Forecast to Log 1H22 Operating Loss of KRW9.0tn
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
KEPCO is forecast to log a 1H22 operating loss of W9.0tn. On a consolidated basis, debt-to-equity ratio will likely climb to 250% by end-2022. In our view, the firm looks to be at bottom in terms of financial structure. However, a turn to profit is possible from 2H22 if the company takes advantage of electricity rate hike momentum. Considering the mid/long-term expansion trajectory for renewable energy, a careful approach is necessary regarding KEPCO.
Focus on timing of start to KEPCO’s mid/long-term investment
We maintain a Buy rating and TP of W33,000 on KEPCO. Regardless of uncertainties towards the Mar 20 Korean presidential election and the firm’s large-scale deficits, over the mid/long term, changes in the electricity power market can only be driven by KEPCO, as investments related to carbon neutrality (eg, offshore wind power and nuclear power) entail both generating economies of scale and security issues. We advise focusing on KEPCO’s mid/long-term direction rather its near-term losses.
On Jan 13, presidential candidate Yoon Seok-yeol (People Power Party) pledged to abolish the government’s planned electricity rate hikes scheduled for Apr 2022. Saying that ‘electricity rates should be decided based on science and common sense, not political purposes’, Candidate Yoon emphasized that ‘we will establish a power supply plan based on fairness and common sense’. Considering the structural deficits faced by KEPCO and the domestic electricity supply landscape, this remark appears significant from a mid/long-term perspective regarding both electricity rate hikes and nuclear power.
4Q21 preview: To post largest recorded operating loss
KEPCO should post consolidated 4Q21 sales of W15.1tn (+2.3% y-y) and an operating loss of W2.6tn (TTL y-y), meeting consensus. For 4Q21, applicable raw material prices include a WTI price of US$71/bbl (+75% y-y) and Newcastle coal price of US$146/ton (+181% y-y), which represent burdensome levels for both fuel and electricity purchase. For reference, KEPCO’s nuclear power plant utilization rate and coal power plant utilization rate are calculated at 85% (+2%p y-y) and 52% (-2%p y-y), respectively, for the quarter.
For 1H22, we estimate a WTI price of US$78/bbl (+70% y-y) and Newcastle coal price of US$181/ton (+159% y-y). However, if electricity rates are hiked as planned by W6.9/kWh and W4.9/kWh in April and October, respectively, KEPCO should turn to profit from 2H22.