KEP - Korea Electric Power: All Eyes On Positive Developments

2023-05-23 06:49:41 ET

Summary

• KEP's new corporate restructuring plan and the resignation of its CEO have increased the chances of the company successfully securing meaningful electricity tariff hikes going forward.
• Korea Electric Power's recent Q1 2023 results suggest that cost pressures for the company have begun to ease to some extent.
• I maintain my Buy rating for Korea Electric Power in consideration of the positive developments for the company.

Elevator Pitch

I continue to award a Buy rating to Korea Electric Power Corporation ( KEP ) [015760:KS] shares.

In my prior article for Korea Electric Power written on March 9, 2023, I discussed about the prospects of a turnaround for KEP.

My current update for KEP focuses on the company's new corporate restructuring program and the read-throughs from its most recent quarterly financial results. Based on my analysis, Korea Electric Power's new restructuring plan and the departure of its CEO will enhance the odds of the company receiving significant tariff increases from the regulators. Separately, KEP's fuel costs and purchased power costs have increased at a slower rate in the most recent quarter.

I view these recent developments for KEP in a positive light, and this explains my decision to stick to a Buy rating for Korea Electric Power.

New Corporate Restructuring Plan And CEO's Resignation In The Spotlight

Seeking Alpha News reported on May 12, 2023 that Korea Electric Power "announced a major financial overhaul to stem mounting operating losses" with a target "to save more than 25T won ($19.3B) by 2026."

According to another May 12 news article published by local media Korea JoongAng Daily , KEP's new corporate restructuring plan will include actions such as "delaying facility construction projects", the divestment of "its office building in Yeouido", and a freeze on pay hikes for all "employees ranked Grade 2 and higher." The KRW25 trillion corporate restructuring program is significant in terms of its size, as Korea Electric Power only earned a net profit of approximately KRW2 trillion (source: S&P Capital IQ ) in FY 2020 when it was still in the black.

More importantly, Korea Electric Power's latest corporate restructuring announcement might be the catalyst needed for the company to receive a substantial electricity tariff hike from the regulatory authorities. As per a May 12 Yonhap News Agency news report , "the ruling People Power Party and the government have demanded stronger reform measures before seeking additional electricity rate hikes." Previously, KEP had proposed a KRW20 trillion corporate restructuring plan which didn't meet the government's expectations. As a comparison, the new KRW25 trillion restructuring program represents a +25% increase in savings as compared to the initial proposal.

Furthermore, Cheong Seung-il's resignation as CEO of Korea Electric Power was accepted by the company on May 19, 2023, and current Chief Business Management Officer Lee, Jung-Bok was appointed as interim CEO. This could be another factor that works in KEP's favor relating to its chances of securing electricity tariff hikes from the regulators going forward. Based on The Korea Economic Daily's May 12 news commentary , "the ruling party has (previously) demanded the departure of the CEO (Cheong Seung-il), who was appointed during the previous Moon Jae-in government backed by the opposition." As such, it is reasonable to assume that Korea Electric Power will face less political pressure when it lobbies for electricity tariff hikes under the leadership of a new CEO who isn't affiliated with the opposition.

Read-Throughs From Most Recent Quarterly Financial Performance

Earlier, Korea Electric Power announced its Q1 2023 financial results with a 6-K filing issued on May 12. There are certain key metrics associated with KEP's first quarter performance which suggest that the worst could potentially be over for the company.

Firstly, the rate of increase in KEP's fuel costs has moderated significantly in Q1 2023 as highlighted in the company's recent quarterly results presentation slides . The coal and LNG (Liquefied Natural Gas) costs for full-year fiscal 2022 rose by +76.6% and +110.2% , respectively on a per-unit basis for Korea Electric Power. In contrast, KEP saw its per-unit coal and LNG expenses increase by +19.1% and +31.2%, respectively in Q1 2023. At its Q1 2023 results briefing (source: call transcript sourced from S&P Capital IQ ), Korea Electric Power emphasized that fuel costs in general are "on a declining trajectory", and this sends a positive signal regarding its fuel cost outlook for subsequent quarters.

Secondly, Korea Electric Power's purchased power costs went up by +15.0% in the first quarter of 2023, which was much less severe than the +93.9% spike in purchased power expenses for KEP in FY 2022. In my March 9, 2023 write-up for Korea Electric Power, I highlighted that "KEP's power purchased costs for Q1 2023 should be lowered thanks to the SMP (System Marginal Price) cap" imposed by Korea's Ministry of Trade, Industry and Energy. KEP also acknowledged at its first quarter results call that the SMP cap "did help us in alleviating our cost burden."

Concluding Thoughts

Recent corporate developments reinforce my bullish view of Korea Electric Power stock. KEP's Q1 2023 financial performance indicates that cost pressures for the company have eased thanks to lower commodity and energy prices and help from the regulators in the form of a SMP cap. On the other hand, Korea Electric Power should be in a good position to secure an increase in electricity tariffs in the future considering its new corporate restructuring program and the resignation of its CEO.

The market currently values Korea Electric Power at 0.14 times consensus forward next twelve months' price-to-sales and 0.29 times historical trailing P/B (source: S&P Capital IQ ). KEP's current valuations indicate that positive developments for the company have yet to be priced into its shares. Therefore, I have made the choice to retain a Buy rating for KEP.

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