瑞信-亚太地区-公用事业行业-澳大利亚公用事业：拿回权力-2019.7.2-32页 (2).pdf

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES,ANALYST CERTIFICATIONS,LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS.US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.2 July 2019Asia Pacific/AustraliaEquity ResearchMulti Utilities Australian Utilities SECTOR REVIEWResearch AnalystsPeter Wilson61 2 8205 4107peter.wilson.2credit-Chloe Lim61 2 8205 4739chloe.lim.2credit-Take the power back;Upgrade ORG/AGLWe upgrade the ratings for both AGL and Origin Energy.Our prior premise was that forecast decreases in wholesale prices would be passed-through to customers and earnings FY19-22F.However,wholesale electricity prices remain high,and July retail repricing introduces doubt over the pass-through.Upgrade AGL and Origin:both have underperformed the market,peers,and key earnings input.Whilst we continue to see downside to electricity prices from renewables and government intervention,a 12M rally shows a subdued impact so far.AGL and Origin have underperformed this key earnings input,underperformed oil(ORG),and underperformed the ASX200 even as bond yields have pushed peer valuations higher.July retail resets show repricing power retained under DMO,introduces doubt on pass-through of price downside.The first reset coinciding with the introduction of the DMO illustrates that retailers have retained the freedom to reprice their back book,introducing doubt that wholesale price falls will be passed through in full.For existing customers on discounts,we estimate that AGL/ORG have retained A$30-55mn in costs;in ORGs case,it has redirected these savings to other customers.Further,best offers from the large retailers are now higher than in Apr/May,indicating an easing of competition,although we expect this to be volatile.Risks.A fall in wholesale electricity futures remains the largest risk,with soft spot LNG prices and government intervention the contributing factors.Upgrade Origin Energy(ORG.AX)to OUTPERFORM,target price A$8.50/sh(from A$7.55/sh).Origin has underperformed AGL and E&P peers;it has a superior earnings,FCF and dividend profile to AGL;and we expect the FY19 results to be a positive catalyst,with a strong Energy Markets EBITDA and an update on the ongoing dividend policy.Upgrade AGL Energy(AGL.AX)to NEUTRAL,target price A$19.20/sh(from A$18.30/sh).Upgrade based on relative underperformance,with resilient electricity futures and July retail pricing resets diminishing wholesale price downside.2 July 2019Australian Utilities2Summary:upgrade ratingsAGL and Origin have underperformed the market and peersAGL and Origin have underperformed on both 12-month and YTD basis.Figure 1 shows AGLs 12-month performance vs the ASX200,the MSCI Global Utilities Index and the average of the New Zealand integrated utilities which we consider to be the most similar in terms of market structure(Gentailers).Figure 2 shows Origin vs the ASX200,AGL,and the average of the Australian large cap E&P peers.Figure 1:AGL vs ASX200 vs Global peers(indexed)Figure 2:ORG vs ASX200 vs local peers(indexed)1.2%1.4%1.6%1.8%2.0%2.2%2.4%2.6%2.8%3.0%3.2%3.4%3.6%708090100110120130140Jun-18Sep-18Dec-18Mar-19Jun-19ASX200AGLMSCI utilitiesNZ peer avg10yr Aus bond yield(RHS,inverted)5060708090100110120Jun-18Sep-18Dec-18Mar-19Jun-19ASX200Aus E&P AvgAGLORG Source:I/B/E/S,Credit Suisse estimatesSource:I/B/E/S,Credit Suisse estimatesAGL and Origin have underperformed their key inputs to earningsThe underperformance of AGL and Origin contrasts to the change in their most important earnings inputs,in particular,versus the change in wholesale electricity futures.The sensitivity of both to these inputs is shown in Figure 4.Electricity futures have rallied consistently since the middle of 2018 due to persistently high spot price outcomes which were caused by supply constraints for coal and hydro,a tight gas market,and a slower-than-expected increase in output from new wind and solar.Figure 3:AGL/ORG vs Electricity futures vs BrentFigure 4:Key input sensitivities60708090100110120130Jun-18Sep-18Dec-18Mar-19Jun-19ORG.AXAGL.AXWeighted Electricity Price IndexBrent(US$/bbl)FY22 EPS DCF Value FY22 EPS DCF Value1%change to Electricity+/-1.8%+/-1.4%+/-1.0%+/-0.9%1%change to Brent+/-1.4%+/-1.0%AGLORG Source:BLOOMBERG PROFESSIONAL service,Credit Suisse estimatesSource:I/B/E/S,the BLOOMBERG PROFESSIONAL service,Credit Suisse estimatesWe remain of the view that the LT wholesale electricity price is lower than 12M futures,but futures rally limits 1-2 year downsideWe have not changed our view that the long-term wholesale electricity price will revert to$60-80/MWh,from the current FY20 prevailing forward price of$90-110/MWh.The bottom end of that range is possible under a scenario of policy induced oversupply(Talkin bout my generation:Big Brother),or a scenario of lower global benchmark coal prices(The coald shoulder)However,we must