Is Origin Energy Limited (ASX:ORG) Trading at a 49% Discount?

Investors often seek undervalued opportunities, and Origin Energy Limited (ASX:ORG) has sparked debate over whether its shares are trading at a 49% discount to intrinsic value. This analysis examines the company’s valuation metrics, recent performance, and risks to determine if the discount claim holds water.

Valuation Metrics: Is the Discount Real?

The 49% discount claim stems from Snowflake Score’s valuation analysis, which estimates Origin Energy is trading at 49.3% below its intrinsic value of AU$13.80 per share. As of early May . 2025, the stock price stood at AU$10.86, implying an undervaluation of 21% compared to this intrinsic value. However, other metrics paint a nuanced picture:

• Book Value vs. Market Price:
  Origin’s book value per share is AU$6.03, while its market price is AU$10.86, reflecting a 79.9% premium to book value. This premium is supported by a Price-to-Book (P/B) ratio of 1.80, above the sector average.

• Analyst Consensus:
  Analysts estimate a worst-case intrinsic value of AU$9.10 and a best-case of AU$16.82, with consensus favoring the stock as undervalued. A Snowflake Valuation Score of 5/6 reinforces this view.

Recent Financial Performance: Mixed Signals

Origin’s March 2025 quarterly results reveal both strengths and challenges:

1. Integrated Gas Division:

2. Australia Pacific LNG (APLNG) revenue fell 11% to AU$2.4 billion due to lower LNG volumes and prices. However, production remains in line with FY25 guidance, and FY26 dividends are expected to stay fully franked.

3. Renewables and Retail Growth:

4. Octopus Energy added 674,000 net customer accounts in the quarter, with the Kraken platform nearing its 67 million contracted accounts target (100 million by 2027).

5. The Yanco Delta Wind Farm secured 1.5 GW of transmission rights, advancing its AU$1.7 billion development.

6. Financial Health:

7. A debt-to-equity ratio of 35.1% and interest coverage ratio of 6.49 highlight manageable leverage. However, free cash flow turned negative (AU$-16 million) due to capital expenditures.

Key Risks to Consider

• LNG Volatility: Lower LNG prices and production dips (e.g., from Tropical Cyclone Alfred) could pressure earnings.
• CapEx Pressure: AU$1.7 billion committed to battery projects (e.g., Eraring) may delay ROI and compress margins.
• Dividend Sustainability: A 5.5% dividend yield is supported by earnings but faces risks from declining free cash flow.

Analyst and Market Sentiment

• Growth Outlook: Analysts project EPS to decline 9.6% annually over three years, citing transition costs and LNG headwinds.
• Snowflake Score: A 0/6 rating for Future Growth underscores concerns about margin compression from renewables investments.

Conclusion: The Discount Debate

Origin Energy’s 21% discount to its AU$13.80 intrinsic value (and 49% below some analyst estimates) makes it an intriguing value play. However, the claim hinges on assumptions about future growth in renewables and Octopus Energy’s scalability.

Key Data Points:
- Current Price: AU$10.86 (May 2, 2025).
- Intrinsic Value (Base Case): AU$13.80.
- Book Value: AU$6.03 (premium of 80%).
- Analyst Consensus: Undervalued by 20–25%, but growth risks are significant.

Investors should weigh the 25% potential upside to intrinsic value against execution risks in renewables and LNG’s volatility. While the stock appears undervalued on paper, its success hinges on delivering on projects like Yanco Delta and maintaining margins amid capital spending. For a value-oriented investor, Origin Energy offers compelling long-term potential, but short-term volatility and dividend risks require caution.

In summary, Origin Energy’s 49% discount claim is overstated when considering its book value, but its undervaluation relative to intrinsic value and growth catalysts position it as a high-risk, high-reward opportunity for investors with a strategic eye on Australia’s energy transition.