Analyst Note| Adrian Atkins |
We upgrade narrow-moat AGL Energy's near-term earnings forecasts to factor in wholesale electricity prices remaining at decent levels in the past few months, which should flow through to retail prices next year. Our longer-term forecasts are largely unchanged, and we maintain our AUD 14 per share fair value estimate. While risky, we consider the stock materially undervalued at current prices. Sky-high prices for coal and LNG exports should put upward pressure on domestic electricity prices in the medium term, creating a more favourable environment for AGL. Additionally, the current global energy crisis strengthens the case for coal power stations to receive capacity payments. This would ensure they make adequate returns and continue operating for as long as needed to enable an orderly transition to renewable energy.