concede that the impact of wind and solar has to date been subdued,with other factors coinciding to tighten the market further.This lends merit to the argument 2 July 2019Australian Utilities3that the forward curve may continue to push out as it has YTD limiting downside to modelled earnings.Realised prices will reflect a 2-3 year rolling average;we model a reduction from$80/MWh in FY19/20 to$70/MWh by FY22,similar to the prevailing forward curve.Retained post-DMO repricing freedom introduces doubt on pass-through of lower wholesale pricesRetailers retain freedom to reprice back-book,retain cost reduction in July resetsWe are increasingly confident that the long-term impact of the new DMO/VDO regulations that apply to retail prices will be less than feared.In particular,we see the watering down of the final version of the rules as significant,as it limited the regulated reference price to apply to only a small minority(10%)of customers that were on standing offers.Because of this,the reference price amounts to a comparison rate(as Origin has long lobbied for),rather than a regulated price cap as originally intended;albeit with a significant transitional impact(A$110mn for Origin)in FY20.Historically,a significant source of profitability has been the freedom to reprice the back book of customers,the so-called loyalty tax.As discussed below,the decision by AGL and Origin to keep prices flat on 1 July for existing customers on discounted market offers despite a modest reduction in their costs shows that this repricing freedom remains;albeit in Origins case,it has used this freedom to reward long-term high value customers at the expense of those customers on discounted market offers,inverting the loyalty tax.Aside from retail margins,the implication is that this repricing behaviour introduces doubt as to whether a fall in wholesale electricity and renewable certificate prices would be passed on in full.Scrutiny on prices remains high,with the ACCC required to release a report every six months on the impact of the DMO,ensuring that no customer is worse off.However,we contend that the heterogeneity of the retail customer base provides some cover for retailers.FY19 to be nadir for retail profitsWe expect retail gross margins to bottom in FY20 due to the transitional impact of the DMO/VDO,before recovering in subsequent years as AGL and Origin reassert control of margins following two years of forced repricing.EBITDA net of operating costs is expected to bottom a year earlier in FY19,with digitisation and an abatement of churn and repricing activity expected to allow for AGL and Origin to start to deliver on cost out targets.We expect cost reductions to translate to EBITDA,given the incumbents have faced a disproportionate increase in activity in recent years.Figure 5:AGL consumer EBITDAFigure 6:ORG consumer EBITDA-600-400-20002004006008001,000FY17FY18FY19FFY20FFY21FFY22FA$mnConsumer OpexConsumer Gas GMConsumer ElectricityGMConsumer EBITDA -800-600-400-20002004006008001,0001,2001,400FY18FY19FFY20FFY21FFY22FA$mnConsumer OpexConsumer Gas GMConsumer ElectricityGMConsumer EBITDA Source:Company data,Credit Suisse estimatesSource:Credit Suisse estimates2 July 2019Australian Utilities4Upgrade AGL/Origin,preference for Origin Our preference for Origin over AGL is based on the following points.ORG:FY19 results in August,expect strong result at top end of guidance,positive dividend catalyst.we forecast Origin to report FY19 Energy Markets EBITDA of A$1,595mn,at the top end of A$1,500-1,600mn guidance,driven by strong Eraring generation output,and NPAT of A$1,131mn,3.1%above consensus.Further,the company has committed to providing detail on its ongoing dividend policy;we forecast 40 cps in FY20,16%above consensus forecasts.ORG:Superior earnings profile,Energy Markets decrease offset by APLNG.To be clear,our modelled FY19-22 decrease in utilities earnings is similar for AGL and Origin.However,a roughly flat EBITDA profile and declining ITDA from Origins LNG segment substantially offsets the Energy Markets decline.As such,we forecast a 3%cumulative earnings decline for Origin FY19-22,compared to a 22%decline for AGL over the same period.ORG:Higher exposure to retail,lower downside risk from wholesale electricity:Proportionally,Origins Energy Markets business is more exposed to retailwhich we expect to bottom in FY19 net of costsand less exposed to wholesale prices which remain above our estimated long-term equilibrium price.This can be seen in Figure 4,with Origins value sensitivity to a change in wholesale electricity prices approximately 35%lower than AGLs.Looking at it a difference way,Origin does not report retail(consumer)gross margins separately,but we estimate that retail gas and electricity contributes 20%of segment EBITDA net of costs,compared to 10%for AGL.In both cases,this share has fallen 10%or more.ORG:Strong FCF position with increasing