Stocks In Focus: AGL, September 17 2025

0:10G'day fools and welcome to Motley Fool Stocks in Focus, the podcast and the YouTube episode where we pack down or unpack a particular ASX company. Now, if this sounds a little unusual, if it looks a bit different, if you're watching YouTube, you'll know it looks a bit different. That's because I'm actually in Homebush in Sydney. We've had a clash between the recording schedule and my son's athletics carnival. Might've been a missed alarm too, just quietly, but that's where I am. And so hopefully we will do it justice. Hopefully the backdrop here is okay and the sound of video will work all right.

0:40If I don't, my apologies in advance, but we wanted to make sure you got this episode. Now, when I say we, I mean me and Motley Fool advisor and analyst Chris Copley. Chris, g'day. G'day, Scott. Thanks for bearing with me. Hey, this is Stocks in Focus. Now, this is not a formal recommendation of ours. We basically start by saying, let's find a company that our members, viewers, listeners might want to hear more about. Maybe it's in the news. Maybe it's widely owned. Maybe it's simply something going on. In this case, from AGL, it might be a combination of all three, I suspect. So, we are going to break it down, mate.

1:11And again, for our viewers and listeners, a reminder, this is a point in time. and it's only general advice. So as always, if you're watching this later or if you are thinking about buying or selling shares in AGL, that's the company we're going to cover, please do the work yourself. Let's take some professional financial advice if you want. This can only ever be a general financial advice. Chris, let's get on with it, mate. We're going to do a bit of an overview of the company. We'll then look at the pros. We'll look at the cons. And I will ask you to put your neck on the line and tell us whether you think AGL could be a market leader over the long term.

1:40The code is AGL, but tell us more about the business itself. Yeah, so AGL provides electricity and gas to a wide range of customers, including both residential, small and large business as well, as well as wholesale clients across Australia. Beyond Energy, it also offers telecommunications and also Netflix subscriptions along with some other services as well, largely as a means more to reduce, turn, I guess, and strengthen its relationships with customers. But Energy is its core business though. In fact, AGL operates Australia's largest private electricity generation portfolio. It has various energy sources ranging from coal-fired and gas-fired along with renewable energy sources such as wind, hydro and solar.

2:25It also offers batteries and other storage technologies as well. They are involved in both the upstream energy generation market where they own a wide variety of energy assets and power stations and electricity which is generated from these assets are sold to the national electricity market or the wholesale electricity market in Western Australia. They generate revenue from this. They also partner with other supply projects and commit to purchase the output to help secure, I guess, more reliable energy supply without the need for significant capital expenditure to fund every construction and energy generation asset.

3:04Beyond this, they also involved in the downstream or the retail market where they purchase electricity back from the wholesale market for its customers, whether they are residential, small or large businesses, and they make the margin on this. Having exposure to both sides here gives the business the opportunity to also better manage price volatility in the energy markets to try and get the best pricing outcomes as well. So the company has also taken a bit of strategic shift in the last several years or so, and it's very much focused on decarbonizing its business. So you could already see this in its results as what they define as green revenue, which comes from green energy and carbon neutral products has nearly doubled since 2019.

3:47The company's also entered a number of major battery projects and hydro projects and things along these lines as well to help boost its exposure in these areas. And they've also committed to exiting coal-fired generation by the end of FY35. So, yes, they're going through a bit of a transition, but they're positioning their assets, I guess, to be more durable for in the future as energy generation sort of builds its reliance on more renewable resources. So yeah, that's AGL. It's an amazing business, mate. And one that at its base is relatively complex, right? You find an energy source, you send that energy along some wires, people pay you to do that.

4:25That seems relatively straightforward. But as you say, the combination of changing energy sources, the national energy market or wholesale market at WA, so much changing, so much kind of going on. And of course, Mike Cannon-Brooks through Grok Ventures, his private company, owning a reasonable chunk of AGL and is probably behind some of the changes strategically. Let's go from the company now to the investment. Now, as hopefully our viewers and listeners know, you have a great company, it's a terrible investment. You have a terrible company that maybe is not a great investment, but on the way, the combinations are legion and you can go in any different direction here.

4:57So let's go from the business itself. By the way, spectacular summary. Thanks for doing that for our viewers and listeners. Let's go to the investment itself. Let's start with the pros. If you're listening or watching this, what are you thinking about? Why would you want to consider maybe buying shares in AGL? So they hold very significant market share and they are a leading retailer in Australia. There are certainly benefits to that. It's got a very large and diversified customer base. It also holds a very large and diversified base of energy assets as well, which is certainly an advantage. Demand in the coming years for energy capacity is also expected to grow at an attractive rate.

5:34And AGL is investing considerable resources into building this capacity, especially as we mentioned in the new renewable type projects. But for a long time, coal accounted for quite high percentages of its total energy generation. So this transition is very significant and is a considerable business change. The transition also comes with costs, which may well in the fullness of time show that earnings are currently being muted by this transition. So this could absolutely be a positive for investors in the longer term and potentially mean that this business can be a bit of a turnaround play for investors who like these kinds of opportunities.

