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On Wednesday, Citi analysts initiated coverage on AGL Energy Ltd. (ASX:AGL) (OTC:AGLNF) with a Buy rating, setting a price target of AUD12.00. The analysts highlighted AGL’s strategic shift from coal to renewable energy sources and firming capacity as key factors in their decision.
AGL Energy is currently navigating a strategic transformation that involves transitioning from coal to renewable energy and firming capacity. This shift is expected to impact the company’s free cash flow outlook in the near term due to increased capital expenditures. However, Citi analysts believe the market is undervaluing AGL’s emerging earnings potential, particularly from its investments in batteries and virtual power plants.
The analysts noted that AGL’s investments are well-positioned to take advantage of increasing price volatility and improving margins through the mid-cycle transition. Despite existing investor concerns about execution risks, coal exposure, and re-contracting uncertainties, Citi believes these challenges will diminish as the company achieves project delivery and strategic milestones.
Citi’s valuation approach for AGL includes a one-third weighting to discounted cash flow (DCF) to account for capital expenditure risks. The analysts are confident that AGL’s improving earnings mix supports a return to long-term average valuation multiples.
While expressing a preference for Origin Energy (ORG) over AGL due to its stronger free cash flow outlook and more diversified earnings base, Citi acknowledges AGL’s potential upside as the company continues its strategic transformation.
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