When AGL was trading at $27 back in April, we were warning that the stock was overvalued and suggested that fair value was back at $22.
AGL is now trading $23 and members should be watching for a buy range to develop.
AGL
AGL reported a 3.7% rise in underlying profits of $389 million to December 31st. This figure was inline with analysts’ forecasts.
However, shares of the energy retailer jumped to an all-time high of $24.05 at today’s open as company officials gave positive guidance into 2017 as retail power prices are expected to climb higher.
AGL said its full year underlying profit would reach the upper half of its forecast range of $720 to $800 million, up from $700 million last year.
The company also raised its half year dividend to 41 cents per share from 32 cents per share last year.
Several market commentators have focused on AGL as an Utility Stock ready to make a strong move higher; we aren’t as confident.
While the AGL stock price has rallied over 25% during the last 12 months, the source of these continued gains are based on increased earning expectations as the increase in electricity costs roll through to both consumers and business users.
Further, AGL bulls are relying upon improved fundamentals within the electricity market to support elevated prices.
Our view is that the expected jump in earnings and dividends per share will be hard to attain and that a sideways trading pattern between $20.00 and $22.50 is a more likely outcome over the medium-term.
Currently ASX leading indices are building higher highs and higher lows and therefore, our predominate focus is on long or buy side signals triggered by the Investor Signals algo engine. When the structure of the indices turn bearish, we’ll provide greater analysis and coverage of short signals.
Occasionally, counter trend opportunities will present and work their way onto our radar screen. CPU and AGL are two countertrend short signals we’re monitoring.
Over the last two months, bond markets have been repricing the probability of a US rate increase. During that time, we’ve watched the US10YR yields trade up from 1.3% to 1.9% . As a consequence, money managers have sold-off defensive yield names. This has been most evident in ASX 50 names within the infrastructure and property sectors.
We maintain a positive interest in these names as the current share prices now have many of the yields offering 100 basis points, (or 1%), more than they were trading at 2 months ago.
WFD and GMG are now trading back on 4% yield, whereas TCL, SYD, GPT and SCG are on average trading near 5% yield.
The December FOMC rate decision meeting will likely be the catalyst for a bounce, however, we’re not expecting these names to recapture the recent highs. Therefore, we’ll look to sell the rally into the early part of 2017. The algorithm engine will track these names and I’ll be certain to alert you to the next lower structural high, but for the time being, you may want to position around the short term bounce which could offer up to a 10% rally.
AGL Energy at $18.50 is a buy.
FY17 NPAT forecast +$770m, EPS $1.15, PE 16x, DPS 0f $0.74 placing the stock on a forward yield of 4%.
Sell a tight covered call option into December to complement the return on AGL.
Today’s report is a summary of what I’m watching following some of the recent price action in the market. On the 30th of August I wrote a blog post under the heading “Property Trusts” and the commentary there still remains relevant. If the Fed Reserve doesn’t raise rates in 2016, we’ll see the yield names rally 5% to 10%. With this in mind, WFD, GPT, SCG are worth keeping on your watch list. AGL, TCL, BXB, IAG, SUN and BLD have also been triggered by the algorithm engine as buying opportunities that should be tracked for an appropriate entry point.
Other names that we’re waiting for a buy signal on include JHX, SGR, QUB, RMD, TWE, SHL, CWN, AMP and NVT. Out of this group, QUB and CWN are the closest to the entry condition being triggered.
AGL.ASX has now traded into our buy range between $18.50 and $19.00. Investors should look to establish an entry point and begin adding this back into portfolios.
AGL.ASX reported FY16 result of NPAT $700m which was in-line with the guidance range of $650-720m. Dividends for FY16 were $0.68 and we should see that increase to $0.77 in FY17 and EPS growth increase by 8 – 10%. This will place AGL on a forward yield of approximately 4%.
We continue to like AGL.ASX as a buy-write.
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