KEPCO Plant Service & Engineering
The author is an analyst of Shinhan Securities. He can be reached at krpark@shinhan.com -- Ed.
1Q23 OP to beat consensus at KRW60.5bn (+169% YoY)
KEPCO Plant Service & Engineering is expected to have registered sales of KRW342.2bn (+12.9% YoY) and operating profit of KRW60.5bn (+169.0% YoY) in 1Q23, exceeding market expectations for KRW326.6bn and KRW43.3bn, respectively. Strong earnings growth appears to have been driven by thermal power plant works. Revenue from thermal plant operations likely reached KRW116.6bn, vs. our previous forecast of KRW90bn, due to a large portion of planned overhauls deferred from 2022 to 2023. It is projected to continue growing to KRW155.3bn (+5.3% YoY) in 2Q23.
On the other hand, revenue from nuclear and pumped storage hydroelectric power plants should have declined 3.1% YoY to KRW105.5bn because of a temporary decline in overhaul orders. Sales from domestic independent power producers (IPPs) likely surged 253.5% YoY to KRW41.4bn thanks to the retrofit of POSCO’s second power generation facility in Gwangyang. Overseas sales are estimated to have dipped 14.9% YoY to KRW53.4bn on completion of low-margin projects ahead of schedule.
The cost-saving effect of efficient workforce management last year, which resulted in lower labor cost compared to the previous years, is forecast to continue into this year. Operating margin should have improved to 17.7% (+10.3%p YoY, +5.6%p QoQ) in 1Q23.
2023 OP forecast at KRW151.2bn (+15.8% YoY)
We forecast sales at KRW1.5tr (+5.2% YoY) and operating profit at KRW151.2bn (+15.8% YoY) for 2023, with growth driven by thermal power plant works in 1H and nuclear/hydroelectric power plant works in 2H. Revenue from nuclear plant works should rise 4.8% YoY to KRW541.5bn on commercial operation of Sinhanul #1 reactor in 4Q22 and #2 reactor in 2H23, and continue on an uptrend with the ramp-up of Singori #5-6 reactors from 2024 onwards.
Retain BUY and raise target price to KRW48,000
We retain BUY on KEPCO Plant Service & Engineering and raise our target price from KRW46,000 to KRW48,000, based on the upward revision of our earnings forecasts. Despite share price gains of 15.7% over the past six months, the stock is trading low at a PER of 14x and a PBR of 1.3x. We expect to see a rise in valuation multiples on increasing earnings momentum in 1H23 and the booking of sales from wind power engineering, procurement and construction (EPC) contracts in 2H23.