dividend profile,dividend catalyst expected at FY19 results in August.Strong free cash flow and the associated deleveraging(est A$1bn per annum pre growth capex)has long been a key investment driver for Origin.With forward debt levels now within Origins target 2.0-2.5x ND/EBITDA band,it has recommenced paying a dividend in FY19,and has committed to providing guidance on its long-term approach to dividends at the FY19 results.We expect a doubling of ordinary dividends in FY20,with a stated intention to return capital in later years as gearing reduces further.We estimate that our modelled 40cps FY20 dividend can be covered by cash flows in a US$40/bbl scenario(i.e.,assuming no distributions from APLNG aside from MRCPS coupon payments).AGL:Flat ordinary dividends,with biennial on-market buybacks.For AGL,we expect ordinary dividends to be flat,reflecting declining FCF.The volatility of FCF in Figure 7 is a result of large working capital movements(mostly margin lodged against hedges).While we expect AGL to remain conservative with its balance sheet given its earnings profile,and the now declared intention post-Vocus to retain optionality for M&A;in the absence of such M&A we estimate that AGL could undertake on-market buybacks of A$600mn (5%of equity)once every two years.2 July 2019Australian Utilities5Figure 7:AGLFCF vs dividend yield vs debtFigure 8:ORGFCF vs dividend yield vs debt0.0 x0.5x1.0 x1.5x2.0 x2.5x3.0 x3.5x4.0 x0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%FY18FY19FFY20FFY21FFY22FND/EBITDA(RHS)Div YieldOFCF Yield 0.0 x1.0 x2.0 x3.0 x4.0 x0.0%5.0%10.0%15.0%FY18FY19FFY20FFY21FFY22FND/EBITDA(Adj,RHS)OFCF YieldOFCF yield inc APLNG debt repaymentDiv Yield Source:Company data,Credit Suisse estimatesSource:Company data,Credit Suisse estimatesORG:Possible growth options in Beetaloo,APLNG production increase.Growth investment opportunities for both AGL and Origin in the domestic utilities business appear limited(A$300mn project size),due to a lack of policy clarity and interventionist intent at a state and federal government level.AGLs short-lived bid for Vocus(VOC.AX)was arguably confirmation of this.However,Origin(through its Integrated Gas segment)does have two genuine growth possibilities:a large but early/speculative domestic gas project in Beetaloo,and potential to lift APLNG LNG production to nameplate and above as the LNG market tightens 2022+.We carry Beetaloo at A$300mn,although the future value could be three times that or more(A$0.35/sh upside).For APLNG,we increase our forecast from 9.0mt to 9.9mt from FY25,which adds$350mn or$0.20/sh to our Origin valuation,net of capex and assuming that 60%of the additional upstream production comes from the contingent QCLNG purchase agreement signed November 2018.The third-party gas supply reduces the earnings and value uplift;with reduced profitability accounting for obvious risks to this scenario such as export restrictions and JV interests.2 July 2019Australian Utilities6Retail resets:Take the power backRepricing flexibility persists with DMO/VDOThere are three distinct aspects of the July retail electricity price resets to consider,each of which we will discuss separately in detail:1.The annual change in underlying prices for existing customers who are on a market offer.2.The transitional impact of moving standing customers onto the Default Market Offer/Basic Service Offer.3.The ongoing change in market offers as tracked by our retail pricing survey.Flat prices for existing market customers,despite small cost decrease,shows flexibility that will underpin medium-term margin recovery In early June,both Origin and AGL announced that they would keep prices flat for existing market customers,i.e.,for those customers not currently on a standing offer.Industry practice is to vary underlying prices annually,while the percentage discount off this price remains unchanged for the duration of the contract period.Prices in NSW,QLD and SA are typically updated in July coinciding with regulated network cost variations,while VIC prices are updated in January.We estimate ORG/AGL retaining A$30-55mn in cost reduction.Origin redirecting to voluntarily expand DMO repricing(disloyalty tax)As shown in Figure 9,by keeping prices for market offer customers flat,we estimate that AGL and Origin have not passed through a reduction in costs equivalent to$30-55mn,or 1-2%of costs.In this case,with wholesale electricity costs estimated to be flat,weighted network costs approximately flat or slightly down in Origins case;the retailers have declined to pass-through the reduction in green costs due to the fall in renewable certificate(LREC)prices.While small at 1-2%,it is emblematic of the freedom of repricing that will ultimately lead to a recovery of retail margins,and arguably raises the question as to whether a fall in wholesale electricity prices and LREC prices will be passed through in full.We are