Australian ASX AGL Energy

Hi, from time to time, I share news of stocks that I'm watching or holding, it seems to be the original objectives of this sub. Here goes:

Position:

1. Started Feb2022 @ AVG $6.90
2. Currently @ AVG $7.11 (Yes my first average up)
3. I have limit orders (Good Till 26th Aug) for $7.95, $7.85, $7.75, $7.65, $7.55, $7.45, $7.35, $7.25, $7.15, $7.05 and a larger order @ $6.95. So far I have caught as low as $7.75.
4. Admittedly I lost a bit of patience after waiting 6 months for its price to drop below my AVG. This could be my downfall here, we'll see.

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AGL Energy is Australia's largest electricity generator and largest carbon emitter. As such, it becomes a target of take-over (possibly for privatisation) by Brookfield Asset Management (owned by Aussie billionaire Mike Cannon-Brookes of Atlassian tech company), so that Mike can accelerate the closure of AGL's coal plants (and save the earth).

Brookes (I use Brookes interchangeably for the asset company and Mike since they're operating with the same goal) offered $7.50 (traded $7.15) in Feb, got rejected, offered $8.25 two weeks later (traded $7.40), got rejected again. AGL had a plan to split into retail and wholesale, and the plan was already well on the way, then Brookes acquired about 15% of shares, threatening to vote against the split (which required 75% shareholder approval). So in May, the split was cancelled before the vote, causing AGL both chairman and CEO to resign. The stock has since been trading around $8.50 (until today….).

Today's annual report showed a profit of $225M vs $537M last year (~60% drop, due to power plant outage and lower wholesale price), it also wrote off $125million due to the failed split. Dividend drops from 34cents a year ago to 10cents (~70% drop).

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Why am I increasing my position?

[1] Morningstar's FairValue is $13.30, my target is always -40% of this FV, which is $7.98, so anything below is a green light for me. Why am I trusting Morningstar instead of doing my own technical analysis and DD?

1. I believe Morningstar has more smarter people and better data than me. Who am I to think I can do a better DD than a company with more brighter people and better access to data?
2. That said, I take Morningstar's FV with a grain of salt, and the grain is 40% discount off its FV.

[2] If the loss of profit is mostly due to outage and hedged wholesale prices, I believe these will pass. The extended outage is due to lack of specialised parts (maybe some screws or washers from China). The outage is estimated to cost $60M profit, I find it hard to believe they'll let this outage continue for too long now that the cost-and-benefit is out in the open. If these specialised parts cannot be produced @ $1M, how about giving some factories $10M to produce them by yesterday, no? How about $20M? I believe nothing cannot be solved at the right price. Additionally with reduced energy output from the outage (25% of its generation capacity), wholesale price will only go up, even though it's currently suppressed by government pressure.

[3] I'm sure Brookes has an axe to grind with his country's largest polluter and his action has caused and will continue to cause harm and loss of value to the company. As a billionaire, I think he's egoistic and but as an Aussie, I believe he will show some restraints (unlike Musk) and want to emerge as a hero. It's likely that he will eventually take control of the company (his networth is $15B vs AGL's $5B), and once it is under his control, he has no option but to turn it into a clean energy producer (to prove his intention and maintain his clean image). He has offered $8.25 before, so his valuation of the company is definitely higher than $8.25 (he didn't become a billionaire by overpaying things). So in long term he's going to turn the company into something that is suitable for future generations and it seems he has the will and means to do that.

[4] Lastly and sadly, I believe our reliance on dirty energy is something that is hard to shake off. If we look at Europe's energy crisis, once Russia turns off the tap, the priority and narrative immediately shift from “turning green” to “producing enough to survive”. So in short term, our insatiable appetite for energy (due to heatwave, industrial growth etc) is going to keep producers like AGL afloat for a long while.

Appreciate any comments, and please do your own DD if you want to get in, I'm in the different position with lower AVG and have already received one round of dividend. I waited until the market is closed to post this, so that you won't FOMO and have the whole weekend to digest and decide. Thanks!