[This Week's Column] KEPCO: Despite Disappointing Results, Expectations Focus on "Nuclear Power"

Share Price Rally Stalls on Earnings Miss

Securities Industry Focuses on Overseas Nuclear Potential

Domestic Electricity Tariff Policy Under Close Watch

Expectations for Korea Electric Power Corporation (KEPCO) in the securities market are rising. While the company's share price, which had been on an upward trend, declined after its fourth-quarter results fell short of expectations, the potential for overseas nuclear power plant orders led by "Team Korea"-with a focus on the United States-is regarded as a key factor that could enhance its value.

Disappointing Earnings and Dividend Results

On February 27, Korea Electric Power Corporation closed at 58,500 won, down 7.58% from the previous trading day. Although the stock hit a 52-week high of 69,500 won on January 21, the announcement of lackluster fourth-quarter results triggered a wave of selling.

On a consolidated basis, KEPCO's revenue for the fourth quarter of last year reached 23.688 trillion won, up 1% year-on-year, while operating profit decreased by 18% to 1.9834 trillion won during the same period. This performance fell short of market expectations. While revenue (23.9006 trillion won) was largely in line with consensus, operating profit was significantly lower than the anticipated 3.4264 trillion won. This shortfall was attributed to one-off costs, including losses from overseas operations of subsidiaries.

The company's debt burden is also substantial. On a consolidated basis, total debt stands at 206 trillion won, and borrowings amount to approximately 130 trillion won. The daily interest expense on borrowings alone totals 11.9 billion won. In response, KEPCO plans to focus on restoring financial soundness by paying interest on borrowings and repaying principal.

Although the dividend payout ratio disappointed last year, sentiment is growing that this year will be different. KEPCO announced a dividend per share (DPS) of 1,540 won last year, with a dividend yield of 3.2% and a standalone payout ratio of 13.7%. Moon Kyungwon, a researcher at Meritz Securities, commented, "Even though actual standalone net profit exceeded our expectations, the payout ratio fell short of our 20% forecast and even declined compared to 2024." He added, "However, we expect an increase in the payout ratio this year, as dividend-related indicators are reflected in the management evaluation grade, and further improvements in the financial structure are anticipated."

Focus Shifts to Nuclear Power

Yonhap News Agency

Despite underwhelming earnings, the securities industry is optimistic about KEPCO's potential, driven by its involvement in nuclear power. There is growing anticipation that "Team Korea," a coalition of public and private companies involved in nuclear power including KEPCO, will lead the expansion of overseas nuclear power markets, notably in the United States. The U.S. plans to increase its nuclear power generation capacity from the current 100GW to 400GW by 2050, in response to surging electricity demand associated with the growth of artificial intelligence (AI) industries. U.S. Secretary of Commerce Howard Lutnick has even proposed that Korea participate in the construction of large-scale nuclear power plants in the United States as a key project following Korea-U.S. tariff negotiations.

Sung Jonghwa, a researcher at LS Securities, stated, "In the overseas market, several long-term projects await, such as the Dukovany Units 5 and 6 in the Czech Republic, Temelin Units 1 and 2 in the Czech Republic, BNPP Units 5 and 6 in the UAE, and Duwaihin Units 1 and 2 in Saudi Arabia, all of which have significant potential for additional orders. In the long run, there is immense potential for participating in the reconstruction of large-scale nuclear power plants in the United States." He added, "Since the U.S. nuclear industry base has deteriorated due to prolonged project inactivity, cooperation with Team Korea is essential."

If KEPCO is awarded the AP1000 nuclear plant project in the U.S., the total contract value is expected to be around 20 trillion won. Heo Minho, a researcher at Daishin Securities, explained, "If KEPCO (and Korea Hydro & Nuclear Power) are responsible for construction of reactor and turbine buildings plus EPC of auxiliary equipment, the order amount for two units would be 18.8 trillion won. If they handle only reactor building construction plus turbine building and auxiliary equipment EPC, the value is estimated at 23.1 trillion won. For Korean-style nuclear plants, the contract value is expected to reach 26 trillion won."

In addition, improvements to the power generation mix are underway, with a growing share allocated to nuclear energy. As the proportion of nuclear, which has a lower unit cost of generation, increases, KEPCO's operating margin is likely to rise. This year, the commercial operation of Saeul Units 3 and 4 is expected to boost the nuclear utilization rate to 89%. The decline in global energy prices last year, which reduced fuel costs, is another positive factor.

Electricity Tariff Policy Under Close Watch

This year, electricity tariff policy is also expected to have a direct impact on KEPCO's profitability. The Korean government had previously raised tariffs several times, leading to higher sales prices, which enabled KEPCO to return to operating profit in the third quarter of 2023 after ten consecutive quarters of losses.

In particular, opinions in the securities industry are divided over the impact of the planned "time-of-use tariff system" to be introduced for industrial electricity users. The government is reportedly considering a revision to lower tariffs during daytime hours-when electricity usage is high-and raise them during the evening. Jeong Hyejeong, a researcher at KB Securities, noted, "The direction of the electricity tariff revision will be a crucial factor for KEPCO's future earnings. If the revision is implemented, it could drive a short- to medium-term reduction in electricity tariffs."

On the other hand, Jo Jaewon, a researcher at Kiwoom Securities, said, "The time-of-use tariff reform is expected to somewhat ease the electricity cost burden for industrial customers. Nevertheless, for KEPCO, the narrowing of peak and off-peak electricity demand should help reduce generation costs." Yoo Jaeseon, a researcher at Hana Securities, commented that the revision could also be interpreted as a policy to defend against revenue loss in the face of visible demand outflows resulting from a sharp increase in industrial electricity prices.

The repercussions of U.S. airstrikes in the Middle East also warrant attention. On March 2, the Ministry of Climate, Energy and Environment held an "energy situation review meeting" with KEPCO and others to assess the impact of Middle East developments on domestic electricity supply and countermeasures. To date, projects being pursued by KEPCO and its power generation subsidiaries in the Middle East have not been directly affected. However, if instability such as Iran's blockade of the Strait of Hormuz persists, international oil prices could rise, posing a downside risk. As fuel purchase prices increase, KEPCO's profits could also decline.

This content was produced with the assistance of AI translation services.