[Click eStock] "Korea Electric Power, Difficult to Improve Profits Without Electricity Rate Hike... Target Price Down"

Target Price Revised Downward by 7% Compared to Previous Level

On the 9th, NH Investment & Securities downgraded the target price of Korea Electric Power Corporation (KEPCO) from 28,000 KRW to 26,000 KRW, stating that profit improvement is difficult without an increase in electricity rates. The investment rating was maintained at 'Buy.'

Minjae Lee, a researcher at NH Investment & Securities, explained, "The reason for maintaining the investment rating is that a full-scale financial structure improvement is possible through electricity rate hikes in the second half of the year." He added, "The target price was lowered because we reflected uncertain geopolitical variables such as exchange rates and oil prices, and raised the discount rate from 50% to 55%, considering the need for a significant electricity rate increase."

KEPCO's second-quarter earnings were favorable on a consolidated basis but weak on a separate basis. KEPCO's consolidated second-quarter sales reached 20.5 trillion KRW, a 4% increase compared to the same period last year, and operating profit turned positive at 1.2503 trillion KRW. The researcher analyzed, "While consolidated earnings exceeded consensus (average securities firm forecasts), the separate basis showed an operating loss of 93.8 billion KRW, making future investment cuts or additional bond issuance inevitable."

It is analyzed that it is difficult to improve performance independently without an electricity rate increase. The researcher said, "Considering ongoing geopolitical risks from the Middle East, earnings volatility is expected to increase. However, since electricity rate hikes and bond issuance limits are decided based on KEPCO's separate entity, the separate entity's second-quarter deficit is a concern." He added, "The separate entity is responsible for investments such as new demand from data centers and replacement of aging transmission and distribution facilities, but without electricity rate increases, it must proceed through borrowing, which conflicts with financial structure improvement."

Electricity rate hikes are expected to take place in the fourth quarter of this year and the second quarter of next year. The researcher stated, "Since oil prices, exchange rates, and coal prices remain high following the first quarter, electricity rates need to increase by 10 KRW in the fourth quarter of this year and 5 KRW in the second quarter of next year to cover capital expenditures (CAPEX) without large-scale borrowing."