Down 24% since July, are AGL shares a cheap buy?

A woman holds her finger to the side of her lips in contemplation as she looks upwards to an array of graphic images of light bulbs above her head, one of which is on and glowing.

The AGL Energy Limited (ASX: AGL) share price has taken a painful 23.54% tumble since July 2023, as seen on the chart below.

It has seen a lot of volatility with the changing energy prices, as well as the unpredictability of the strength of Australia’s summers and winters.

But, AGL shares have been on the rise in recent weeks. We recently heard from the Australian Energy Regulator that in the first quarter of 2024:

Average quarterly prices were higher than the preceding quarter in all regions. Prices ranged from $69/MWh in Tasmania to $137/MWh in Queensland. Weather was a key price-driver, with heat causing higher demand while a severe storm in Victoria caused network outages.

…Heat and humidity drove record maximum demand in Queensland (11,055 MW) while Victoria and South Australia had record minimum demands for a Q1.

Is the AGL share price a buy?

Energy generators and energy retailers are facing significant change in the coming years with an expectation that coal power can be largely replaced by renewable energy over time

The business has grown its development pipeline to 5.8GW in pursuit of its goal of 12GW by 2035, with an interim target of 5GW by 2030.

AGL said as it builds its pipeline, it will “periodically review market dynamics, customer demand and development options and seek to accelerate options and the decarbonisation pathway where possible.”

It also has 800MW of new grid scale batteries in operation, in testing or under construction. The 250MW Torrens Island battery became operational in August. Construction is underway for the 500MW Liddell battery at its Hunter energy hub in NSW, following the final investment decision in December.

AGL sees growth potential as it helps customers like Microsoft, CSL Ltd (ASX: CSL) and NBN Co electrify and decarbonise.

The broker UBS thinks AGL shares are a buy, with a price target of $11.25. UBS said:

With the lowest cost generation portfolio in the market, we expect AGL to deliver a strong earnings profile over FY25-28e. If AGL continues to maintain solid generation availability (as it has over the past 12 months), we believe earnings could surprise to the upside, particularly following other (higher cost) thermal generators exiting the market.

While earnings may fall in FY25 according to UBS, AGL is projected to make earnings per share (EPS) of $1.24 in FY27 and $1.32 in FY28. That would put the current AGL share price at under 8x FY27’s estimated earnings and 7x FY28’s estimated earnings.

The UBS forecasts also suggest AGL could pay a dividend yield of 8.25% in FY27 and 8.8% in FY28, which is before any potential franking credits.

Bonus tailwind

One thing that could be a real (extra) boost in demand for energy is AI and data centres.

As reported by the Australian Financial Review in April, a boom in data centre demand could mean a tripling of demand for the poles and wires company (Endeavour Energy) that services Sydney’s western suburbs. Endeavour Energy has 16 data centres in its distribution area, 19 applications for connection and 18 additional inquiries.

In a submission to the Australian Energy Market Operator, Endeavour Energy said:

If realised, we expect data centres alone to reach a peak demand…representing over 250 per cent of our total network demand today.

While I’m not expecting a large increase in energy prices, I think the data centre-fuelled demand could be enough to make AGL shares more attractive than the market is suggesting right now.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the ‘five best ASX stocks’ for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now…

See The 5 Stocks *Returns as of 1 February 2024

More reading

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended CSL and Microsoft. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.