Electricity Tariff System Finally Restructured
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
We believe that KEPCO’s earnings stability has been secured via the restructuring of the electricity tariff system, a change which has taken three years. Also, if the amendment to the Electricity Business Act is passed, KEPCO should have an opportunity to become a global offshore wind power player. The firm is currently undervalued versus global utility plays, which are trading at an average 2021F P/B of 1.5x.
Electricity tariff system finally restructured after three years
We maintain a Buy rating on KEPCO and raise our TP from W26,000 to W33,000 as we adjust our target P/B from 0.25x to 0.30x. We expect the firm’s valuations to climb on the restructuring of the electricity tariff system. Of note, our target P/B is similar to KOGAS’s average 2020 P/B.
In restructuring the tariff system, the government noted a need to: 1) reflect both the fuel cost adjustment tariff and environmental tariff in electricity rates; 2) reduce unnecessary electricity tariffs; and 3) create greater consumer awareness of the need to share of environmental costs. In the mid/long term, the adjustment to the tariff system should allow KEPCO to secure investment resources for new energy (wind power, ESS, and smart grid) projects. However, earnings generated through the new system will likely be insufficient to fully support mid/long-term investment in renewable energy.
Amendment to Electricity Business Act needs to be passed
An amendment to the Electricity Business Act, which was proposed by Democratic Party Rep Song Gap-seok and 10 others, is under review. The bill seeks to allow KEPCO to participate in large-scale renewable energy generation projects, such as offshore wind power. As was the case in the global nuclear power industry in the 1970s, KEPCO has an opportunity to become a global player in the offshore wind power market. We also note that the government is seeking to expand the nation’s renewable energy industry and create economies of scale in the hydrogen industry. Noting that NextEra Energy in the US and IberDrola in Spain (which lead the offshore wind power development industry) are trading at P/Bs of about 2.0x, we believe that KEPCO will enjoy a valuation re-rating if the amendment is passed. Of note, the firm is currently trading at a 2021F P/B of only 0.25x.