Beginning of September, AGL disclosed that it completed the sale of its 50% participating interest in the 420MW MacArthur Wind Farm for $532m. This was earlier than expected as the company had guided for “first half of FY16” but in-line price-wise as it had anticipated a $500m price tag. It is an important milestone in AGL’s target of $1bn of disposal of non-strategic and underperforming assets by the end of FY17. AGL had pre-announced that proceeds were expected to repay $324m of Loy Yang senior Debt, so that is positive news credit-wise. As announced at its FY15 results in August, AGL released at its AGM the guidance for its FY16: Underlying Profit is expected to be in the range of $650-720m, which compares to $630m achieved in FY15. On the negative side, this guidance includes non-cash accounting changes, which are expected to reduce pre-tax profit by around $50m and New Energy operating loss to increase to $25m pre-tax. Positives are: the full year contribution from AGL Macquarie (acquired in September 2014), cost reductions following its recent strategy review and corporate restructure, modest rises expected in electricity, gas and REC (Renewable Energy Certificates) wholesale prices, slowing in the decline of residential electricity consumption and improved retail margins. A major unknow is the renegotiation of the AGL Loy Yang Enterprise Bargaining Agreement, which is due to begin in this half. Management increased its estimates of restructuring costs from around $20m to $30m pre-tax expected to be booked as significant items in FY16. Management addressed rumours that company might consider so-called capital management options, ie dividend payments or returning capital to shareholders. It denied them as being premature and reaffirming its priorities:
- deliver on forecasts;
- maintain strong balance sheet and strong credit rating to fund investments;
- then it will consider its options;
What is the impact on AGL Subordinated bonds and our recommendations? While the guidance may have been lower than what the consensus of Equity analysts expected, we are reassured by management’s reaffirmation of priorities being a strong balance sheet and its credit rating, which is clearly bondholder friendly. Despite the uncertainties regarding the oil price and its need to substitute progressively coal generation with solar, we believe the company is on the right track and therefore reiterate our HOLD recommendation on the AGL Subordinated Notes.