Reform of Electricity Tariff System Expected
The authors are analysts of Shinhan Investment Corp. They can be reached at yjjung86@shinhan.com and ik.jung@shinhan.com, respectively. -- Ed.
3Q20 OP of KRW2.3tr (+88.2% YoY) falls short of consensus
KEPCO posted operating profit of KRW2.3tr (+88.2% YoY) on sales of KRW15.7tr (-1.3% YoY) for 3Q20, missing the market consensus (KRW2.5tr) by 7.4%. Standalone operating profit came in at KRW1.6tr (+138.5% YoY).
Electricity sales volume stood at 131,778GWh (-1.8% YoY), with weak sales seen across the board excluding electricity for residential use. It was the sharp drop in fuel costs to KRW4tr (-18.4% YoY) that drove earnings improvement. The portion of nuclear power generation increased (+1.3%p YoY), while that of coal-fired generation declined significantly. The rising portion of LNG power generation was offset by lower input costs. Power purchase costs amounted to KRW3.9tr (-9.6% YoY), declining at a slower rate than fuel costs. We believe the portion of power purchases rose due to shrinking coal-fired generation.
Reform of electricity tariff system expected amid lower input costs
For 4Q20, we forecast KEPCO to report operating profit of KRW578.9bn (positive swing YoY) on sales of KRW15.1tr (+1.6% YoY). The effects of lower input costs will continue to be felt with the average oil price (WTI) estimated at USD44/bbl. The sharp KRW appreciation seen since end-3Q20 is also positive. We assumed the average USD/KRW exchange rate to fall KRW49 QoQ. While costs remain favorable overall, we conservatively estimated nuclear power capacity utilization for 4Q20 to reflect the uncertainty of when the Sinhanul #1 reactor will go into operation and maintenance works at several reactors scheduled at the year-end.
Expectations for reform of the electricity tariff system should emerge as the key share price trigger at the year’s end. The announcements of the 9th Basic Plan for Electricity Supply and Demand and the mid/long-term policy recommendations by the National Council on Climate and Air Quality are coming up. The future direction of electricity tariffs should be confirmed within the year.
Retain BUY for a target price of KRW25,000
We retain our BUY rating on KEPCO for a target price of KRW25,000. We applied a target PBR of 0.23x, the lowest valuation of the past ten years, to2021F BPS. Amid growing expectations for dividend payout, KEPCO shares should easily recover to the lower end of the historical PBR band. The expected reform of the electricity tariff system should provide an added boost.