What does Macquarie think AGL shares are worth?

The AGL Energy Ltd (ASX: AGL) share price is virtually back to where it was a year ago, as the chart below shows. With the ASX energy share trading at a lower valuation than it has been for most of the last six months, it's a good time to look into the business.

Investment bank Macquarie Group Ltd (ASX: MQG) has given its views on AGL and its earnings outlook in the foreseeable future. Pleasingly, Macquarie said that, to date, the weather has been mild and volatility has been "relatively low" like last year.

Macquarie outlined how it sees the AGL share price, profit and dividend performing, so let's look into that.

Broker views on AGL shares

The broker noted that growing hours of negative energy price are offsetting "higher hours between $150-$300/MWh." It also said that forward curves highlight that energy volatility is shrinking. Macquarie said this operating environment makes it hard to create a positive earnings surprise in FY25 and "all things being equal creates a flat outlook for FY26".

The default market offer (DMO) was released today, which led to reporting that power bills may increase by up to 10%. Changes in the DMO are meant to reflect the costs for retailers relating to energy and getting it to customers through the electricity network. Commenting on the DMO, Macquarie said:

There is some squeezing of returns around the meter data used (ie, net of solar vs gross demand), albeit this is now factored in. WEC prices will be largely the same from the draft. The impact of materially lower LCG prices is pushed to FY27.

The broker believes that retail battery adoption will be the next "surge". In NSW, a 26MWh battery being installed for around $4,000 suggests to Macquarie that a "step change in demand is plausible". Macquarie then said that:

Conversion may reduce gross electricity sales, but savings on FIT, and hedging should more than offset this. Upside is around conversion to the VPP.

In other words, AGL savings on feed-in tariffs (FIT) payments – the rate paid to people who 'sell' their excess solar power back into the grid – and using the financial tool of hedging should help offset lower total electricity demand. AGL could benefit from some customers joining AGL's virtual power plant (VPP) which utilises customers' batteries and so on to send energy into the energy system like a power plant.

Macquarie estimates AGL could generate adjusted net profit of $657.4 million in FY25, $644.4 million in FY26 and $729.2 million in FY27.

Price target

A price target is where analysts think the AGL share price will go over the next 12 months.

Macquarie currently has a price target of $11.47 on AGL shares, implying a possible rise of close to 12% in the next 12 months. The broker is also forecasting AGL could pay an annual dividend per share of 54 cents in FY25 and 53 cents per share in FY26.

Macquarie has an outperform rating on the business.

The post What does Macquarie think AGL shares are worth? appeared first on The Motley Fool Australia.

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 Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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