AGL Energy Ltd (AGK) has a reiterated Buy stock recommendation and an upgraded $15.50 share price target from Australian stockmarket analysts from Citi.

AGL Energy Ltd (AGK): A Value Proposition

Recognising value — BG’s bid for ORG has enhanced the strategic value of AGK’s direct and indirect coal seam methane (CSM) assets. We upgrade AGK’s 12M target price to $15.50 based on a break-up valuation methodology. Our reiterated Buy recommendation is driven by the solid value proposition that the stock offers. Earnings momentum is less compelling, with our DCF valuation lagging our sum of parts. We have lowered our risk rating to medium from High ascribed at the time of the earnings downgrade under the former CEO.

Reasonable near term earnings growth — FY09 will see a full year’s impact of the VIC & SA retail tariff increases. Further, the benefits of Project Phoenix and corporate cost out should underpin a 5 year CAGR of just under 10% on NPAT. However, we do have some concerns around earnings visibility given the volatility of the contribution from Wholesale Energy, by its very nature.

NSW privatisation, a new leg of growth — The favourable outcome of the State government’s caucus meeting has been a step forward towards the privatisation of NSW’s electricity assets. AGL will benefit from a privatised NSW electricity retail business through scale advantages and dual fuel opportunities.

Expected to benefit from a carbon scheme — We expect AGK to benefit from its lower than average emissions intensity in its wholesale electricity hedge book, combined with the potential to pass on the incremental cost of carbon to consumers. In addition, the company should be relatively well placed under an expanded MRET recently committed by the Federal Government. AGK offers the only listed hydro exposure in Australia.