Business Strategy & Outlook:
AGL is one of Australia’s largest integrated energy companies. This has a narrow economic moat, underpinned by its low-cost generation fleet, concentrated markets, and cost-advantages from vertical integration. Earnings are dominated by energy generation (wholesale markets), with energy retailing about half the size. Strategy is heavily influenced by government energy policy, such as the renewable energy target. AGL has proposed a structural separation into two businesses; a multi-product energy retailer focusing on carbon neutrality and an electricity generator that will own AGL’s large fleet of coal fired power stations among other assets. It is expected to complete in mid-2022.

AGL’s consumer market division services over 4 million electricity and gas customers in the eastern and southern Australian states, representing roughly a third of available customers. Retail electricity consumption has barely increased since 2008, reflecting the maturity of the Australian retail energy market and declining electricity consumption from the grid. Despite deregulation and increased competition, the market is still dominated by AGL Energy, Origin Energy, and Energy Australia, which collectively control three fourths of the retail market. AGL’s wholesale markets division generates, procures, and manages risk for the energy requirements of its retail business. The acquisition of Loy Yang A and Macquarie Generation means electricity production significantly outweighs consumption by its retail customers. Exposure to energy-price risks are mitigated by vertical integration, peaking generation plants and hedging. More than 85% of AGL’s electricity output is from coal-fired power stations. AGL Energy has the largest privately owned generation portfolio in the National Electricity Market, or NEM.

Financial Strengths:
AGL Energy is in reasonable financial health though banks are increasingly reluctant to lend to coal power stations. From 1.4 times in 2020, the forecasted net debt/EBITDA rises to 2.1 times in fiscal 2022. Funds from operations interest cover was comfortable at 12.8 times in fiscal 2021, comfortably above the 2.5 times covenant limit. AGL Energy aims to maintain an investment-grade credit rating. To bolster the balance sheet amid falling earnings and one-off demerger costs, the dividend reinvestment plan will be underwritten until mid-2022. Dividend payout ratio is 75% of EPS.

Bulls Say:
As AGL Energy is a provider of an essential product, earnings should prove somewhat defensive.
Its balance sheet is in relatively good shape, positioning it well to cope with industry headwinds.
Longer term, its low-cost coal-fired electricity generation fleet is likely to benefit from rising wholesale electricity prices.

Company Description:
AGL Energy is one of Australia’s largest retailers of electricity and gas. It services 3.7 million retail electricity and gas accounts in the eastern and southern Australian states, or about one third of the market. Profit is dominated by energy generation, underpinned by its low-cost coal-fired generation fleet. Founded in 1837, it is the oldest company on the ASX. Generation capacity comprises a portfolio of peaking, intermediate, and base-load electricity generation plants, with a combined capacity of 10,500 megawatts.

(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

Kilroy Realty is a REIT that owns, develops, acquires, and manages premier office, life science, and mixed-use real estate properties in Los Angeles, San Diego, San Francisco Bay Area, Seattle, and Austin. It owns over 115 properties consisting of approximately 15 million square feet. The company has positioned itself to benefit from the burgeoning life sciences sector with material exposure in its current portfolio and future development pipeline. The management’s focus on ESG as it aligns its office portfolio to meet the sustainability requirements of its clients. Kilroy’s management has been able to successfully time the boom in technological employment occurring in the largest metropolitan areas along the West Coast. The company’s strategy is to achieve long-term sustainable growth by developing and owning the highest quality real estate in technology and life science market clusters. The quality of their portfolio is evident from the fact that its average age is just 11 years compared with 30 years for peers.

The economic uncertainty emanating from pandemic recovery and the remote work dynamic have together created a challenging environment for office owners. Employees are still hesitant at returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rates in Los Angeles and San Francisco office markets were recorded at 20.8% and 21.9% respectively in Q1 2022. The current vacancy rate in both these cities is substantially higher than the vacancy rates during the height of the global financial crisis. The net absorption rate in West Coast markets remains negative to marginally positive as of Q1 2022 and rental growth figures are disappointing especially given the inflationary environment. Having said this, it is an increasing number of companies requiring their employees to return to the office. In the long run, that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

Kilroy Realty is in sound financial health. The company’s total debt was $4.1 billion as of the end of the first quarter in 2022, resulting in a debt/EBITDA ratio of 6.6 times. It is like to point out that the debt/EBITDA ratio should trend lower over the next few years as fundamentals recover and EBITDA sees healthy growth. The weighted average interest rate on the company’s debt was 3.70% and the weighted average maturity period was 7.0 years. The maturity schedule of the company’s debt shows that there are no major debt maturities until the end of 2024 and the maturities are adequately spread. The fact is that in an increasing interest rate environment 100% of the company’s debt is fixed-rate debt. The leverage used by the company to fund its capital structure is appropriate given the high-quality office portfolio. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest expenses), was 3.5 times and the interest coverage ratio was 8.4 times as of the end of the first quarter of 2022. As a real estate investment trust, Kilroy Realty is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 67.0% for the year 2021. This shows that the company is generating sufficient cash to cover its fixed expenses and payout dividends. The company is also in a comfortable position with respect to liquidity as it has a robust liquidity position of around $1.4 billion including the cash on the balance sheet and the revolving credit facility. This gives the firm enough flexibility to fund its operations, pay dividends, pursue inorganic growth, and invest in organic development opportunities.

Bulls Say

Kilroy’s focus on technology and life science market clusters should benefit the firm in the long run as the buoyant growth in these areas. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend.

Kilroy’s management team has demonstrated that it is able to successfully recycle capital and pursue growth over the past business cycle.

Regulatory barriers to construction in West Coast cities such as Los Angeles and San Francisco mean Kilroy will continue to benefit from muted supply.

Company Description

Kilroy Realty is a premier owner and landlord of approximately 15 million square feet of office space across Los Angeles, San Diego, the San Francisco Bay Area, and greater Seattle. The company operates as a real estate investment trust.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.