ORG: Energy Giant - Peak Margins or Permanent Platform?
ORG: Energy Giant - Peak Margins or Permanent Platform?
In a Nutshell
Executive Summary
In a Nutshell
Origin Energy is Australia's largest energy retailer with 4.8 million accounts across electricity and gas, plus a 27.5% stake in the APLNG liquefied natural gas export project and a 22.7% stake in UK digital energy platform Octopus Energy. At A$11.84 versus fair value A$7.58, the stock is overvalued by 53%. The market appears to price full structural persistence of peak Energy Markets margins and Octopus at private valuation—assumptions we view as optimistic given wholesale electricity normalisation and widening Octopus losses.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★★★★☆ | Fully franked dividend of A$0.60 (5.2% yield at current price, 7.9% at fair value) is well-covered at 87% payout ratio. APLNG distributions of ~A$750 million annually fund dividends without equity dilution, providing income stability through the energy transition. Conservative balance sheet (2.0× leverage) and 33% covenant headroom support dividend sustainability even in downturn scenarios. |
| Value | ★☆☆☆☆ | Trading at 8.0× EV/EBITDA versus peer median 7.3×, a 14% premium justified by operational excellence but excessive at 53% above assessed fair value. No margin of safety at current price—even the base case (60% probability) sits 30% below market. Stock becomes attractive below A$8.50 where base case provides protection and yield exceeds 7% fully franked. |
| Growth | ★★☆☆☆ | Revenue flat to declining (FY26-28: -0.5% CAGR) as wholesale electricity normalises. EPS declining 8-9% annually as Energy Markets margins revert from cyclical peaks. Growth story is structural transformation (coal to batteries) rather than earnings expansion—battery portfolio targeting 3-4 GW by 2029 creates new revenue streams but won't offset baseload coal retirement. |
| Quality | ★★★☆☆ | Business quality score 6.95/10 (highest among Australian integrated utilities) driven by operational excellence (industry-lowest 14.7% churn rate) and Kraken digital platform delivering A$150 million permanent cost savings. ROIC of 12.5% exceeds WACC of 8.0% by 450 basis points, confirming value creation, though compressing toward 150 basis points terminal. Narrow moat lasting 5-7 years faces test post-2029 Eraring coal closure. |
| Thematic | ★★★★☆ | Pure-play exposure to Australia's energy transition with A$2 billion battery buildout (1.74 GW committed, largest in National Electricity Market). First-mover advantage in firming services as coal retires and renewable intermittency increases firming premiums. Kraken/Octopus stake provides exposure to global energy digitalisation (90 million contracted accounts) at discounted valuation. |
Best fit: Income investors seeking fully franked exposure to energy transition. The APLNG cash engine provides dividend stability (A$750 million annual distributions) while the business transforms from coal to batteries. The 5.2% fully franked yield (7.9% at fair value) is sustainable even through earnings normalisation, with conservative leverage providing downside protection. Suitable for patient capital with 2-3 year horizon.
Executive Summary
Origin Energy makes money from three distinct businesses. Energy Markets sells electricity and gas to 4.8 million Australian households and businesses, generating ~A$1,650 million in annual earnings. Integrated Gas comprises a 27.5% stake in APLNG, a Queensland coal seam gas to LNG export project, distributing ~A$750 million annually to Origin. Octopus Energy is a 22.7% stake in the UK digital energy platform valued at A$2.1 billion (25% discount to private market valuation).
Recent performance shows Energy Markets at cyclical peak margins—the December 2025 half delivered A$878 million EBITDA, up from A$652 million prior corresponding period, driven by tariff lag (retail prices rising faster than wholesale costs) and Kraken platform cost savings of A$150 million. Customer accounts grew 96,000 to 4.8 million with industry-lowest churn of 14.7%. APLNG distributions remained strong at A$378 million. Octopus losses widened to A$89 million from A$24 million as non-UK expansion burns cash.
The investment case centres on whether Energy Markets margins are structural or cyclical. Management credits Kraken automation (30% retail staff reduction, measurable cost savings). We assess 55% structural, 45% cyclical—wholesale electricity normalisation will partially reverse tariff lag gains. APLNG provides transition funding. Octopus separation in mid-2026 could crystallise A$1.1 billion carrying value gap. At A$11.84 versus fair value A$7.58, the stock is overvalued by 53%.
Results & Outlook
What happened? The December 2025 half-year result showed Energy Markets EBITDA surging 35% to A$878 million as tariff lag (retail prices rising faster than wholesale electricity costs) combined with Kraken platform cost reductions. Customer growth of 96,000 accounts extended a multi-year winning streak with churn of 14.7% sitting 7.7 percentage points below the market average. APLNG contributed A$378 million in distributions with 96% of FY26 volumes already priced. The disappointment was Octopus, where Origin's share of EBITDA losses widened to A$89 million as the UK platform's international expansion consumed cash.
| Metric | FY24 | FY25E | FY26E |
|---|---|---|---|
| Revenue (A$M) | 16,500 | 16,200 | 15,600 |
| EBITDA (A$M) | 3,500 | 3,200 | 3,100 |
| EPS (A$) | 0.76 | 0.72 | 0.69 |
| Free Cash Flow/Share (A$) | 0.67 | 0.74 | 0.75 |
| Customer Accounts (M) | 4.6 | 4.7 | 4.8 |
| Churn Rate (%) | 15.5 | 14.7 | 14.0 |
What's next? Energy Markets margins will compress as wholesale electricity normalises—30 gigawatts of renewable capacity entering the National Electricity Market over three years signals tariff lag reversal by FY28. We model EBITDA declining from A$1,650 million (FY26) to A$1,350 million terminal, reflecting 55% structural cost savings, 45% cyclical reversal. APLNG distributions moderate to A$700-750 million as field decline offsets higher oil prices. The key catalyst is Kraken/Octopus separation scheduled for mid-2026, which could crystallise the A$1.1 billion gap between carrying value (A$1.0 billion) and our assessed value (A$2.1 billion). Battery portfolio expands from 1.74 gigawatts to 3-4 gigawatts by 2029, creating firming revenue as Eraring coal plant closes in 2029.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$7.58 |
| Current Price | A$11.84 |
| Upside/Downside | -36% |
| Base Case (60% prob) | A$8.24 |
| Bear Case (30% prob) | A$5.00 |
What could go wrong? The single biggest risk is correlated energy deflation—wholesale electricity, oil prices, and the Australian dollar moving together in a global risk-off event. This cluster (18% probability) would compress Energy Markets EBITDA to A$1,200 million AND APLNG distributions to A$500 million simultaneously, delivering -A$3.00 per share impact. The trigger would be sustained wholesale electricity below A$65 per megawatt-hour combined with oil falling to US$55 and the Australian dollar strengthening to US$0.74. Unlike independent risks that can be hedged separately, this macro regime hits all three business pillars at once. Our bear case (30% probability) values the stock at A$5.00, implying 58% downside from current levels. The market appears to price zero probability of margin normalisation—a view we consider optimistic given 30 gigawatts of renewable supply entering the National Electricity Market and tariff lag mechanics that reverse as quickly as they appeared.