Power: Reporting Season Preview

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Date posted:
09 February 2022, 12:00 PM
Sectors Covered:
Industrials, New Energy

FY23 profit recovery but long-term baseload in doubt

  • Electricity prices have surged in QLD and dragged NSW along with it despite milder average summer temperatures.
  • The market share of renewables has grown considerably though, and we don't see a reversal of the trend of lower coal utilisation in the medium to long term.
  • Our preferred exposures are ORG for large caps and GNX for small caps.



La Nina not enough to suppress prices in QLD

Despite lower average demand than in peak summer years like FY19 and FY20, Queensland's electricity market still suffered acute shortages in late January which was enough to send the average pool price to over $10,000/MWh for over an hour.

Coal generation volumes in QLD, as measured by aggregate at the gate output, were 7% lower in January 2022 compared to pcp which set the stage for the tightness in the market.

Residential tariff hike likely in FY23 

With significantly higher wholesale prices in NSW and QLD we anticipate that the DMO will rise by between 7% - 10% in those states, allowing retailers to lift their residential and SME tariffs accordingly.

Carbon prices (LGCs) have also rallied which will lift environmental costs in all states on top of the milder electricity increases in VIC and SA. We estimate that longer dated contracts have approximately doubled over the last six months.

Lifting our FY23 earnings outlook but we expect longer-term moderation

We increase our earnings forecast for both AGL and ORG with higher expectations for electricity gross margins lifting our underlying net profit forecast by 312% and 34% respectively.

With mostly fixed fuel costs, a larger contracted book of LGCs and a less diversified business AGL is the most sensitive to higher wholesale electricity and carbon prices.

Our long-term forecast is for earlier than anticipated coal closures which will lead to falling earnings in AGL's legacy generation business. ORG's Eraring plant could also potentially close earlier than we've anticipated but we think it's operating flexibility to ramp output quickly will allow it to extract value across its remaining useful life in a variety of different electricity price scenarios.

Continue to prefer ORG and GNX

We continue to prefer ORG for large cap exposure because of its diversified business via its ownership stake in APLNG, the lower carbon intensity of its generation fleet and its greater proportion of flexible generation in its fleet. We increase our ORG target price to $6.57 (+6%) on stronger electricity gross margins.

We also prefer GNX for small cap exposure as a pure play renewables and storage opportunity with its major growth project, Kidston Hydro, funded and underway. A final investment decision on its battery project is possible next quarter and it continues to progress its windfarm project with J-POWER near the Kidston site.

Delorean Corporation (DEL) is a higher risk alternative for small cap investors. It's focus on renewable biogas has attracted the attention of larger companies seeking to partner with it to reduce their carbon footprint. It is also well positioned for changes to carbon regulations with biogas looking likely to be recognised with carbon credits. We expect this would drive more interest from third party clients as well as improving the economics of its own projects.

Find out more

You can find further detailed analysis of company results this reporting season by browsing our reporting season tag, and view a full list of upcoming results on our Reporting Season Calendar.

If you would like access or more information, please contact your adviser or nearest Morgans office.

Request a call  Find local branch

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team

Create trial account 

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

  • Print this page
  • Copy Link