AGL (ASX:AGL) marginally lifted the lower end of its fiscal 2026 earnings guidance range on higher generation plant availability, along with improved retail margins and cost control. Underlying NPAT guidance is now for $610 million-$680 million, from $580 million at the low end previously.

Why it matters: We lift our fiscal 2026 net profit after tax forecast by 3% to $646 million, at the new guidance midpoint. Our longer-term forecasts are largely unchanged, implying slight downside in fiscal 2027 as softer and less volatile wholesale electricity prices offset contributions from developments.

  • Better power plant performance supported the upgrade, with fleet availability of 83.2% in the nine months to March 31, which is up 3.1 percentage points on the first half. But good performance and battery additions weigh on electricity futures prices and volatility.
  • This depresses the 2027 outlook. But higher demand, on population growth, data centers, and electric vehicle penetration—combined with closure of the Yallourn and Eraring coal power stations by 2029—should again lift prices and volatility.

The bottom line: We keep our $12 per share fair value estimate for no-moat AGL. Shares are undervalued, trading at a 24% discount and on a forward P/E of 10 and dividend yield of 5.7% fully franked. We think the market underestimates AGL’s earnings resilience.

  • We expect broadly flat earnings over the long term. Structural headwinds, including the expiry of low-cost legacy coal and gas contracts and coal plant closures, should be broadly offset by investment in AGL’s development pipeline, particularly batteries.

Long view: After years of stagnation, mainly because of the offshoring of industry and the uptake of rooftop solar, demand for grid power is likely to lift.

  • Data centers are a big part of the story. They make up 2.5% of demand in the national electricity market, rising to 5% as centers under construction complete, and to over 12% if all planned centers complete.

AGL Energy’s battery and renewable energy developments to offset headwinds

AGL Energy is one of Australia’s largest integrated energy companies. Earnings are dominated by energy generation (wholesale markets), with energy retailing contributing just a fifth of operating earnings. Strategy is heavily influenced by government energy policy, such as the renewable energy target.

AGL Energy’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market.

AGL Energy’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 80% of AGL Energy’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market.

Bulls Say

  • As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive.
  • Its balance sheet is in relatively good shape, positioning it well to cope with the renewable transition.
  • Its low-cost coal-fired power stations underpin solid earnings for the group.

Bears Say

  • The regulatory environment is unpredictable and has a significant impact on AGL Energy’s earnings.
  • AGL Energy’s gas costs are rising as cheap legacy supply contracts end.
  • Banks plan to phase out lending to coal power stations in the 2030s.