Huntleys' Stock of the Week

Recommendations: Accumulate

AGK's current stock prices

Waiting for the right opportunity

Investment Rating:

AGL Energy (AGK) is one of Australia's major integrated energy companies. It services the largest retail energy and dual fuel customer base which exceeds 3.5 million. AGK has investments in upstream gas activities and electricity generation that complement long term gas supply contracts along with derivatives to support the retail customer base. Strong growth potential exists within the retail and power generation businesses and the upstream gas portfolio which should deliver above average shareholder returns over the medium term.

Event:

• Now that the NSW budget is out with confirmation of large deficits for at least the next two years the sale of the retail energy assets will come to the fore. The three electricity retailers for sale - Energy Australia, Integral Energy and Country Energy - service about 4.5 million customers.
  
  
• The Tripodi travelling troupe traipsed around the globe looking for potential buyers but realistically the logical buyers reside in Sydney - AGL Energy and Origin Energy. Both are conservative and it is unlikely bids for the retail energy assets will be aggressive.
  
  
• AGK has also successfully refinanced 2009 and 2010 debt maturity obligations. New facilities totalling $800m in two tranches now mature in June 2012.

Impact:

• The more valuable power distribution networks will be separated from the retail businesses and at this stage retained by the government. Obviously the ACCC will be interested in any transaction involving AGK and Origin. Energy retailing is a high fixed cost business. If churn can be minimised and the existing customer bases merged the benefits would be significant.
  
  
• The addition of any of the three businesses to AGK would be earnings accretive and the extent of the accretion sensitive to the price paid per customer.
  
  
• We retain our current earnings estimates and a positive bias toward the stock.

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