[Click eStock] "Korea Electric Power, Concerns Over Earnings Deterioration Due to Coal Price Increase Despite Electricity Rate Hike"

[Asia Economy Reporter Song Hwajeong] Although electricity rates have increased for the first time in 8 years, there are concerns that Korea Electric Power Corporation's (KEPCO) performance may worsen due to rising coal prices.

According to Meritz Securities on the 24th, KEPCO decided to raise the fuel cost adjustment unit price applied in the fourth quarter of this year by 3.0 won per kilowatt-hour (kWh) from the previous quarter to 0.0 won per kWh, and as a result, operating profit in the fourth quarter is expected to improve by about 360 billion won. Mungyeongwon, a researcher at Meritz Securities, explained, "The existing forecast (operating profit of -1.3 trillion won this year) already assumes more than 3 won per kWh in the fourth quarter, so there will be no impact on the forecast," adding, "Considering the rise in raw material prices, it is highly likely that electricity rates will continue to increase over the next two quarters."

There were four fuel cost adjustments this year: one increase, one decrease, and two holds. Researcher Moon said, "This electricity rate increase is significant as it is the first increase in 8 years and the first since the implementation of the fuel cost linkage system," but added, "However, it is difficult to see the significance of a single increase when the system's credibility has been damaged by two previous holds." He further stated, "To partially restore trust in profit visibility, it is necessary to confirm that two increases in the first and second quarters of next year are carried out normally until the upper limit of the fuel cost adjustment unit price (5 won per kWh) is reached."

Although electricity rates have increased, there are concerns about performance deterioration due to rising coal prices. Coal prices have nearly doubled over the past three months due to supply disruptions in Australia and increased demand from China. Researcher Moon analyzed, "This is a cost increase factor for KEPCO, whose coal power generation ratio was 41% as of the first half of this year," adding, "Despite the electricity rate increase, KEPCO's 12-month forward profit forecast is likely to decline."

There is an opinion that the trigger for a future stock price rebound can be found in nuclear-related events. Researcher Moon said, "Compared to other related stocks, benefits from export business are limited, so whether nuclear power utilization rebounds in 2022 is important," and added, "It is also necessary to pay attention to whether compensation for damages from the nuclear phase-out policy through the Power Industry Fund will be provided."