[Edaily Reporter Shin Ha-yeon ] On the 13th, Shinhan Investment Securities analyzed that KoreaElectricPower(015760)’s third-quarter earnings fell significantly short of market expectations, and the likelihood of the company slipping into an operating loss in the fourth quarter has increased. The firm also noted that while short-term earnings improvement will be limited, investors should pay attention to the company’s low valuation and the potential for reforms in the electricity market. It maintained its “Buy” rating and target price of 40,000 won.

Han Seung-hoon, an analyst at Shinhan Investment Securities, stated in a report released that day, “With the SMP reaching the 140 won/kWh range in early November, the likelihood of a shift to a loss in the fourth quarter has increased,” adding, “While short-term earnings improvement will be limited, we are focusing on policy changes that will improve conditions, such as the introduction of regionally differentiated industrial rates and the LMP, both of which are being pursued within the year, as well as the government’s support for power grid investments.”

KoreaElectricPower Corporation’s (KEPCO) third-quarter consolidated revenue totaled 26.8518 trillion won, a 2.6% decrease from the same period last year. Operating profit plummeted 70.9% to 1.6441 trillion won, falling 31.9% short of the market consensus of 2.4143 trillion won. The operating profit margin also dropped from 20.5% in the same period last year to 6.1%.

The main causes of the poor performance were cited as an overall increase in costs, including fuel expenses and purchased power costs. While the rise in the wholesale electricity price (SMP) was limited compared to the increase in liquefied natural gas (LNG) prices, other operating expenses—such as provisions for nuclear power plant decommissioning and greenhouse gas emission costs—also rose.

An analyst explained, “While the rise in the System Marginal Price (SMP) was limited compared to the surge in LNG prices, the increase in other operating expenses put pressure on profitability,” adding, “The main causes were an increase in the adjustment to the provision for nuclear power plant decommissioning costs following the recalculation of decommissioning costs for Wolseong Unit 1 and a rise in greenhouse gas emission costs.”

Fuel costs in the third quarter totaled 6.8838 trillion won, a 25.1% increase from the same period last year. This was driven by rising prices of key raw materials and an appreciation of the won against the dollar. Purchased electricity costs also rose by 11.4% to 10.3028 trillion won.

The share of electricity generated by baseload power sources rose to 89.0%, up 1.7 percentage points from the same period last year. The utilization rates of KEPCO’s power generation subsidiaries were 82.7% for nuclear power and 71.2% for coal, up 4.8 percentage points and 0.5 percentage points, respectively. However, these gains were not sufficient to offset the burden of purchased electricity costs, which were driven by rising System Marginal Prices (SMP) and increased costs associated with the Renewable Energy Supply Obligation (RPS) system.

Shinhan Investment Securities revised downward its operating profit estimates for KoreaElectricPower Corporation (KEPCO) for this year and next year by 16.5% and 13.0%, respectively, to reflect the cost burden. The operating profit forecast for this year was lowered from 7.5591 trillion won to 6.3101 trillion won, and the forecast for next year was lowered from 4.099 trillion won to 3.5677 trillion won.

In particular, the firm expects the company to post an operating loss of 246.7 billion won in the fourth quarter of this year, marking a shift into the red. Annual operating profit is also projected to decline by 43.5%, from 6.3101 trillion won this year to 3.5677 trillion won next year.

However, despite the downward revision to the earnings forecast, the target price was maintained. The firm determined that the impact on the target price calculation would be limited, as the 12-month forward book value per share (BPS) is projected to decline by only 1,802 won to 80,021 won, which is lower than the previous estimate.

One analyst stated, “Since the decline in BPS is limited, we maintain our ‘Buy’ rating and a target price of 40,000 won,” adding, “The target price-to-book ratio (PBR) is 0.5x, while the current stock price is at a 12-month forward PBR of 0.38x.”

The analyst further emphasized, “While the low valuation will provide downside support, a revaluation of the stock price will require stability in energy prices and a recovery in profitability through improvements to the tariff and settlement systems.”