2021 Earnings Improvement Difficult
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
We expect KEPCO KPS’s 2020 DPS to fall to W1,500 (-22% y-y), as an improved management evaluation grade (announced in 1H20) is likely to lead to labor cost hikes. Of note, we estimate the company’s 2020 dividend payout ratio at 51% and dividend yield at 5.2%.
Shares continue to trade in 5% dividend yield range
We adhere to a Hold rating and TP of W33,000 on KEPCO KPS. In the power plant maintenance market, labor costs and plans to add/close power plants and increase/decrease manpower are important. The nuclear/thermal power plant maintenance market, in which KEPCO KPS has a competitive edge, is shrinking due to the nuclear and coal-free policies of the current government. Although plans to expand LNG power plants are being established to offset the decline in nuclear and coal power plant capacity over the mid/long term, LNG maintenance costs are relative low, and it is difficult to compete with boiler/ turbine makers.
Also negative are increases in manpower and labor costs (due to the conversion of non-regular workers to regular workers and improved management evaluation grades) and competition with private maintenance firms. We believe that limited earnings growth due to a lack of mid/long-term growth strategies makes valuation re-rating difficult. However, the stock price continues to trade in a 4~5% dividend yield range. DPS in 2020 is estimated at W1,500 (-22% y-y), and dividend yield based on the current share price is placed at 5.2%. Of note, our TP is equivalent to a dividend yield of 4.6%.
2021 earnings improvement difficult
In 2021, sales at the thermal power and nuclear power division should reach W905.4bn (+1% y-y) on new maintenance volume. External and overseas sales will likely amount to W315.7bn (+11% y-y), reflecting the commencement of commercial operations at private power generation companies and UAE BNPP. However, low domestic sales for renewable energy, which is the center of the incumbent government’s energy policy, and weak overseas orders, which are sluggish due to Covid-19 and low oil prices, are limiting top-line growth.
In addition, as the firm’s management evaluation grade was raised from ‘D’ to ‘B’ in 1H20, its labor costs are expected to grow. This cost is likely to be recognized in stages through 1H21, so an increase in costs appears inevitable. Due to limited top-line growth and increased costs, we forecast 2021 OP of W174.8bn (+6% y-y) and a DPS of W1,614 (+7% y-y).