KEPCO KPS
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com -- Ed.
KEPCO KPS’s 1Q23 OP likely beat consensus, driven by deferred sales and labor cost savings. At a time when Korea and the US are forecast to strengthen nuclear cooperation and Eastern Europe and the Middle East are expanding their NPP plans, KEPCO KPS’s valuation merit shines. The firm’s shares are trading at a 2023E P/E of only 13x.
Nuclear play with attractive valuations
We reiterate a Buy rating on KEPCO KPS, and a TP of W50,000. Main contracts for Shin Hanul #3 and #4 were signed in March, a main contract for a Polish nuclear power plant (NPP) is set to be inked in July, and bidding results for the Czech Republic’s NPP are slated to be announced in December. The results of biddings for UK and UAE NPPs (in which KEPCO and KHNP are participating) and Saudi Arabia and Kazakhstan NPPs (in which Korea is in competition with Russia, China, and France) are likely to be released at undisclosed times this year. We note that nuclear players with lofty valuations, such as KEPCO E&C and Doosan Enerbility, are likely to experience high share-price volatility.
Thanks to its stable earnings and valuation merit, KEPCO KPS is unlikely to see any dramatic share-price correction, even if no nuclear-related news flow or events emerge over the near term. Having hovered around 4.2x before the previous administration began its nuclear phase-out policy, the company’s P/B has fallen to an average of 1.5x over the last five years. Its shares are now trading at a historical low of P/B of 1.3x.
OP to be affected by management evaluation rating
On a consolidated basis, KEPCO KPS’s 1Q23 sales are projected at W334.8bn (+11% y-y) and OP at W56.9bn (+153% y-y), exceeding consensus. Such a rosy outlook stems from: 1) deferred sales of around W30bn for the thermal power and power transmission & distribution businesses; 2) the inclusion of sales from POSCO Gwangyang; and 3) labor cost savings of roughly W15bn. At the nuclear business, while earnings were likely lackluster in 1Q23, owing to delays in preventive maintenance work, top-line growth is forecast this year, backed by sales from new NPPs.
KEPCO KPS should report 2023 sales of W1.4tn (+0% y-y) and OP of W160.2bn (+23% y-y), driven by increasing maintenance work and labor cost reduction. That said, OP may decrease by over W20bn, depending on a management evaluation rating in July. However, even in such a case, there should be no drastic change in valuation (P/E of 13.0x → P/E of 14.7x).