Fundamental Analysis of AGL Energy and Origin Energy in the Energy Industry of Australia

Principles of Financial Management
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Executive Summary
The report has carried out fundamental analysis for the two ASX listed companies within
Australia for identifying the macro and micro factors that can impact their performances in the
future context. The companies selected for the purpose are AGL Energy and Origin Energy
operating within the energy industry of Australia. The top-down analysis has gain an analysis
into the impact of the macro-economic factors on the future performances of the two companies.
In this context, the factors analyzed are specifically interest rate, inflation rate, business cycle of
economy and GDP growth rate. The bottom-up analysis has examined the micro economic
factors impacting their performances. This has been done by carrying out financial ratio analysis
to gain an examination of the current and future performances of these companies.
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Introduction
It is very essential for the investors to gain an analysis of the macro and micro economic
factor that can impact the performance of an entity. In this context, fundamental analysis is a
technique used by the investors for identifying the factors that may cause directional changes in
the value of a company and its share prices. It adopts the use of both top-down and bottom-up
analysis for developing an insight into the macro and micro factors that may impact the
performance of an entity. Top-down analysis is usually carried out by initially examining the
macro-economic factors and then conducting a more specific sector analysis. On the other hand,
bottom-up analysis emphasizes on evaluation of the key performance indicators of a firm such as
its financial performance. The report has carried out an evaluation of the two ASX listed firms
for carrying out fundamental analysis with the use of both top-down and bottom-up analysis for
evaluation of their current and future growth prospects on the behalf of the investors. The
companies selected for the purpose are Origin Energy and AGL Energy Limited operating in the
energy industry of Australia.
Top-down Analysis
Top-down analysis of the selected companies is conducted by evaluation of the overall
economic environment of Australia. This will help in forecasting the changes in the economic
fundamentals and their impact on the selected company’s performance operating in the energy
industry of Australia. The analysis is carried out by an evaluation of the following macro-
economic factors of Australia as follows:
Interest & Inflation Rate
The interest rate within Australia is maintained at very low level by the Reserve Bank of
Australia (RBA) at 1.5 per cent since the year 2016. This has been done by the RBA for
promoting the economic growth within the country that has been struggling since the past few
years. This has promoted RBA to curb the interest rates at low level to foster development in the
economy of the country. The low interest rate will help in reducing the level of inflation and
decreasing the rate of unemployment. RBA has even gain success in restoring the economic
growth by reducing the rate of interest by having a control over the level of inflation. The central
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bank of the country is still emphasizing to maintain the interest rates at very low level for
promoting wage growth. The wage growth within the country is still maintained at 2 per cent that
is same as the rate of inflation. As such, the RBA is maintaining the interest rates at low level
because an increase in the interest rate with lower growth of wages could negatively impact the
economic growth by raising debt level within the country (Murphy, 2018).
(Source: https://tradingeconomics.com/australia/interest-rate)
Current Value of $AUD
The value of Australian dollar (AUD) is subjected to fluctuation in relation to the other
currencies across the world. Its current value is recognized to be 75 US cents by the end of the
year 2018 and is expected to further decline and reach 77 US cents by the end of the year 2019.
The major reason for the decline in the value of AUD can be regarded as the increasing gap
between the interest rates of the US and Australia (Reserve Bank Of Australia, 2018). Also, the
movement in its value is fluctuated by the downward pressure resulting from the global growth
forecast of the country. The increased volatility in the Aussie market is causing a relative fall in
the value of Australian dollar as it is losing value in relation to the value of foreign currencies
that have more financial stability. Moreover, its value fluctuates largely because the variability in
the prices of commodities. Australia is a major exporter of natural resources and thereby the
decrease in the price of commodities such as iron ore and coal have caused the relative decline in
the prices of Australian dollar. This has caused a reduction in the demand of the currency and a
significant decline in its value in the recent years (What makes the Australian dollar move,
2018).
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