New Nuclear Reactors And Tariff Hikes To Strengthen Future Operations

Key Takeaways

• Increasing nuclear power capacity and tariff hikes are expected to boost revenues and improve net margins and earnings.
  
• Financial stabilization efforts, including asset sales and cost reductions, aim to enhance long-term profitability and financial health.
  
• Limited ability to offset higher costs and potential operational volatility could hinder KEPCO's revenue growth and earnings stability amid uncertain fuel prices and currency fluctuations.

Catalysts

An integrated electric utility company, engages in the generation, transmission, and distribution of electricity in South Korea and internationally.

• The increase in nuclear power generation capacity, including the operation of new reactors like Shin-Hanul Unit 2 and potentially Shin-Hanul Unit 3, is expected to boost power generation and efficiency, leading to increased revenues and potentially higher net margins.
  
• Tariff hikes, such as the recent increase in industrial service power tariffs, are expected to enhance revenue per unit of electricity sold and could improve overall earnings in the short to medium term.
  
• Ongoing efforts to decrease fuel and purchasing costs, particularly with lower coal and LNG fuel costs, are likely to improve net margins as the costs of production decrease.
  
• KEPCO's financial stabilization plan, which includes selling assets, reducing investment costs, and increasing non-power sales income, is designed to improve overall financial health and net margins, thereby supporting long-term profitability.
  
• Currency hedging strategies to manage foreign exchange risks could stabilize financial performance despite exchange rate fluctuations, potentially impacting net income positively by mitigating foreign exchange-related losses.

Korea Electric Power Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Korea Electric Power's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 7.5% in 3 years time.
• Analysts expect earnings to reach ₩7624.9 billion (and earnings per share of ₩11872.75) by about December 2027, up from ₩3708.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₩4260.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.3x on those 2027 earnings, down from 3.7x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.1%, as per the Simply Wall St company report.

Korea Electric Power Future Earnings Per Share Growth

Risks

• The uncertainty surrounding global fuel price trends and the lack of an official KEPCO fuel cost outlook could result in unexpected increases in operating costs, potentially affecting net margins.
  
• Delays in completing new nuclear power plants, such as Shin-Hanul Unit 3, could impact KEPCO's ability to increase low-cost nuclear energy production, affecting cost savings and projected earnings.
  
• The potential for foreign exchange fluctuations, particularly the depreciation of the Korean won, can increase fuel costs and borrowing costs, negatively impacting net income.
  
• A large gap between consolidated and nonconsolidated operating profits suggests potential volatility in operational performance, particularly if GENCOs and subsidiaries face challenges, impacting overall earnings stability.
  
• Limited prospects for further tariff hikes in the near future might constrain KEPCO's ability to offset increased costs through higher revenue, affecting revenue growth potential.

Valuation

• The analysts have a consensus price target of ₩28058.82 for Korea Electric Power based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩33000.0, and the most bearish reporting a price target of just ₩24000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₩101927.4 billion, earnings will come to ₩7624.9 billion, and it would be trading on a PE ratio of 3.3x, assuming you use a discount rate of 12.1%.
• Given the current share price of ₩21450.0, the analyst's price target of ₩28058.82 is 23.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.