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7 reasons the AGL (ASX:AGL) demerger might be bad for its share price

One leading broker believes the AGL Energy Limited (ASX:AGL) share price could suffer from its demerger plans. Here’s why…
The post 7 reasons the AGL (ASX:AGL) demerger might be bad for its share price appeared first on The Motley Fool Australia. –

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The AGL Energy Limited (ASX: AGL) share price was out of form on Tuesday despite the release of a major announcement.

After initially storming higher, the energy company’s shares ended the day 3.5% lower at $9.81.

What did AGL Energy announce?

On Tuesday AGL announced provisional plans to split into two businesses – New AGL and PrimeCo.

New AGL will be Australia’s largest multi-product energy retailer, leading the transition to a low carbon future. Whereas PrimeCo will be Australia’s largest electricity generator, supporting the economy as the energy market evolves.

Management believes the proposed separation will give each business the opportunity to execute their own respective strategies and growth agendas.

What’s the word on the street?

Goldman Sachs has been looking over its plans. And while it acknowledges that the announcement lacked detail, the broker doesn’t appear convinced by the proposal.

Goldman believes that the proposed demerger could result in downside risks for seven reasons. These include:

“1. Increasing capital intensity of ‘New AGL’ as (i) the NSW Energy Plan likely drives an acceleration of the closure of black coal generation in NSW, and with (ii) an increasing requirement for carbon offsets to achieve a carbon neutral position on Scope 1 & 2 emissions for ‘New AGL’ from separation;

2. Likely lower gearing capacity required as lenders/bondholders manage risks;

3. Cost duplication from a new management team and likely trading team;

4. Declining vertical integration and a new competitor;

5. Corporate appeal may increase for ‘New AGL’, but ‘PrimeCo’ has potential to be considered critical infrastructure limiting foreign ownership options for the business, while this carbon intensity of the portfolio will also likely limit appeal for Australian institutional/pension fund investors.

6. Cribb Point LNG import terminal has been rejected, and likely requiring a repositioning of the gas strategy. We expect Viva’s Geelong Energy Hub to proceed with LNG imports in Victoria in the medium term; and

7. Asset sales and dividends: Silver Springs and Newcastle gas storage are flagged as for sale, while declining earnings weaken distributions.”

In light of this, the broker sees increased uncertainty for investors and continued downside risk to earnings.

As a result, it has retained its neutral rating and cut its price target to $10.45.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 7 reasons the AGL (ASX:AGL) demerger might be bad for its share price appeared first on The Motley Fool Australia.

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