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AGL’s Vessey needs to fall on his sword

Paul Rickard
Thursday, July 19, 2018

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AGL shareholders should be demanding that the Board sack CEO Andy Vessey. And if the Board doesn’t act, then shareholders should be lining up to change the Directors at the AGM later this year.

Vessey’s intransigence over the Liddell coal fired power stations has cost shareholders billions of dollars. This year, AGL shares are down by 11.5%. Since reaching a high of $26.52 on 8 December, they are down by 18.7%. And $3bn has been wiped from AGL’s market capitalisation.

AGL Share Price July 17 to July 18

AGL’s nearest listed competitor, Origin Energy, which owns the Eraring coal fired generator and has a similar retail energy business, has seen its share price rise over the same period. It closed yesterday at $9.38 compared to $9.13 on 8 December.

While there is a little bit of “apples and oranges” in comparing AGL and Origin and there are also other factors at play in the fall in AGL’s share price, an inescapable conclusion is that AGL’s position on the closure of Liddell has hurt it. AGL has no friends in Government, few friends in the public and the regulators are gunning for it.

AGL’s posture on Liddell, initially insisting that it had to be closed, then refusing to consider a sale of the plant, and then glibly dismissing an offer from competitor Alinta Energy and Chow Tai Fook Enterprises with “AGL has determined that the offer is not in the best interests of AGL or shareholders” has infuriated the Government, sections of the media, the public and the regulators. The charge that AGL was closing Liddell to protect its generating margins on its Bayswater and Loy Yang A power stations was widely levelled.

Some went further, accusing AGL of price gouging. Former Prime Minister Tony Abbott labelled AGL’s decision not to sell the Liddell coal-fired power station a “strike against the national interest”.

So is it any wonder that the ACCC’s final report on its inquiry into Electricity Supply and Prices went a lot further than expected? Its recommendation to prohibit acquisitions or other arrangements (other than investment in new capacity) that would limit market shares to 20% per cent in any region or across the national energy market as a whole to prevent further “harmful concentration” will be known as the “AGL clause”. AGL’s national market share at 21% (29% in NSW, 30% in VIC and 39% in SA) means that it will be locked out of any acquisition opportunities.

Vessey’s strategy that the company needs to move to lower emissions generation technology and that there is no future in coal fired power generation might well prove to be right. However, he has overplayed his hand and shareholders are paying the cost. AGL needs to get in sync with the community and bury the hatchet with the Government. This will be easier if Vessey goes.

Do the brokers see any value in AGL?

The major brokers who have assessed AGL following the release of the ACCC report have a marginally positive view on its outlook. According to FN Arena, there is 1 buy recommendation and 4 neutral recommendations (no sell recommendations).

The consensus target price is $22.90, a 6.2% premium to yesterday’s closing price of $21.56. While acknowledging that AGL is relatively cheap trading on a PE (price earnings) ratio of 14.0 x forecast FY18 earnings and 13.1 x forecast FY19 earnings, the brokers note the heightened regulatory environment and the risk this poses. They expect to see further downward pressure on wholesale energy prices and compression in the retail distribution margin. Individual recommendations and price targets are shown in the table below.

Bottom Line

I would be much more comfortable buying AGL if it was smoking a peace pipe with the Government. It is not, and probably won’t, until Vessey goes.

Further actions by Government, the regulators or as a result of public/media pressure can’t be ruled put. Energy is a “red hot issue”, particularly in the lead up to a federal election. The public want lower energy prices and are not going to shed any tears if AGL gets hurt (many would say gets what is due to it).,

In the absence of any change in Management or strategy, avoid in the short term.

Published: Thursday, July 19, 2018

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