Further Growth Difficult due to Business Structure
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
Regardless of Covid-19, KEPCO KPS’s domestic business remains stable thanks to the nature of power plant maintenance. However, overseas business operations are inevitably facing difficulties. While our TP equates to a 2020E P/E of 10.0x, due to muted prospects for growth, valuation upside potential is limited, in our view.
Further growth to be difficult due to business structure
While adhering to a Hold rating on KEPCO KPS, we lower our TP from W37,000 to W33,000. Due to Covid-19, our estimates for dividend payout ratio and EPS are downwardly adjusted by 45% and 4%, respectively. For reference, our TP was derived using the dividend discount model (DDM), assuming a discount rate of 5.8% (risk-free rate of 1.5%, market risk premium of 6.0%, and market beta of 0.7) and perpetual growth rate of 1%.
Despite delays in maintenance at some sites due to Covid-19, related effects have remained minimal. Owing to the nature of domestic power plant maintenance, planned work largely has to remain on schedule. While KEPCO KPS does possess growth potential in light of prospects for overseas business expansion, such growth looks challenging given current circumstances.
Based on planned maintenance projects, the firm’s 2020 earnings should remain stable. However, additional costs (incentive payments) will likely be incurred if KEPCO KPS receives a grade of C or higher in the management evaluation scheduled for June. The company’s shares are trading at a 2020E P/E of 9.3x, with 2020E DY sized at 4.8%.
1Q20 review: Nuclear and coal power earnings shine
On a consolidated basis, KEPCO KPS logged 1Q20 sales of W251.1bn (+3.3% y-y) and OP of W27.1bn (+49.4% y-y), with OP slightly exceeding our estimate. Thermal and nuclear power-related sales came to W92.7bn (-0.2% y-y) and W74.2bn (-3.1% y-y), respectively. At the thermal power business, earnings improved on ordinary maintenance at Yeosu and Jeju plants and an expansion of maintenance for Hanul #2 and Gori #1. However, due to Covid-19, planned maintenance for some thermal power plants has been delayed to 2H20.
On a consolidated basis, we estimate the company’s 2Q20 sales at W321.9bn (-1.9% y-y) and OP at W51.3bn (-7.1% y-y). Given the number of eco-friendly facilities and private power generation projects, thermal power-related earnings should come in similar y-y. As for the nuclear arm, however, given that a number of maintenance projects have already been completed, y-y earnings decline looks inevitable.