Even as third-quarter earnings are expected to beat expectations, KEPCO's target price cut 11%

[Financial News] Shinhan Investment Corp. lowered its target price for Korea Electric Power Corporation (KEPCO) by 11.1%, from 45,000 won to 40,000 won, even as it forecast that the company's third- and fourth-quarter operating profit would exceed market expectations. The assessment is that the energy cost burden could persist amid the prolonged U.S.-Iran war, while increased investment in the power grid could further delay an earnings recovery. The brokerage maintained its 'Buy' rating.
Han Seung-hun, an analyst at Shinhan Investment Corp., said on the 15th, "The prolonged U.S.-Iran war and expanded investment in the power grid are constraining improvements in medium- to long-term earnings and the financial structure," adding that "stabilizing energy prices and gaining visibility into an earnings recovery are key."
Shinhan Investment Corp. forecast KEPCO's third- and fourth-quarter consolidated revenue at 27.4518 trillion won and operating profit at 2.6067 trillion won. These figures represent year-on-year declines of 0.4% in revenue and 53.9% in operating profit. However, operating profit is expected to exceed the market estimate of 2.3638 trillion won by 10.3%.
One reason earnings are expected to beat market expectations is the limited rise in the system marginal price (SMP), or wholesale electricity price. SMP is the price KEPCO pays when purchasing electricity from power generators; the smaller the increase, the lower the burden of electricity purchase costs.
The average SMP in the third and fourth quarters is forecast to rise 14.4% year on year to 133.7 won per kilowatt-hour (kWh). This increase is modest compared with the 31.4% rise in liquefied natural gas (LNG) prices for power generation over the same period.
In particular, last September the LNG fuel cost per kWh rose 27.8% year on year to 153.1 won, while SMP increased just 5.4% to 119.0 won. The gap between the two price increases widened to 22.4 percentage points.
The analyst explained, "The expanded exclusion of LNG generators from price-setting due to transmission constraints is thought to have had some effect," adding, "If the limited increase in SMP continues, there may be room to raise earnings estimates."
The view, however, is that attention should be paid to a medium- to long-term slowdown in profitability rather than short-term earnings improvement. Shinhan expects high energy prices to persist amid the prolonged U.S.-Iran war, keeping generation costs elevated. It also sees the expansion of large-scale power grid investment as potentially constraining improvements in the financial structure.
Accordingly, Shinhan lowered its operating profit forecast for this year by 1.3% to 7.5591 trillion won. It sharply cut its forecast for next year by 47.2%, from 7.7607 trillion won to 4.099 trillion won. Compared with last year's operating profit of 13.4906 trillion won, this represents declines of 44.0% this year and 45.8% next year.
Reflecting earnings uncertainty, it also lowered its target price-to-book ratio (PBR) from 0.55x to 0.48x.
The analyst explained, "The burden of rising energy prices is expected to persist, delaying the timing of an earnings recovery," adding, "We lowered our target PBR to reflect increased earnings uncertainty."
[email protected] Bae Hangeul Reporter