The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. -- Ed.
If the average Dubai crude price remains at US$30/bbl until end-1H21, KEPCO’s OP should recover to W3.7tn in 2020 and W7.4tn in 2021. Since power generation costs have declined following the recent oil price plunge, we judge that now is the time to adopt a cost-reflective electricity tariff system.
il price plunge led to earnings surprise in 2015 -- will the same thing happen in 2020?
At end-2014, KEPCO had a chance to adopt a cost-reflective electricity tariff system thanks to an oil price plunge, but chose not to reform its tariff system. Instead, the firm’s earnings improved drastically thanks to fuel cost reductions. With oil prices having plunged again in 2020, we judge that now is an opportune time to adopt a cost-reflective electricity tariff system. Other countries have adopted the system when they were able to reduce tariffs thanks to cost savings.
We expect KEPCO to bear combined 2020 environmental costs of at least W2.6tn, including W0.9tn in emission trading scheme (ETS) costs and W1.7tn in renewable portfolio standard (RPS) costs. With the auction share for ETS allowances set to climb from 3% to 10% in 2021 and the RPS ratio to drastically rise from 2024, KEPCO’s environmental costs are expected to increase W0.7tn pa through 2024. As the firm is unlikely to be able to cover the cost hike under normal operating activities, rate reformation, including the introduction of a cost-reflective system, will be required.
Oil price plunge to ease Covid-19-related woes
Although we adhere to a Buy rating on KEPCO, we lower our TP from W32,000 to W26,000 as we adjust our target P/B from 0.30x to 0.25x, due to: 1) possible short-term electricity rate discounts due to Covid-19; and 2) decreasing demand in the mid/long term. However, if the average Dubai crude price remains at US$30/bbl until end-1H21, KEPCO’s OP should recover to W3.7tn in 2020 and W7.4tn in 2021. For reference, the firm’s costs increase W200.0bn when oil prices rise US$1/bbl or the dollar/won rate climbs US$/W10.
We expect KEPCO to book 1Q20 consolidated sales of W14.5tn (-5% y-y) and OP of W0.7tn (TTP y-y), with OP beating consensus. Of note, our nuclear power plant and coal power plant utilization rate forecasts for 1Q20 are 76% and 63%, respectively. The shares are currently trading at a P/B of 0.17x based on end-2019 BPS.
NH Investment & Securities