up. We maintain a Buy recommendation, as Origin remains a quality business with an attractive ~6%dividend yield.
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