KEPCO
The author is an analysts of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com -- Ed.
The government is expected to announce an electricity rate hike on Mar 31. If the rate is raised by more than W10/kWh, the difference between the electricity rate and raw material costs will expand, leading to full-fledged profit recovery from 2H23. If the rate is raised less than that, additional hikes will be needed in 2H23.
Increase of W10/kWh or more needed
We maintain a Buy rating and TP of W30,000 on KEPCO, as the government appears committed to raising energy rates. If the government raises the rate by more than W10/kWh on Mar 31, it would fit our ‘ideal’ scenario for 2023 electricity rate hikes (W25/kWh). In addition, earnings should recover in earnest from 2H23, as the gap between selling prices and raw material costs has widened following the recent drop in coal and natural gas prices. If the price hike on Mar 31 is less than W5/kWh, however, additional hikes will be needed in 2H23, which could weaken short-term share price momentum. Accordingly, our TP is subject to revision, depending on the Mar 31 rate decision. Our current TP is equivalent to a P/B of 0.6x based on 4Q23 BPS.
In the case that the electricity rate remains frozen, rate hikes could be discussed again in July and October. However, we note that as July is peak summer season, consumers would be burdened by a rate hike at that time. Also, external uncertainties could make a hike difficult in October. If the government fails to increase rates, KEPCO is likely to report an operating loss of W12.6tn in 2023 and operating profit of W2.0tn in 2024, increasing the burden on the firm’s financial structure.
W10/kWh electricity rate hike would result in 2024 NP of W3.3tn
Even assuming no additional hikes after a W10/kWh increase in 2Q23, 2024 OP is estimated at W7.6tn and NP at W3.3tn. However, as such profit levels should still be insufficient to improve the company’s financial structure, further hikes would still be necessary. Assumptions for our 2023 estimates include a dollar/won rate of US$/W1,300, NewCastle coal price of US$100/ton, WTI price of US$70/bbl, and Northeast Asia natural gas price of US$20/MMBtu.