Korea Electric Power Corporation: Profitability recovery and dividend resumption (NYSE:KEP)

elevator pitch

I am assigned a Buy investment rating. Korea Electric Power Corporation (New York Stock Exchange: KEP) (015760:KS). In my previous post on 9 October 2023, I highlighted the positives associated with Appointment A. KEP’s new CEO.

Attention is being paid to whether this update can serve as a catalyst for the re-evaluation of KEPCO. KEP is expected to turn a profit again this year, and dividends are highly likely to resume this year. I believe that KEPCO can achieve higher P/B multiples with the realization of these two catalysts. Therefore, I maintain a buy opinion on KEPCO stock.

Expect a turnaround in 2024

KEP has recorded deficits for the past three years from fiscal year 2021 to fiscal year 2023. Korea Electric Power Corporation can make a profit again this year.

From the Q4 2023 Results Briefing (Record Source: S&P Capital IQ) At the end of February 2024, Korea Electric Power Corporation (KEPCO) provided guidance that this year, “the contribution of nuclear power plants will increase” and “the contribution of coal and LNG (liquefied natural gas) will slightly decrease.”

Specifically, KEPCO expects the operation rate of its nuclear power plants to reach 80% this year. On the other hand, the operation rates of LNG and coal are expected to be relatively low to 20% and 50%, respectively, in 2024. The two new nuclear power plants are scheduled to operate in the first half of 2024 and the second half of 2024, respectively. High nuclear utilization guidelines.

According to consensus data obtained from S&P Capital IQKEP’s actual operating profit and operating margin for the fourth quarter of 2023 were +175%, or +5.3 percentage points, higher than what sell-side analysts predicted.

In its 4th quarter performance report, KEPCO explained that its operating profit in the recent quarter had improved due to a decrease in fuel costs due to the “increased proportion of nuclear power plants” and a subsequent decrease in the proportion of nuclear power generation. LNG and coal. The nuclear power plant operation rate in the fourth quarter of 2023 increased compared to the same period last year. This is because one existing nuclear power plant resumed operation after completing maintenance activities, and one new nuclear power plant began operation in the last month of 2022.

In other words, the increased proportion of nuclear power generation (relatively cheaper than coal and LNG), which is a factor that improved KEPCO’s operating profitability in the fourth quarter of 2023, is likely to be an important lever for improving operating profit margin. company this year.

The market expects that KEPCO will record a net profit of 2.378 trillion won in fiscal 2023, turning from a net loss of 4.762 trillion won to a surplus. (Source: S&P Capital IQ) in fiscal year 2024. We believe this is reasonable given KEP’s favorable generation mix optimization along with its transition to nuclear power this year, as described above.

I think returning to profitability will be a key catalyst for KEP this year. The next section addresses another potential catalyst for KEPCO.

Dividends are likely to resume this year

KEPCO’s current consensus financial estimates indicate a dividend per share of KRW 947 (Source: S&P Capital IQ) in fiscal 2024, this translates to a reasonably attractive forward dividend yield of 4%.

It is not surprising that KEPCO has recorded losses for the past three years (2021-2023) and has not paid dividends. This also means that many institutional and individual investors who are income-oriented or yield-seeking have not invested in KEPCO over the past few years, but that may change in the future.

At its recent fourth quarter performance presentation, KEPCO said, “If we can generate surplus profits, it will be in line with the government’s overall public enterprise and public enterprise dividend policy.” Korean public enterprise)’, ‘We will communicate more clearly with the market regarding dividends.’ In other words, KEPCO appears to have both the ability and will to pay dividends to shareholders in 2024, assuming that it is profitable as management commented.

Separately, there may be pressure at the top for Korean listed companies that trade at low valuation multiples, such as KEP, to take a shareholder-friendly stance and return excess capital to shareholders.

In a press release issued on February 26, 2024, the Financial Services Commission of Korea (FSC) stated that the Financial Supervisory Service will introduce a “Corporate Value Enhancement Program” to “support (Korean) companies’ voluntary value enhancement efforts.” According to a February press release issued by the FSC, Korea’s “Corporate Value Enhancement Program” includes companies’ “key financial indicators (e.g., price-to-book ratio (PBR)), price-to-earnings ratio (PER), and return on equity (ROE). ) will include plans such as showing ” (ROE) and dividend payout ratio, and provide ‘tax benefits and benefits’ to motivate domestic companies to ‘improve shareholder returns’.

Currently, the market evaluates KEPCO’s PBR at 0.45 times. It is clear that KEP is one of the undervalued domestic listed companies that are under the scrutiny of financial authorities, and there is a strong incentive for KEPCO to resume dividend payments as soon as possible.

final thoughts

KEPCO’s valuation, which is less than half of its book value, is attractive. I identify the return of the dividend as a return to profitability as a catalyst for a re-rating of the stock, which explains why KEP deserves a Buy rating.