Origin Energy’s conservative FY25 earnings guidance disappointed shareholders.

About Origin Energy Limited

Origin Energy Limited (Origin Energy, the Group, ASX: ORG) is an integrated energy business that listed on the ASX in 2000.  It operates Australia’s largest coal-fired power station and owns gas-powered electricity generation assets and is a major electricity and natural gas retailer.

Strong earnings result  

Origin Energy reported a strong FY24 earnings result with Statutory Profit of $1,397 million, 32 percent higher than the previous financial year at $1,055 million. The result is equivalent to Statutory earnings per share of 81.1 cents, compared to 61.3 cents in FY23. On a Core Underlying Profit basis, profit was $436 million higher at $1,183 million, which is equivalent to Underlying earnings per share of 68.7 cents.

A final dividend of 27.5 cents fully franked will be paid on 27 September. This amount compares to 20 cents in FY23 and takes the full year dividend to 55 cents per share, fully franked. This is significantly higher than the FY23 dividend of 36.5 cents fully franked.

Adjusted Free Cash Flow remains robust at $1,296 million, compared with $965 million in FY23. This strong cash generation supports Origin’s high dividend payout ratio of 73 percent of Adjusted Free Cash Flow and the Group’s strong balance sheet with gearing at 23 percent or 0.9 times Adjusted Underlying EBITDA. This is down from 1.2 times, as at 30 June 2023.  Adjusted Free Cash Flow is measured as Cash from Operating and Investing Activities, excluding major growth projects.

Origin is in a strong customer position with 4.6 million retail customer accounts, that includes small business customers. The Group gained 135,000 additional customer accounts in FY24.

Quality assets to drive long-term earnings growth

Australia has committed to increasing its renewable electricity generation to 82 percent by 2030.  The energy transition represents a significant growth opportunity for Origin in that its portfolio of businesses comprises a strong gas supply portfolio that includes a gas-fired peaking generation fleet, and an increasing renewable energy penetration in the energy system.

As more solar energy enters the energy system, the more the Australian electricity market experiences higher levels of intra-day peak demand and pricing volatility. In response to higher intra-day electricity demand, Origin’s flexible peaking generation fleet represents a growing source of earnings. Under these circumstances, Origin Energy is well positioned to capture increasing value for shareholders.

The recent takeover proposal by the Brookfield-led private equity consortium for all of Origin’s shares at $9.43 highlights this strategic position the company holds in Australia’s energy market. Origin Energy’s biggest shareholder, Australian Super, opposed the $20 billion takeover and offered to provide capital to help the country’s biggest electricity and gas supplier fund its transition to renewable energy. This institutional offer of support is a clear indication of the long-term strategic value of Origin’s high-quality energy assets.

Looking Ahead

Origin Energy’s FY25 guidance disappointed the market, after Origin highlighted the negative impact of higher coal costs and lower regulated tariffs reflecting lower wholesale costs and retail cost allowance. The shares were sold off on the back of this disappointing guidance.

However, these headwinds are temporary and short-term in nature. Discerning investors know that markets are forward looking, and value is not so much what the business is worth today, but how well positioned it is for the future.

Origin owns assets in renewables and battery storage systems as well as an energy supply from a diversified fleet of power generating assets that includes coal-fired and gas peaking power stations. These difficult to replicate assets are essential for delivering reliable energy through the transition to clean energy, making them more valuable in the decade ahead.

The Group also owns a highly profitable Australia Pacific LNG gas export business, in addition to its domestic energy markets business. It is likely that the private equity takeover consortium had in mind the splitting of these two businesses to quickly unlock latent value embedded in both businesses. This of course is an option that the incumbent Board may consider in the future.

Considering all the above circumstances and possibilities, Origin Energy shareholders are likely to derive economic upside from Australia’s transition from fossil fuel-based energy sources to renewable energy sources over the long-term.