Energy retailers find new spark

Photo of Nick Radge, The Chartist By Nick Radge, The Chartist

min read

What the share-price charts say about AGL, Origin, Meridian and Mercury.

Australian energy companies are under scrutiny on several fronts: potential government intervention in electricity markets in a similar vein to the east coast gas markets, and new start-ups wanting to disrupt the industry with new delivery and subscription models.

Add to that high retail pricing, falling demand, new technologies and the challenge of climate change, and the industry is on the cusp of major change.

Here is a technical analysis of four key energy retailers in Australia and New Zealand:
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article.)

1. AGL Energy
AGL is not only one of Australia’s oldest companies, established in 1837 to power Sydney, but today is one of the country’s largest energy retailers, providing gas, electricity and solar. The company has mainly served customers on the east coast, but recently announced it will extend its competitive success into Western Australia.

Recent FY17 results were roughly in line with analyst expectations and the company provided strong guidance for the coming few years on the tailwind of higher gas and electricity prices. The current strong operating environment and consumer re-pricing caused several brokers to upgrade their outlook.

After the global financial crisis, AGL spent six years in the wilderness trading in a range between $12 and $16. This extended sideways period was a classic example of accumulation and tends toward a new bullish movement. That new trend started in 2015 as rising energy prices propelled earnings higher.

From a technical standpoint, the recent dip from record highs is not a major concern. Indeed, the stock went a little parabolic into those highs and as is usually the case, the next phase is a healthy pause.

The most probable outcome for the balance of 2017 is a period of sideways consolidation before renewed strength kicks in and takes the share price to new highs. This pattern of trend, pause, trend, pause is extremely common and we would only be concerned for the health of the trend should prices continue to dip back below $20.
 Radge AGL Chart
Source: Premium Data

2. Origin Energy
Origin Energy is a fully integrated company involved in exploration and production of natural gas, electricity generation and distribution. In the renewable sector it holds a portfolio of international businesses covering wind, geothermal, hydro-power and solar technologies.

It recently announced a 16 per cent rise in revenues and suggested it is now looking beyond debt reduction and towards growth. The forecast 6 per cent growth in energy prices through next year continues to buoy sentiment, as does the improving cash flow from the APLNG ramp-up. Like AGL, Origin has been earning large profits on its retailing business and its underlying profit of $550 million reflected a strong improvement on last year’s results.

Although considerable technical damage has been done to the share price over the past eight years, the near-term price action remains reasonably positive and portends ongoing strength over the coming years.

Normally after a significant fall as seen through 2015, a period of sideways base building takes place. Here, however, a rare V-shaped low occurred, which is deemed positive. For the longer-term bullish argument to remain, we would like to see current momentum continue towards the major line of resistance at $9.

Should that resistance be tagged in the coming months, assuming no prior weakness, then a moderate reversal should take shape and present a buying opportunity, before another leg higher commences and the $9 boundary is overcome.
 Radge ORG Chart

Source: Premium Data

3. Meridian Energy
Meridian is a New Zealand electricity generator and retailer that was privatised by the New Zealand Government in late 2013. It is dual listed in New Zealand (Code: MEL) and Australia (Code: MEZ).

The company generates the largest proportion of New Zealand’s electricity and is the fourth-largest retailer with 14 per cent market share. It also operates in Australia. The vertically integrated company operates seven hydro stations and seven wind farms.

Upcoming FY17 results are expected to show a flat result because of extremely low rainfall in New Zealand and calm wind conditions. Cash flow remains very strong, with the majority of earnings coming from the wholesale market and continued customer growth in Australia.

Also attractive for investors is the company’s willingness to pay out special dividends and the strategy remains the board’s preference. The gross dividend yield is 8.1 per cent and is forecast to rise to 8.8 per cent in FY19.

Being a relatively new listed company there is not a great deal of price history to work with. At the time of the IPO there was some uncertainty, as a previous government spin-off, Mighty River Power, now known as Mercury (see below), quickly sank after listing.

What is immediately obvious on the chart is the distinct upward trend since the IPO. It did accelerate in a parabolic fashion in late 2014, creating a dip, but has now resumed at a more sustainable pace. Although record highs were recently touched, there may be scope for some consolidation, but the main driver was expected to be the FY17 results in late August.

Radge MEZ Chart
Source: Premium Data

4. Mercury
Mercury (name changed from Might River Power) was the first of three state-owned New Zealand power companies to be partly privatised. It is the second-largest generator with a market capitalisation of $4.4 billion. Its competitive advantage is its 100 per cent renewable generation and uniquely located operations in the North Island.

It also provides an end-to-end metering solution via its Metrix business, the second-largest data and services provider, with 473,000 meters owned or under management.

In its just-released FY17 results the company noted a 15 per cent increase in net profit on record hydro volumes and high wholesale electricity prices. The impressive financial results were also supported by strong portfolio and plant management, growth in its retail business through a focus on customer loyalty, and a solid contribution from the Metrix smart-metering business.

The company also announced a 2 per cent lift in its ordinary dividend, the ninth consecutive year of dividend growth, and a special dividend of 5.0 cents per share, fully imputed, to distribute excess free cash flow and proceeds from carbon sales. Analysts are sidelined, citing growth challenges going forward.

Again, we do not have a great deal of data to work with off the charts and the picture is very like Meridian. After listing, prices tracked sideways for several months before leaping 70 per cent and giving much of it back. Since then we have been seeing a more sustainable trend to the upside that is now testing the early 2015 highs. There is a minor upward channel in place, with prices tagging the upper boundary.

While I do not place too much emphasis on diagonal trend lines, the more important point is the confluence with record highs. As such we would expect some more consolidation at these levels, with possible weakness back toward $3.

But momentum is strong, fundamentals appears friendly and dividend growth remains supportive, so weakness should be met with buyer demand.

 Radge MCY Chart
Source: Premium Data

About the author

Nick Radge is Head of Trading & Research at He has more than 30 years of market experience and mentors students in trading system design and coding.

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