The AGL Energy Limited (ASX: AGL) share price has done well for investors – it has risen by close to 50% in 2023 to date, as we can see on the chart below.
Things are looking good for my call in February that the AGL share price could double within four years.
AGL is capturing more investor attention, with two fund managers – Alphinity and Firetail – being attracted to the ASX energy share. So, let’s look at what their optimistic thoughts on the business are.
Firetrail commentary
AGL was a position in the Firetrail portfolio during the month of June 2023, and it contributed to the fund’s performance after the ASX energy share provided FY24 earnings guidance.
That guidance was around 15% higher than what the market (consensus forecast) was expecting. AGL also clarified its future capital intentions in the update.
Firetrail pointed out that of the $20 billion that AGL has earmarked for investment in the energy transition, roughly half will be on AGL’s balance sheet, and only $4 billion will be spent between now and 2030.
The capital expenditure profile will, according to the fund manager, enable AGL to “pay out 50% to 75% of profits as dividends, providing a strong, sustainable yield for investors.”
Alphinity thoughts on the AGL share price
In its quarterly update for the three months to 30 June 2023, the fund manager said that the company is now “firmly in an earnings upgrade cycle”.
It noted that the company “has been through the perfect storm” with weak wholesale electricity prices, an “ill-thought-through attempted demerger and subsequent management and board changes.”
Alphinity noted that the energy transition from fossil fuels to renewables remains a “formidable challenge” from an energy generation perspective.
But, investors can be positive about the company’s prospects because wholesale electricity prices have “recovered strongly and now appear to be underwritten in the medium-term by higher gas prices.”
The fund manager said:
This should not just see a strong recovery in AGL’s earnings, it will improve its balance sheet strength which will be an important factor in funding the capital expenditure required for the company to transition to a more renewables-based energy generation portfolio.
AGL share price valuation
Looking at the latest estimates on Commsec, AGL could generate earnings per share (EPS) of $1.06 in FY24. This would mean the AGL share price is valued at around 11 times FY24’s estimated earnings.
It might also pay an annual dividend per share of 56 cents in FY24. Excluding the effect of franking credits, this could translate into a forward dividend yield of 4.7%.
It could be a little harder to generate strong returns in the short-term from here after 2023’s gains to date, but I think a forward price/earnings (P/E) ratio of just 11 is still reasonable. So I think a total shareholder return of at least 15% (including dividends) is very achievable for the ASX energy share.
