10 consecutive halves of customer growth as the Origin story rolls on

Origin Energy (ASX: ORG) has emerged as one of the more interesting names this reporting season. Stronger retail earnings, upgraded guidance and a rising share price suggest the market liked what it saw, even as LNG earnings softened and Octopus remains in investment mode.

But is this just a solid half, or the start of something bigger, driven by data centre demand and rising power prices?

Ray David of Airlie Funds Management joined me to break down what mattered in the result, why he thinks the medium-term outlook is compelling, and what could derail the story.

The stock opened 4.34% higher to $11.55 and is currently trading at $11.59 at the time of writing.

Key Numbers

• Underlying EBITDA of $1,589m (3.1% beat).
• Energy Markets EBITDA of $860m vs $805m ests (7% beat), up from $738m HY25, supported by stronger electricity gross profit and operating leverage.
• Integrated Gas EBITDA of $798m vs $817m ests (2% miss), down from $1,038m HY25, reflecting lower realised LNG prices and weaker trading.
• Octopus EBITDA loss of $89m vs $24m loss HY25, as investment in UK smart tariffs, regulatory costs and international expansion weighed on earnings.
• Underlying profit of $593m vs $551.3m ests (7.5% beat).
• Interim dividend of 30cps vs. 30 cps ests (in-line).

Origin also tightened its guidance for the full year.

• Energy Markets Underlying EBITDA guidance $1,550–1,750m vs previous guidance of $1,400–1,700m (13% upgrade at the midpoint).
• Australia Pacific LNG production 645–680 PJ (APLNG 100%).
• Total Origin capital expenditure $900–1,100m vs previous guidance of $800–1,100m, primarily reflecting extension of Eraring Battery 2.

Do you currently hold Origin Energy and what is your rating?

No, Airlie Funds don’t currently hold Origin Energy, but it’s one of the companies that’s on our list where if it was ever sold off for whatever reason, we would be looking at it pretty closely.

Rating wise, the way we work is we don’t have ratings, we have valuations. When stocks go below that valuation, we can make a case for it and look at adding it to the portfolio. If it’s above the valuation, then we won’t own it.

We quite like the industry and we quite like Origin in particular. It’s a concentrated industry structure. There’s a strong demand story, particularly with the data centre build. 

We think Origin is well placed because they've also got the best of breed software or customer management systems with their investment in Kraken. The multiples are not high, and we have a long-term view that energy prices will continue to rise.

Even though we don’t own it, I would consider it a BUY.

What matters from the results?

The key standouts were energy retail. It was another result of positive customer growth. 

It’s the 10th consecutive half of customer growth, which is a pretty outstanding result in a mature and competitive market.

Energy Markets guidance got upgraded. That was a function of increased wholesale energy prices, which operate with a bit of a lag. Their cost-to-serve program is delivering benefits to shareholders as well as clients through productivity benefits. They benefited from lower costs and higher prices.

Cashflow was really strong. Energy generation is capital-intensive and energy retail can be quite volatile, so cashflow can move around. But this result you did see a pretty material step up in free cashflow generation. Both operating cashflow was up and capital expenditure was down.

Kraken, which is a smaller part of the valuation, announced that they are now in 14 million households in the UK, which is effectively almost half the market. 

Again, outstanding result, basically a good example of disruptive technology coming in and winning a lot of share.

How do those outcomes affect the outlook?

The medium term is very positive for energy generation. 

You are seeing strong demand for power, largely due to data centre investments. 

At the same time, you're not seeing a significant amount of capital coming into the sector to add new generational capacity. Any capital that's coming in is largely going to be replacement capital for coal-fired plants. 

You can see a scenario where energy prices continue to increase in the medium term due to growth in data centre demand. 

For Origin in particular, their investment in Octopus and Kraken means they do have the best-of-breed software technology to serve their customers. They have announced the target of $100-150 million of cost out over the short to medium term.

Their access to that software will mean they are quite well positioned to lower their costs and continue to improve cost-to-serve, which is positive for margins.

What should investors be paying attention to as the story unfolds?

I think the biggest upside driver for energy is the data centre story. There are significant amounts of capital being put in. It is probably the biggest demand shock to the energy market since the advent of aluminium smelters. 

We haven't had this much demand creation for energy, and that's something to keep watching. 

Electricity prices are going to go up, which is negative for the consumer, but these energy retailers and generation businesses have fixed cost businesses. So, they should benefit from high wholesale pricing.

Another source of upside is that it's hard to see the government forcing energy generation assets to wind down, even if it's coal. About half of Origin's baseload capacity is coal and the biggest plant is Eraring. It is forecast to shut down in 2029, which would impact earnings. But in that scenario, it's politically unpalatable to have that much energy generation come out of the market and cause a spike in energy prices.

So I think Eraring will be open for much longer than what the market's expecting and that should be supportive for earnings.

What could you be wrong about?

The biggest risk to this sector is government intervention and government enforcing lower electricity prices. 

You can do that by looking at where you can take profits out of the supply chain. If you think about where the profits are, there are three parts. There's energy generation, which is Origin. There's transmission, which is privatised assets - the poles and wires. Then there's the retail, and that's again, Origin. 

Governments trying to impute lower prices is a risk to the sector. You have seen it in the past where governments have set maximum tariffs, which has caused earnings headwinds. 

I think that's a real risk and it's always difficult to forecast. So that's something to be wary of. Rising electricity prices are negative for the consumer and negative for politicians.

The way to get those costs down is to hit the energy retailers.

What do you think was a standout or key chart from the results presentation? 

The single chart I like the most is the customer growth chart.

It’s a very mature market. If we look at other sectors like insurance or banking, customer growth is quite anaemic. 

Energy retail is competitive and it’s a mature industry, but Origin is growing in that market. It looks like Origin is taking share in a competitive market.

Origin also highlighted the amount of AI customer interactions in the business. They have implemented AI to help customer service and the amount of human interaction has halved.

Normally when someone does it, like the banks, it’s a disaster. But customer churn rates have been pretty stable over the same period and the customer base is growing. It tells you they’ve had a good experience implementing AI, and customer service levels are being maintained or improved, which is rare in real-world AI applications.