Earnings expected to beat forecasts, yet target price cut 11%—why Korea Electric Power?

[Financial News] Hana Securities lowered its target price for Korea Electric Power by 11.1%, from 45,000 won to 40,000 won, even as it forecast that the company’s third-quarter results would exceed market expectations. The firm said that although power purchasing costs are falling in the short term, rising fuel prices and changes to the electricity tariff system could weaken profitability over the medium to long term. It maintained its “Buy” recommendation.
Yoo Jae-seon, an analyst at Hana Securities, said on the 12th, “The decline in the system marginal price (SMP), which has continued since September 9, may leave room for short-term earnings to improve.” He added, “Despite the decline in the exchange rate, bituminous coal and liquefied natural gas (LNG) prices remain strong, increasing long-term cost pressures.”
Hana Securities forecast third-quarter revenue of 27.5664 trillion won and operating profit of 3.0812 trillion won for Korea Electric Power. Revenue is expected to be slightly lower than a year earlier, while operating profit is projected to decline 45.5%. Even so, operating profit is expected to exceed market forecasts.
Fuel costs and power purchasing costs are projected to rise 30.4% and 7.8%, respectively, from a year earlier, to 7.1757 trillion won and 9.9689 trillion won. The increase reflects higher generation costs due to rising bituminous coal and LNG prices. Hana Securities also forecast that lower industrial electricity demand and a decline in the average selling price would weigh on revenue.
However, the recent decline in SMP is helping to ease some of the cost burden. September’s SMP rose just 5.4% from a year earlier to 119.02 won per kilowatt-hour (kWh). The increase was limited compared with the 31.4% rise in the LNG fuel cost per unit over the same period.
Yoo said, “Even taking into account that this is the off-season, the situation is unusual and is thought to stem from a problem with the power grid.” He added, “With SMP remaining low in October as well, there could be more room for earnings to improve in the fourth quarter.”
The concern is what happens if SMP returns to normal. Mainland SMP has remained around 110 won per kWh on weekdays in October, but Yoo forecast that it would rise to 150 won or more after normalizing. In that case, he said, power purchasing costs would rise again, making a move into an operating loss in the fourth quarter likely.
Changes to the electricity tariff system expected from next year are also a concern. Hana Securities expects industrial electricity rates to be lowered when a regionally differentiated tariff system takes effect in 2027. Its analysis said that revenue from electricity sales would decline, while opportunities to cut costs by introducing regional SMP or reducing sales by private power generators would be limited.
Yoo said, “A medium- to long-term decline in earnings is unavoidable due to lower industrial electricity rates under the regionally differentiated tariff system and the impact of regulation.” 

[email protected] Bae Hangeul Reporter