With international oil prices holding above $100 a barrel, Daishin Securities (003540.KS) has sharply lowered its target price for Korea Electric Power Corp. (KEPCO) on concerns over deteriorating earnings.
Daishin Securities said on the 20th that it cut its target price for KEPCO to 40,000 won from 54,000 won, a reduction of 25.9%. The brokerage maintained its "buy" rating. The revision reflects higher fuel costs from rising crude prices, weaker profitability following a cut in industrial electricity rates, and a lower valuation for the company's overseas nuclear plant construction business. Daishin noted that increases in international oil prices typically feed into liquefied natural gas (LNG) import prices with a lag of four to five months, meaning a prolonged period of high crude prices could further raise power generation fuel costs.
Daishin estimated that an overhaul of industrial electricity rates by season and time of day, implemented in April this year, will produce a rate cut of 0.8% to 0.9%, with an additional reduction of 5.5% to 5.9% expected from a regional industrial rate system set to take effect next year. While a regional wholesale pricing system could lower KEPCO's power purchase costs, wholesale selling prices at its generation subsidiaries would also decline, limiting cost savings on a consolidated basis. In addition, KEPCO will not take part in the AP1000 nuclear plant construction project in the United States, contrary to earlier expectations, prompting a downward revision to the value of that business.
The earnings outlook is also subdued. Daishin estimated KEPCO's third-quarter revenue at 26.957 trillion won, down 2.2% from a year earlier, with operating profit falling 45.3% to 3.094 trillion won. While operating profit is expected to beat the market consensus of about 2.36 trillion won, a steep year-on-year decline is unavoidable, the brokerage said.
Even with the nuclear plant utilization rate recovering to 80.1%, up 4.3 percentage points from a year earlier, higher fuel costs will constrain any earnings improvement, Daishin said. Third-quarter fuel costs are projected at 7.29 trillion won, up 32.5% from the same period last year, while the average electricity selling price is expected to fall 1.4%.
Still, the recent share price decline has largely eased valuation concerns, the brokerage said. "With the stock falling to 0.35 times its 12-month forward price-to-book ratio, most of the negative factors have been priced in," said Huh Min-ho, an analyst at Daishin Securities. "The precondition for a share price rally is a downward stabilization of oil prices and, through that, expectations of an earnings recovery from the third quarter of 2027."
