[Click eStock] "Korea Electric Power, Earnings Expected to Decline Due to Raw Material Price Increase... Target Price Down"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained a buy rating on Korea Electric Power Corporation (KEPCO) on the 22nd and set a target price of 35,000 KRW, down 10% from the previous target.

Yoo Jae-sun, a researcher at Hana Financial Investment, explained, "Last year's performance improved significantly compared to the previous year due to a decline in raw material prices, but this year, the trend is expected to move in the opposite direction," adding, "Considering the decrease in the fuel cost adjustment unit price, the spread is expected to narrow rapidly from the second quarter."

In the fourth quarter of last year, KEPCO recorded sales of 14.7 trillion KRW, a 1.7% decrease compared to the previous year. Residential sales increased by 8.1%, and the decrease in sales adjustment items was reduced. Operating profit turned positive compared to the previous year, recording 933.7 billion KRW. Most of the greenhouse gas emission rights costs were recognized in the fourth quarter, and the reduction in coal power generation last year led to a decrease in other expenses. The utilization rate of power plants was 79.6% in the nuclear sector, up 20 percentage points from the previous year, while coal dropped 17.9 percentage points to 72.8%. The System Marginal Price (SMP) also fell to 55.8 KRW per kWh, reducing both fuel and purchased power costs.

The impact of rising raw material prices is expected to be reflected from the second quarter. While the profit growth trend is expected to continue until the first quarter, the second quarter is anticipated to re-enter a profit decline phase due to an expanded drop in sales prices and rising costs. Costs in the second half of the year are also expected to be significantly affected by the raw material price increases in the first half, leading to a larger decrease in profits. Considering the ongoing raw material price increases due to recent inflation concerns, a conservative approach toward KEPCO is expected to be necessary.

Researcher Yoo Jae-sun stated, "If the fuel cost adjustment unit price is raised in mid-September, doubts about the implementation of the cost-linkage system may be resolved," adding, "The potential realization of legislation allowing combined operations of power generation, transmission and distribution, and retail will act as a positive event for KEPCO."