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Investing.com - UBS upgraded AGL Energy Ltd. (ASX:AGL) from Neutral to Buy while lowering its price target to AUD10.65 from AUD11.50, despite the company’s recent earnings disappointment.
AGL’s fiscal year 2025 results showed second-half EBITDA and NPAT missing expectations by 5% and 6% respectively, according to UBS. The underperformance stemmed from lower generation availability due to unplanned outages, which led to higher electricity procurement costs.
While AGL’s fiscal year 2026 guidance suggests improved generation availability year-over-year, UBS notes that reliability remains an ongoing risk for the Australian energy company. The key positive takeaway from the results is that expected margin compression in electricity and gas portfolios over the next three years is now factored into projections.
UBS highlights that earnings from AGL’s accelerated investment in grid-scale batteries can "entirely overwhelm" the negative impact of expiring cheap legacy gas and coal supply contracts. This supports a growing EBITDA profile from FY25-28, though partially offset by higher depreciation, amortization, and interest costs from increased capital expenditures.
Following a 13% stock price decline, AGL now trades at 4x FY26/27 EBITDA, compared to Origin Energy Markets implying over 10x and New Zealand utilities averaging above 11x, while providing approximately 5% fully franked dividend yield, supporting UBS’s upgrade to Buy.
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