Positioned Well to Benefit from Growing Need to Tackle Air Pollution Issue

KEPCO Engineering & Construction’s (KEPCO E&C) shares are jumping in wake of its earnings surprise in the second quarter this year. Its sales growth, however, will likely be limited although the firm’s operating profit should steadily improve going forward, according to NH Investment & Securities (NHIS).

The securities company expect a share of the firm to peak under 36,000 won. As further good news will likely be needed for additional share price momentum, it will be important to get potential new orders, NHIS added. .

While maintaining a Hold rating on KEPCO E&C, NHIS rose its target price from 32,000 won to 36,000 won (equivalent to a 2016E P/E of 20.0x). Responding to its recent posting (on July 27) of the quarterly earnings surprise, KEPCO E&C’s shares jumped 20%. NHIS expects the firm’s operating margin to improve further thanks to the completion of low-margin EPC projects and its remaining high-margin engineering projects.

Although NHIS predicts that KEPCO E&C’s operating profit will steadily improve down the road, it adheres to a Hold rating for now due to uncertain prospects in the global nuclear market. For the domestic nuclear energy market, an opinion more open to nuclear energy is likely to grow with the government ceasing operations of KEPCO’s old coal-powered thermal power plants as part of measures to deal with the chronic air pollution problem related to the abundance of fine dust particles in the air. However, there are still some opinions that are negative about the recently-approved ShinGori plants 5 and 6. Against this backdrop, it is unlikely that KEPCO E&C will see new nuclear power-related new orders in 2016 in the domestic market. Turning to the overseas market, an ongoing fierce competition for new orders is presenting a concern to KEPKO E&C while the interest in nuclear energy has risen since the signing of the “Paris Agreement,”

Weighing the above-listed factors, NHIS expects KEPCO E&C’s shares to peak just under NHIS’ new target price of 36,000 won. Of note, boasting of technologies related to desulfurization and denitrification facilities, the company is well positioned to benefit from the growing need to tackle the current air pollution issue. Other future growth drivers include the winning of new orders for both nuclear projects in the UAE and system-integrated modular advanced reactors (SMART reactors).