Thursday, October 3, 2024

An overlooked cheap ASX stock to tap into the year’s hottest theme?

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AGL Energy Ltd (ASX: AGL) shares have been on a rollercoaster over the past year, trading 8.5% higher in 12 months despite the ups and downs. Since the start of 2024, the ASX energy share has risen 6%.

ASX investors now have some fairly obvious options for gaining exposure to artificial intelligence (AI), such as data centre operator NextDC Ltd (ASX: NXT). But could there be potential for the AI theme to indirectly boost AGL?

I believe a range of other businesses may benefit in the future from the growth of AI usage. Here’s why I think AGL is one of the ASX stocks that could ride the wave.

Energy demand to grow significantly

The significant growth of AI is likely to mean more energy-intensive data centres.

For example, Nextdc advised that in the 12 months to 31 December 2023, its contracted utilisation increased 64.8MW (or 77%) to 149MW. The company added that it had a record forward order book of 68.8MW, which it projects will convert into billings across FY25 to FY29.

Meanwhile, Yukio Kani, CEO of JERA, Japan’s largest power provider, recently described data centres as “very hungry caterpillars”, as reported in the Wall Street Journal.

And, according to reporting by the Australian Financial Review, data centres already use 5% of Australia’s electricity. Data centre capacity is expected to more than double in the rest of the decade, from 1,050MW to 2,500MW by 2030, translating to 13% growth per year.   

As AGL is one of Australia’s largest energy retailers and generators, I believe the ASX energy share is primed to benefit from the AI theme. Australia faces the challenge of decarbonising (and removing coal power generation), but at the same time, it could face sizeable increases in overall energy demand.

Australia’s growing population and a shift to electric vehicles may also increase the demand for energy. This could be another potential tailwind for AGL shares.

Why AGL looks like a cheap ASX stock

AGL has a development pipeline of 5.8GW, with plans for long-duration storage. Broker UBS has forecast AGL’s earnings per share (EPS) could be $1.24 in FY27. That suggests the AGL share price is currently trading at 8x FY27’s estimated earnings.

For a business that provides an essential service and can generate resilient earnings, I believe its forward price/earnings (P/E) ratio is low, particularly if data centre demand increases energy prices.

UBS predicts AGL EPS could rise another 6% to $1.32 in FY28, suggesting a promising long-term outlook for earnings growth.

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