Korea Electric Power Corp. (KEPCO) (015760.KS) faced intensified downward pressure on its stock after deciding to freeze third-quarter electricity rates. With its already heavy debt burden under scrutiny, the delayed rate hike has made improvement in earnings outlook difficult to expect. Securities firms have lowered KEPCO's target price accordingly.
According to the Korea Exchange, KEPCO shares closed at 37,100 won on Friday, down 1,700 won, or 4.38%, from the previous trading day. The stock fell as low as 36,150 won during the session and remained weak in after-hours trading following the regular session. Other energy-related state-owned enterprise stocks, including Korea Gas Corp. and Korea District Heating Corp., also closed lower one after another.
The deeper decline in KEPCO's stock that day was closely tied to the announcement of an electricity rate freeze for the second half. KEPCO said earlier Sunday that it would maintain the fuel cost adjustment unit price applied in the third quarter at 5 won per kilowatt-hour (kWh), unchanged from the current level. Koo Yun-cheol, Deputy Prime Minister and Minister of Economy and Finance, said at the Seoul Government Complex on Friday, "We will freeze major public utility rates, including electricity and gas rates, in the second half as well."
However, with rates frozen while KEPCO's debt remains heavy, the outlook for earnings improvement also lost momentum. Jung Hye-jung, a researcher at KB Securities, explained, "With the rise in international energy prices being reflected with a delay, power procurement costs have increased by 700 billion won, while electricity rates remain frozen, making a decline in profits inevitable." She added, "KEPCO's operating profit for the second quarter this year will be 1.8 trillion won, down 15.3% from a year earlier."
Securities firms have successively lowered KEPCO's target price. KB Securities issued a report on the 23rd of this month, saying it cut KEPCO's target price to 54,000 won from the previous 63,000 won. In May this year, Samsung Securities, Kyobo Securities, NH Investment & Securities, Shinhan Investment, and Hyundai Motor Securities successively lowered KEPCO's target price. Kyobo Securities and Shinhan Investment lowered their forecasts to 43,000 won.
