KEPCO
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com -- Ed.
A domestic electricity rate hike that had been expected to be implemented from 2Q23 has been temporarily postponed. We now expect 2024 OP to be limited to W1.6tn (versus our Mar 29 report estimate of W7.2tn). Although it will not be easy to achieve any further electricity rate increase in 2H23, we point out that funding issues are expected to resurface as there is no room for the bond issuance limit due to a decrease in equity.
Operating losses unavoidable
Although sticking to a Buy rating, we lower our TP on KEPCO by 27% to W22,000 (from W30,000). We maintain a Buy rating as: 1) a recent decision to temporarily postpone an electricity rate hike (that had been expected to be implemented from 2Q23) does not mean that electricity rate expansion will be halted over the mid/long term; and 2) prices for major raw materials are rapidly declining. That said, we point out that electricity rate hikes remain the only fundamental solution to KEPCO’s funding problems. The main reasons for our TP cut are: 1) a change in our 2023 operating losses projection to W12.6tn (versus our previous estimate of operating losses of W8.6tn) and a 12% cut in 2023E BPS to W43,270 (from W48,956); and 2) a likely weakening in mid/long-term earnings momentum, leading us to reduce our target P/B multiple to 0.5x (from 0.6x).
There are two opportunities left in 2023 to discuss pushing up the electricity rate, one to come at end-June and the other at end-September. However, as confirmed in the recent hike delay decision, the most important factor in current electricity rate increase decision making is the burden of the public. As the burden related to summer and winter electricity rates will be maximized, hikes in the remaining quarters will not be easy to achieve.
Funding issues likely to resurface
KEPCO’s bond issuance limit (non-consolidated basis) is estimated to decrease from W132tn in 2022 to W90tn in 2023. Of note, in 2022, the total amount of corporate bonds (non-consolidated basis) was W77tn, with W40tn issued last year alone. Of note, 2022 net losses amounted to W24tn. Considering that the firm is expected to post net losses of W7tn in 2023 (non-consolidated basis), funding issues related to additional issuing of corporate bonds look likely to resurface as a problem.