KEP - Korea Electric Power: New CEO Appointment Is A Positive Development

2023-10-09 12:26:28 ET

Summary

• Kim Dong-cheol was recently appointed as Korea Electric Power's new CEO, and he replaces Cheong Seung-il who previously disclosed in May he wished to step down as CEO.
• A meaningful increase in the electricity tariff rate and a faster pace of revenue diversification are some of the key goals set by the new CEO.
• I have a favorable view of the new CEO appointment, and this explains why I have maintained my Buy rating for KEP.

Elevator Pitch

My Buy rating for Korea Electric Power Corporation ( KEP ) [015760:KS] shares stays unchanged.

I previously previewed Korea Electric Power's financial results for the second quarter of this year with my prior update written on August 3, 2023. I touch on KEP's new CEO appointment in the current article.

My opinion is that the new CEO, Kim Dong-cheol, will bring about favorable changes for Korea Electric Power. These positive developments might include a potential tariff hike which is more substantial, and an acceleration of the company's revenue diversification and cost optimization plans. Therefore, I am maintaining my Buy rating for KEP.

New CEO

Seeking Alpha News reported last month that Kim Dong-cheol has become Korea Electric Power's new CEO, after the former CEO Cheong Seung-il indicated in May that he would resign. It is worth paying attention to Kim Dong-cheol's background. In the September 18, 2023 Seeking Alpha News article , it was highlighted that Kim Dong-cheol "was a legislator at the National Assembly four times from 2004 to 2020" and "recently worked for Yoon (Suk Yeol, South Korea's president) to support his presidential election bid."

The appointment of Kim Dong-cheol as CEO is worthy of note, as none of the company's CEOs in its 60 year odd history was a former politician. Korea Electric Power is a state-owned entity with the government having a 51% equity interest in the company, and the changes in the electricity tariff rate have a significant impact on KEP's revenue and earnings. As such, it makes a lot of sense for someone with a political background like Kim Dong-cheol to lead Korea Electric Power.

Although it is still early days, there are signs suggesting that Kim Dong-cheol is very committed to his role as the new CEO of KEP. According to an October 5, 2023 Korea JoongAng Daily opinion piece , Kim Dong-cheol "does not go home and lives in his office", and his "door name plate now reads 'war room' in the Kepco (Korea Electric Power) headquarters." On the surface, it seems that Korea Electric Power's new CEO Kim Dong-cheol is serious about turning around the fortunes of the company as soon as possible.

As per data taken from S&P Capital IQ , KEP has been loss-making at the EBIT level between the second quarter of 2021 and the second quarter of this year, as high energy prices have had a negative impact on the company's profitability. In the subsequent sections of the article, I highlight key areas where the new CEO could play a part in improving the financial performance of the company.

Tariff Hike

Kim Dong-cheol is in a good position to push for an increase in electricity tariff rates. In the preceding section, I have already mentioned that he is a former politician. It should be relatively easier for Kim Dong-cheol to negotiate with Korean regulators and lawmakers regarding regulatory matters, as opposed to KEP's former CEOs who didn't have political experience.

At his inauguration ceremony on September 25, 2023, Kim Dong-cheol stressed that "normalizing electricity rates is the most pressing task" for Korea Electric Power and the country. In his inauguration speech, the new CEO noted risks such as "a serial bankruptcy of vendors" and over-consumption of energy" in the event that KEP's electricity tariff rates aren't raised sufficiently.

In specific terms, Korea Electric Power is requesting for a new quarterly +KRW25 per kWh tariff increase at the very least as per the new CEO's comments at a media briefing held on October 4, 2023. In comparison, KEP's electricity tariff rate was increased by merely +KRW21 per kWh for the first two quarters of the current year combined.

Prior to the new CEO appointment, expectations for further tariff hikes were very low. At the company's Q2 2023 results call (event transcript sourced from S&P Capital IQ ) on August 11 this year, KEP mentioned that it is "in the process of discussing with the government on the overall process for adjusting tariff" and emphasized that "nothing has been determined in terms of increasing our power price."

With Kim Dong-cheol taking over at Korea Electric Power, the chances of KEP securing a meaningful tariff hike have increased substantially as evidenced by the new CEO's recent comments.

Revenue Diversification And Cost Management

The new CEO for Korea Electric Power has plans in place to diversify the company's top line and cut its expenses.

In the company's corporate presentation slides , the core domestic electricity utility unit contributed 94% of KEP's 1H 2023 revenue. Kim Dong-cheol has set a target for KEP to generate over 30% of the company's sales from foreign markets and new businesses in the long run as highlighted at his inauguration speech last month. Korea Electric Power has to reduce its reliance on the core domestic (South Korea) electricity utility business which is highly regulated and heavily dependent on the Korean government for tariff hikes.

As an example of new growth areas for the company, KEP revealed at its second quarter results briefing that the company and its subsidiary Korea Hydro & Nuclear Power are working on new nuclear energy projects in "Saudi Arabia, UAE and U.K. region", "East European region and Egypt."

With respect to expense control, KEP's new CEO knows what he wants to focus on. At the company's October 4 media briefing, Kim Dong-cheol highlighted that he will prioritize the optimization of staff costs by making the company leaner and more efficient. As indicated in KEP's corporate presentation, "other operating expenses" were the third largest cost item (14% of revenue) for Korea Electric Power after fuel and purchased power in 1H 2023. This indicates that there is ample room for KEP to reduce or even eliminate certain spending.

Concluding Thoughts

KEP continues to be deserving of a Buy rating. The new CEO appointment is expected to boost Korea Electric Power's prospects in various ways, and this supports my Buy rating for the stock.

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