Origin valuation stirs investors’ quest for higher offer

However, sources close to Brookfield have picked holes in the “roll forward” calculations, and point out that the existing offer sits well within the core valuation range. They say the valuation includes the latest information on Origin’s performance and its outlook, including the marginal improvement conveyed by chief executive Frank Calabria at Wednesday’s annual shareholder meeting.

At that meeting, retail shareholders also largely voiced opposition to the deal, mostly due to concerns about selling the company into foreign ownership. The deal has yet to get clearance from the Foreign Investment Review Board.

Price gap

Origin’s traded share price already implies pressure on Brookfield and EIG – which plan to split Origin’s assets between them – to sweeten their offer despite the absence of a rival bidder. The bidders raised their offer twice last year before their approach was revealed to the market in November.

The price of Origin shares last week surged above the offer price for the first time after the merger received approval from the competition regulator, holding ground since.

Shares in Origin edged up as much as 5¢ to $9.26 before settling at $9.22, up 1¢.

In documentation released on Thursday, Origin chairman Scott Perkins noted the 40¢ gap between the traded price and the offer price, and cautioned that if the deal is voted down, Origin shares may drop.

But in his letter to shareholders, Mr Perkins also highlighted Grant Samuel’s “roll forward” valuation, which lifts the bottom end of the valuation range to $8.85 a share by December 18 – the implementation date – assuming a 10 per cent return on equity.

AusSuper last month increased its stake in Origin to 13.68 per cent, saying the share price was “substantially below” its long-term value estimate. Perpetual and Kingfisher Capital Partners have said the offer is too low given the improvement in the market outlook and other factors, including the rapid growth in Origin’s partly owned UK affiliate, Octopus Energy.

Macquarie Equities last month suggested the offer needed to be closer to $10 a share. It reiterated its view on Thursday that “a bump will be necessary to secure approval”.

The deal requires 75 per cent shareholder approval at a vote set for November 23.

AustralianSuper declined to comment on Thursday, but Kingfisher portfolio manager Ross Illingworth maintained his view that Origin is worth more than Brookfield and EIG are offering.

“I’ll be recommending the clients vote against it – I am very concerned that Brookfield and EIG are going to make a lot of money and we’re not,” said Mr Illingworth, whose firm represents self-managed super funds, investment companies, charities and high net worth individuals.

“Markets are dynamic and unfortunately for the offerer, the dynamics have changed rapidly over 11 months. We don’t want to transfer material and wholesale value across to an offerer on the cheap.”

Grant Samuel described the valuation of the major electricity and gas suppliers as “both challenging and subject to considerable uncertainty”, citing factors including the pace of the energy transition and the timing of coal plant closures.

It put a value of between $9 billion and $10 billion on Origin’s energy markets business, which includes power generation and energy retailing, with 3.5 million customer accounts.

Origin’s 27.5 per cent stake in the Australia Pacific LNG project in Queensland was valued at between $6.89 billion and $7.51 billion, or up to $33 billion for the whole APLNG venture including debt. It assumed a long-term oil price of $US60-$US65 a barrel.

The valuation for Origin’s 20 per cent stake in Octopus came in between $2.25 billion and $2.45 billion, based on an enterprise value of £5.7 billion ($10.9 billion) to £6.2 billion.

Investors and analysts have been keenly awaiting the valuation of Octopus, which has experienced significant growth in customer numbers and in its licensing business since Origin bought its interest in May 2020.

Grant Samuel noted “clearly a significant degree of upside potential” in Octopus, and that the future value of Origin’s stake could be substantially higher if growth projections are met. But it added it was important to recognise that its discounted cash flow valuation incorporates significant growth over the next few years, and that the business is “not without risk”.

Origin’s total equity value was put at between $14.6 billion and $16.4 billion, giving an enterprise value including debt of $18.12 billion to $19.91 billion.