AGL Energy Limited (AGK) is Australia´s second largest retailer of electricity and gas, with a 27% market share.
The company is also involved in electricity generation, owning conventional assets such as thermal and coal fired power stations, and renewable assets including wind, hydro, geothermal, landfill and biomass.
The attraction of this business is its relatively defensive earnings profile, which is the result of being a provider of an essential product.
Looking forward, the bulls argue that earnings will continue to grow through regulated increases in energy prices.
The company is also well placed to benefit from further government initiatives on the renewable energy front.
The bears counter that increasing competition is squeezing margins and that its coal seam gas (CSG) assets face an uncertain future given the recent NSW and federal government decisions in relation to CSG.
In terms of key measures, profitability is somewhat weak with return on equity averaging 5.6% for the past three years.
The company is in good financial shape with a conservative gearing ratio of 35% and interest cover of 5.2 times.
On our numbers for 2014, AGK is trading on a prospective 14 times earnings and paying a gross yield of 6.2% - numbers which look attractive in the current investment climate.
The stock is suitable for risk tolerant investors seeking a combination of modest income and some capital growth.
Given the recent pull back in price the company is a good long-term investment for those looking for stable income and some capital growth.
At the current price the gross yield is 6.2% and expect share price growth is 10%.
Our target price of the company is $16.00.
For more information on AGL Energy Limited (AGK) please contact us on 07 4771 4577.