6:12They've brought some of their cold closures forward more recently and impaired some assets, increased some provisions as well, which have clouded results a bit more recently and seems to have played a role in sending the share price down a fair way. So there's certainly some potential upside there because of that. The business also maintains lower churn rates than the broader industry, partly, as we mentioned before, with the support of Netflix partnerships and telecommunications services, which boosts its relationship with clients. It's also been growing its customer base within its energy services at a modest rate each year over the past several years as well.

6:48And whilst, I guess, earnings can be quite volatile for these types of businesses, the company has consistently delivered a dividend every year over the past couple of decades. Its dividend yield is approximately 5.8 % or so, so quite strong at the moment as well. And from a valuation perspective, the business is certainly not trading at a premium. It's sitting at less than 10 times its normalized earnings figure, and this sits quite low on its historical trading range. It's also lower than other listed peers like Origin Energy as well. So its valuation is quite low, both on the absolute and also on a relative basis.

7:22So yeah, there are absolutely some things about this business to like as an investment. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

7:37Sounds pretty attractive, but as always, there are cons. There are things you should consider before buying, maybe even things that are big enough to keep you away. I'll ask you for that in a minute. But what are some of the cons? If you think about investing in AGL, or maybe you've got some shares and you're worried about what some of the downside risks might be, what should investors be aware of? So the big thing about this business for me is it's very much a price taker. So, for example, in the most recent financial results, the business saw its earnings decline as wholesale electricity prices fell and margins compressed, partly because of this, I guess, more broadly earnings per share over the past couple of decades really hasn't grown much at all.

8:13Despite the considerable investments that have been made and its increased capacity, investors have, you know, they've gotten the dividends along the way, but that really is where all the returns have come from. I partly mentioned the transition risks before as well. As the company is moving quickly towards its decarbonisation strategy, there are risks in execution. They operate in a very capital intensive industry and there are risks that perhaps the considerable investments that they're making does not deliver the expected returns. Cost inflation could impact things. Things such as availability of labour and regulatory approvals can also mean things move slower than they would otherwise like, which could also impact returns.

8:55Things like regulatory price caps and things along those lines can also impact the business's earnings as well. On top of this, the business is also in an industry which can be very cyclical. So energy usage can fluctuate based upon economic conditions and its ability to increase prices for consumers when economic conditions are tough can also be limited. And this can impact margins and profitability. Also, consumption in gas, for example, can change depending on weather conditions. Output from its renewable portfolio of assets such as solar and wind can also fluctuate based on conditions as well.

9:31So, this certainly isn't a business with high levels of earnings predictability. And there are many things which are beyond management's control, which can impact the results. So, certainly some risks involved with this business as well. Yeah, man, I said complexity earlier. It's even more complex than that, right? So there's a lot going on. That being said, that can be an opportunity for investors. It could be potentially a trap as well. So let me get you to put your crystal ball out, mate. Put your five-year hat on. Let's look out. We're long-term investors, I say. Let's look at five-plus years.

10:01Pretty good dividend, pretty low price earnings multiple on the same token, plenty of concern and not a lot of control. Where does that leave you? Do you reckon AGL can be a market beta over the next five-plus years or is it likely to lag the ASX? Yeah, I can certainly see the sort of the turnaround thesis there, but I will say that this is not really a business that I have super strong opinions in. It's not the typical type of business or industry that I spend a lot of time researching in either. And I will say that that is deliberate. It's a very tough industry. It's very tough to find an edge or any significant differentiation relative to your peers.

10:35And if you look at its share price over the last 20 years, the share price that it's trading at today is towards the lowest price that the business has traded at. So, you know, really the business has not rewarded its shareholders now for a couple of decades. There are obviously, you know, changes going on in the market at the moment, you know, demand for energy is rising with tower winds, such as, you know, the electrification of the economy, you were seeing rising uptake of electric vehicles, you know, the considerable energy usage in data centers, for example, as well as another thing. Also, there are opportunities for those in the market who better navigate the transition towards more renewable energy sources.

11:11So there's certainly opportunities there, but I don't have the conviction to say with confidence that the next decade or so will be considerably better than the last couple of decades. So I would be leaning towards the business continuing to be a longer term underperformer. There you go. Some potential upsides, but overall a risk probably a little too spicy for Chris. I think that's probably a very reasonable view to take as well. Paul, thank you for spending a bit of time with us. Just a reminder, if you're on the podcast feed right now, jump over to the YouTube channel. Pretty easy to find. It's youtube.com forward slash foolau.

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12:14Chris, thanks for spending some time with us. Thanks for sharing your expertise. Thanks for watching. Thanks for listening. And until next time, fool on. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.