AGL May Provide Lower Returns, Goldman JBWere Says

By Angela Macdonald-Smith

Sept. 4 (Bloomberg) -- AGL Energy Ltd., Australia's biggest power and gas retailer, will probably yield lower-than-average returns to shareholders in the next 12 months as interest rates drop and retail margins decline, Goldman Sachs JBWere Pty said.

AGL fell the most in more than 10 months in Sydney trading after Goldman Sachs JBWere said the utility may provide a total return to shareholders of 1 percent in the next year, compared with 23 percent for the broader Australian market. The Melbourne-based securities firm cut its recommendation on the stock to ``sell'' from ``hold'' in a Sept. 3 report.

The Reserve Bank of Australia on Sept. 2 pared the benchmark interest rate to 7 percent from 7.25 percent and Macquarie Group Ltd. said there may be two further cuts this year. Some investors turn to utilities like Sydney-based AGL as they seek so-called defensive stocks providing stable returns as economies slow, offering more attractive yields than cash and bonds.

``We struggle to see AGL keeping pace with the market,'' analysts Kynwynn Strong and Roy Gilmore said in the report. ``With the RBA moving to an easing bias and medium-term risks around inflation diminishing in our view, we see support for defensive stocks declining.''

AGL dropped A$1.15, or 7.4 percent, to A$14.40. The benchmark utilities index fell 3.9 percent.

AGL's share valuation ``looks expensive,'' Goldman Sachs JBWere said. The stock is trading above its long-term price-to- earnings ratio and at a 28 percent premium to the broader market, it said.

JPMorgan Chase & Co. cut its recommendation on AGL to ``neutral'' from ``overweight.'' The stock has yielded a total return to shareholders of 28.6 percent over the past three months compared with a decline of 6.6 percent for the broader market, JPMorgan said in a separate Sept. 3 report.

AGL trades at a price-earnings ratio of 18.3 times, while the expected sale of the company's petroleum interests in Papua New Guinea has the potential to disappoint investors should the price be less than the range of between A$800 million ($668 million) and A$1.1 billion expected by the market, JPMorgan said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net