Everything has a price and the AGL share price may have finally found its way from the sin bin to the bargain bin
The post Why the embattled AGL (ASX:AGL) share price is surging higher today appeared first on The Motley Fool Australia. –
The AGL Energy Limited (ASX: AGL) share price might finally be catching a break as a leading broker upgraded the beaten-down ASX shares to “buy”.
The AGL share price surged 6.2% to $6.03 in after lunch trade. In contrast, the S&P/ASX 200 Index (Index:^AXJO) added 1% and fellow energy provider Origin Energy Ltd. (ASX: ORG) share price gained 1.5%.
It seems everything has a price – even for unpopular ASX shares! AGL is arguably one of the most shunned due to its coal-fired power plants.
Why the AGL share price was languishing
AGL is looking to split the company to separate the carbon polluting plants from its energy retail business.
The market has given the strategy the thumbs down as many can’t imagine who will want to own shares in an entity that only holds coal power generation assets.
This explains why the AGL share price has shed around 60% of its value over the past year. Little wonder that its AGM yesterday was such a tense affair.
How to value the AGL share price
But JPMorgan reckons now is the time to be buying the embattled AGL share price. This is despite the broker acknowledging that few investors would be keen on AGL’s Accel Energy spin-off that houses the climate damaging assets.
Therefore, the value really lies in the energy retailing business that will continue to operate under AGL.
Parts worth more than the whole
“We estimate the value of AGL Australia at A$6 billion, including A$2 billion in debt assuming a post-tax WACC of 6%,” said JPMorgan.
“We value the equity at A$4 billion, which equates to A$5.96/share.
We expect stable free cash flow of A$450-$500 million per annum and assuming a 75% payout, we estimate the entity will provide dividends of 16cps by FY2024.”
M&A appeal adds second tailwind
The valuation doesn’t include AGL’s takeover appeal. Cashed up bidders are scouring the market and you only need to look at recent corporate interest in defensive assets to see what I mean.
“In our view, there could be very little interest in Accel Energy given its exposure to coal, its leverage to wholesale prices and its sizeable rehabilitation costs,” said JPMorgan.
“However, we see the potential for strong corporate appeal in AGL Australia with a number of large companies looking to grow into energy retailing in Australia.”
AGL share price upgraded to buy
Attractive valuation and takeover appeal were enough to convince the broker to upgrade its recommendation on the AGL share price to “overweight” from “neutral”.
JPMorgan’s 12-month price target on the shares is $7.55.
Wondering where you should invest $1,000 right now?
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.
*Returns as of August 16th 2021
Sydney Airport (ASX:SYD) share price struggles amid latest takeover blow
APA Group (ASX:APA) share price jumps on strong support for its takeover bid
ASX 200 (ASX:XJO) midday update: Transurban falls, Premier Investments jumps
Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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.