You are required to analyse AGL energy and prepare an investment recommendation report. The report provides an assessment of the company's current position and future prospects, incorporating the use of various valuation techniques to arrive at estimates of the intrinsic value of the company's shares.

Your report should make a case for the company's shares to be rated in one of the following ways:

Sell	Hold	Buy
The shares should be sold, as a materially negative return is anticipated in the next six to 12 months.	The shares will have neither a materially positive return nor a materially negative return in the next six to 12 months.	The shares should be bought, as a materially positive return is expected in the next six to 12 months.

Company Analysis

Provide an overview of the company's history, operations and any structural changes it has undergone since it began. This is to understand how the company got to where it is today and what may occur in the future.

Also, discuss the ESG factors relevant for the company, including analysis of the company's contribution to the conservation of the natural world, consideration of people and relationships and standards for running a company.

Industry Analysis

Analyse the structure of the industry in which the firm operates and whether it is domesticfocussed or has a global nature. Identify the industry's major companies and where they operate and how they compete with AGL.

Evaluate the relative historical financial performance of the company among its peers

identify the firm's major competitors and discuss why they have been selected

identify, and explain the relevance of, five financial ratios of your choice (not to include ROE, Net Profit Margin, Total Asset Turnover or Financial Leverage) for the company and its peers over a historical period of five financial years.

explain the performance of the company compared to its peers using this analysis

analyse and explain the reasons for changes in these ratios over the past five years and compared to the average of the past five years

do not simply describe the changes in the ratios

Estimate the ROE of the company and three major competitors for the most recent five years using the DuPont ROE approach.

DuPont Analysis should be done using the 3-step procedure

3 steps: Net Profit Margin, Total Asset Turnover and Financial Leverage

analyse the company's and your selected peer companies' ROEs over the period

show your own calculations for each component over the previous five years for the company and its three selected competitors

compare the DuPont ROE of the company with its three peer group companies

analyse and comment on the reasons for the change in ROE for the firm and its competitors with reference to the difference in the three components over five years

relevant charts/graphs should be used to illustrate these figures

Analyse the company's/industry's current issues and explain the effect of these issues on the company's future earnings

At the Macroeconomic Level

general factors that apply for the industry (GDP, employment, growth of the industry, regulation, global factors, supply, demand, prices of inputs and outputs, etc.)

At the Microeconomic Level

the company- and industry-specific factors (operation, financials, objectives, competition, etc.)

As a SWOT analysis

detail the Strengths, Weaknesses, Opportunities and Threats to the company

As either a PESTEL or a Porter analysis

analyse the company's position in its industry using one of these techniques

Intrinsic Value Estimation

Start your valuation analysis with the estimation of expected return using CAPM.

You need 3 inputs to calculate the CAPM expected return.

An Estimate of the company's Beta

Use the daily closing price data for the company and the market index to calculate daily holding period yields for the most recent five years. Using this data, you can estimate raw beta by using regression analysis in Excel. Attach details of your work as an Appendix.

Adjust the Raw Beta using the formula: Adjusted Beta = (0.67) x Raw Beta + 0.33

The Risk-Free Rate of Return

Use the 10-year Australian Government bond yield as a proxy for the risk free rate. This yield can be found in Workspace AU10YT=RR. Take the current bid Yield (do not use the bond price)

The Market Return

Use this estimate of the market return: 7% (source: CommSec)

The CAPM required return should be used as the discount rate in your valuation models

Estimate the intrinsic value of the company's shares using the dividend discount model (DDM)

you must use a 3 Stage DDM. Follow the methodology discussed in the Equity Valuation slides

justify the number of years used for each of your growth periods

determine the growth rate for Period 1 using the Retention Ratio and ROE formula

estimate the growth rate for Period 2 using your discussion in the company's/industry current issue section

estimate the terminal (Period 3) growth rate using a proxy that represents the longterm growth rate and calculate the terminal value

calculate the present value of each future dividend and the terminal value, then add them to calculate the intrinsic value of the company

provide justification and reasoning if you use a different growth rate than the one calculated for Period 1

provide justification and reasoning for your growth rate assumptions for growth in Period 2 and Period 3

Estimate the intrinsic value of the company's shares using the Free Cash Flow to Equity (FCFE) model

you must use a 3 stage FCFE model to calculate the intrinsic value of the stock

source the components for FCFE from the company's financial statements using Eikon

calculate the FCFE per share over the past six years. The average growth in FCFE per share will be the growth rate for Period 1

Formula - FCFE = Net Income + (Depreciation Expense Capital Expenditures) - D in Working Capital - Principal Debt Repayments + New Debt Issues

estimate the growth of FCFE for Period 2 using your macro and microanalysis

estimate the terminal (Period 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value

calculate the present value of each future year's FCFE to calculate present value, then add them to calculate the intrinsic value of the company

provide justification and reasoning if you use a different growth rate than the one calculated for Period 1

provide justification and reasoning for your growth rate assumptions for growth in Period 2 and Period 3

Are your estimated growth rates same as that used for your DDM model or different? Why?

Apply Relative Valuation techniques to ascertain the valuation of the firm

compare multiples such as Price-to-Book, Price-to-Earnings and Price-to-Cash Flow or Price-to-Sales for the company and its peers

determine the relative valuation of the firm using these multiples (do not attempt to calculate the share price)

analyse and comment on the relative valuation of the firm in comparison to its peers

is it overvalued or undervalued using this methodology?

Using relevant charts, evaluate the company's share price performance over the last five years

compare the relative performance of the company to the S&P/ASX 200 Index

compare the relative performance of the company to its peer group

comment on these charts, referencing reasons for any significant changes you have identified

common-based charts from Workspace give the best view of these relationships

Perform a technical analysis of share price movements over the last five years

use 50-day vs 200-day moving average lines and volume analysis to identify Buy/Sell/Hold signals

show, and comment on, these analyses with reference to charts sourced from Workspace

use volume analysis to confirm your price signals

draw support and resistance lines to indicate price trends and channels

Evaluate your findings

Why do the intrinsic values you have calculated differ from the current/recent share price?

How does this difference inform your investment recommendation?

What is your investment decision based on your evaluation?

Is your recommendation to Buy, Sell or Hold shares in this company?

Is it different from the signal obtained from the technical analysis? Why?

Does your qualitative analysis agree with your quantitative analysis? If not, why not?