[Edaily Reporter Shin Ha-yeon ] On the 10th, HYUNDAI MOTOR SECURITIES lowered its target price for KEPCO Plant Service & Engineering(051600)by 22.4%, from 67,000 won to 52,000 won, citing continued weak earnings due to the prolonged scheduled preventive maintenance of nuclear power plants. However, the firm maintained its “Buy” investment rating, noting that expectations for mid- to long-term growth driven by the expansion of new nuclear power projects both domestically and internationally remain valid.

Shin Dong-hyun, an analyst at HYUNDAI MOTOR SECURITIES, stated in a report released that day, “Revenue from nuclear power plants was sluggish as the number of cases involving prolonged scheduled preventive maintenance (O/H) increased beyond expectations,” adding, “We estimate that this simultaneously led to a decline in overall revenue and a deterioration in the revenue mix.”

KEPCO Plant Service & Engineering’s consolidated revenue for the third quarter was 330.5 billion won, a 16.1% decrease from the same period last year. Operating profit plummeted 75.4% to 11.7 billion won, falling short of market consensus. Compared to the previous quarter, revenue fell 24.5% and operating profit dropped 73.3%. The operating profit margin stood at 3.5%, a significant decline from 10.5% in the first quarter and 10.0% in the second quarter.

The primary cause of the decline in performance was delays in nuclear power plant maintenance schedules. Initially, the number of reactors scheduled for planned preventive maintenance in the third quarter was expected to decrease by more than 60% year-over-year, based on nuclear power generation capacity and the duration of the maintenance. Furthermore, as the number of cases involving extended maintenance periods increased in the third quarter—following a similar trend in the second quarter—revenue recognition in the nuclear power and pumped-storage sectors fell significantly more than anticipated.

In particular, the decline in the share of relatively high-margin nuclear maintenance revenue placed a significant burden on overall profitability. According to HYUNDAI MOTOR SECURITIES, third-quarter revenue for the nuclear and pumped-storage sectors is estimated at approximately 131 billion won, a 26.3% decrease compared to the same period last year.

Earnings volatility resulting from prolonged nuclear power plant maintenance is expected to continue for the time being. This is because Hanbit Unit 2 and Wolseong Unit 2 are scheduled to reach the end of their design lives this year, followed by Hanul Unit 1 and Wolseong Unit 3 next year.

Analyst Shin stated, “As it is expected that efforts will be made to extend the operation of aging nuclear power plants, we estimate that the prolonged maintenance of nuclear power plants will continue for some time,” adding, “Consequently, short-term earnings volatility may increase.”

However, the firm expects revenue to recover somewhat in the fourth quarter as the number of reactors undergoing maintenance increases. HYUNDAI MOTOR SECURITIES’ fourth-quarter revenue forecast stands at 426 billion won, with operating profit projected at 33 billion won. Operating profit is estimated to increase by 73.9% year-over-year.

The firm also revised its earnings estimates downward. The full-year revenue forecast for this year was lowered by 3.6% from the previous 1.605 trillion won to 1.547 trillion won, while the operating profit forecast was reduced by 25.7% from 169 billion won to 126 billion won. Next year’s operating profit estimate was also lowered by 18.7%, from 185 billion won to 151 billion won.

The downward revision of the target price reflects these changes in the earnings outlook. HYUNDAI MOTOR SECURITIES maintained its target price-to-earnings ratio (PER) at 19.23x, the same as before, but adjusted the target price due to a lower projected earnings per share (EPS) for the next 12 months. The applied PER is at the upper end of the PER band observed in 2013, when the company signed a contract for the Barakah nuclear power plant maintenance project in the United Arab Emirates (UAE).

Analyst Shin stated, “While there is some short-term earnings uncertainty, expectations for the expansion of new nuclear power projects both domestically and internationally remain,” and announced that he is maintaining a “Buy” investment rating.