AGL's share price has recently dropped 10 per cent from its year high of $11.58.

Price movement
AGL’s share price has recently dropped 10 per cent from its year high of $11.58. Shareholders have had to endure some volatile movements over the last five years, from about $13 down to $8.

AGL suffered large write-downs after exiting from the New Zealand retail electricity market last year. Its recently announced that the takeover of the Loy Yang power station is the reason for its current price weakness.

Profile
The Australian Gas Light Company was established in 1837. It listed on the stock exchange in 1871 and is the largest energy retailer operating in the Australian market.

Its businesses cover power generation, LPG (via a 50 per cent ownership of Elgas), infrastructure management, gas pipeline reticulation, and telecommunications. Its international assets include a 21 per cent interest in TrustPower (electricity) and a 66 per cent interest in the Natural Gas Corporation, both in New Zealand, and 100 per cent of Chile’s Gas Valpo.

Current details
AGL, Tokyo Electric Power and a CBA-led consortium of investors are buying the Loy Yang power station for $3.5 billion. AGL is making an equity investment of $200 million. Loy Yang has been burdened with excessive debt since it was privatised by the Victorian Government in 1997. The Australian Competition and Consumer Commission has raised objections to the deal, saying it would be anticompetitive.

Loy Yang accounts for 24 per cent of Victoria’s electricity generation. AGL supplies 40 per cent of Victoria’s customers with electricity and gas. Victorian crossownership regulations will need to be amended, as AGL will be both a retailer and generator in the same market.

Its stated objective of growing its current 2 million customers to 3 million by 2006 will be substantially achieved. AGL has stated the acquisition will not add to earnings in the first year but will be positive thereafter. This would place AGL on a P/E of 14.5 times for the 2004 financial year and 13.5 times for 2005, with a dividend yield of 5 per cent.

Sector
Commonwealth and state energy ministers have endorsed a new single energy regulatory framework to regulate the electricity and gas markets. It is intended to reduce the duplication of responsibilities across the states’ various legislation. If achieved this could result in a more efficient energy market, which would benefit the major energy companies.

Worth buying?
ACCC decisions have the potential to cause delays that will unsettle shareholders. This would create an opportunity to buy AGL at $9 to $9.50, at a reasonable P/E (12-12.5). Wait to buy.

Geoffrey Hill is the presenter of ABC NewsRadio’s daily afternoon finance report and is an independent private client adviser. Visit www.ghill.com.au