AGL Energy’s (ASX: AGL) fiscal 2025 underlying net profit after tax (“NPAT”) decreased 21% to $640 million on lower retail margins caused by cost-of-living pressures, lower wholesale electricity prices, and higher gas costs. Dividends also fell 21% to $0.48 per share, fully franked.

Why it matters: Underlying net profit after tax (“NPAT”) was close to the middle of the guidance range and our expectations. Fiscal 2026 guidance is for underlying NPAT of $500 million to $700 million. We downgrade our forecast by 4% to $608 million, near the guidance midpoint.

  • Key headwinds include higher coal and gas costs as some cheap supply contracts end, as well as higher operating costs, depreciation, and interest costs.
  • But coal power station reliability is likely to improve following some one-off issues in the June half, and so are retail margins as AGL pushes through retail price hikes. Mass-market electricity demand rose in 2025 despite flat customer numbers as the electrification trend gained traction.

The bottom line: We maintain our $12 per-share fair value estimate for no-moat AGL. Shares fell 13% after it released results, likely because of soft guidance. We think shares are now attractive, trading at a 25% discount to fair value, on a forward P/E ratio of 10 and dividend yield of 5% fully franked.

  • We think the long-term outlook for roughly flat earnings is intact. The expiry of cheap legacy coal and gas supply contracts and the closure of coal power stations are major long-term headwinds. But they should be broadly offset by investments in the large development pipeline.
  • The dividend payout ratio is at the bottom of the 50%-75% target range as the firm rapidly invests in large-scale batteries and other projects. We expect dividends to rise on a higher payout ratio over the longer term as capital expenditure slows.

Key stats: EBIT in integrated energy, which mostly comprises the generation portfolio, fell 13% to $1.4 billion mainly on lower wholesale electricity prices.

AGL energy’s renewable development pipeline to offset coal headwinds over the long term

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.

AGL 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.

AGL 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.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.