Market cap

KEPCO: the value of KHNP alone justifies the market capitalization




The author is an analyst at NH Investment & Securities. He can be contacted at minjae.lee@nhqv.com. — Ed.

Estimated at a minimum of 10 tn W, the fair value of KHNP (100% subsidiary of KEPCO) alone explains the market capitalization of KEPCO. With large nuclear power plant exports taking off, KHNP’s value is only expected to increase further. Household electricity rate hikes are also helping to normalize KEPCO’s earnings.

KHNP rated at W10tn minimum

We maintain a buy rating and a 30,000W TP on KEPCO. Exports of large nuclear power plants (NPP) are taking off, led by KEPCO and Korea Hydro & Nuclear Power (KHNP), and KEPCO’s financial structure should normalize thanks to sustained increases in electricity tariffs. KEPCO owns a 100% stake (240 million shrs) in KHNP, and its current share price does not reflect this value.

We recognize that it is difficult to accurately measure KHNP’s fair value given: 1) high earnings volatility due to the month-to-month settlement adjustment factor; and 2) ongoing government regulatory risks. However, assuming a settlement adjustment factor at 90% of KHNP’s average electricity sales price over the last five years and also applying a 40% discount to the 2019~2021 EV/EBITDA multiple of EDF (France) considering the regulatory risk, our SOTP assessment gives us an EV of W10tn for KHNP. Based on KHNP’s 2Q22 capital of W25tn, fair EV equates to a P/B of 0.37x. In our view, KHNP’s fair value will easily exceed W10tn once nuclear plant exports take off in earnest and regulatory reforms stabilize the settlement adjustment coefficient.

The electricity price has increased

In 2022, the government made significant increases in electricity tariffs for all types of electricity supply (from 18 W/kWh to a minimum and 28/kWh to a maximum), despite the anticipated impacts on the inflation. It should be noted that the government’s approval of rate hikes in 2H22, when the impacts of rising oil prices are expected to be seriously reflected in Korean inflation, suggests a shift in the government’s stance towards the financial giant. ‘electricity. In the past, governments tended to cap utility prices at the first sign of rising inflation fears.

KEPCO’s unconsolidated debt to equity ratio hit a new high of 225% at the end of 2Q22. Given the likely increase in natural gas and coal import prices next year (1H), KEPCO is expected to continue to incur operating losses in 2023. While the 2022 rate hikes will only probably not much to eliminate KEPCO’s operating losses, without these increases KEPCO’s operating losses could be w7tn greater.

Nonetheless, we maintain KEPCO as the top pick in the utilities sector, noting that a combination of electricity rate hikes and lower commodity prices next year could see a dramatic improvement in earnings from the 1S23. KEPCO desperately needs a turn to black.