20160524-三星证券-Worth_a_look_25页_1mb

Sector Update Summary

Core Content

This document provides an analyst's update on the Korean utilities sector, focusing on the performance and future outlook of Kepco, Kogas, and Kepco KPS. The analyst reinstates coverage for the sector at OVERWEIGHT, with specific recommendations for Kepco and Kogas at BUY, and a target price for each. The report highlights the sector's attractive valuations, improving financials, and favorable profit outlooks, despite a mature energy market with low consumption volatility.

Main Points

• Sector Outlook:

  • The utilities sector is reinstated at OVERWEIGHT due to attractive valuations and solid profitability prospects.
  • The government's strategy to bolster financial structures and invest in new energy projects is expected to benefit the sector.

• Kepco (015760 KS, KRW60,200):

  • Recommendation: BUY with a 12-month target price of KRW85,000.
  • Valuation: Based on 0.72x forward P/B, which is a 30% discount to the global average of state-owned power utilities.
  • Performance:
    • Expected to earn a record operating profit of KRW13.2t in 2016.
    • Operating profit is projected to rise 19.6% to KRW13.2t, with a 2.7% increase in operating margin to 22.2%.
    • ROE is expected at 11.9%, and the dividend yield is projected at 5.3%.
  • Cost Reduction:
    • Benefiting from low oil prices and new base-load capacity additions, which should reduce fuel costs.
    • Expected to reduce electricity-purchasing costs by 9.3% (KRW1.06t).
  • Debt Management:
    • Debt ratio has improved significantly, from 135.8% in 2013 to 99.9% in 2015.
    • The company is expected to maintain ROE above 10% and ROA around 4.5%.

• Kogas (036460 KS, KRW42,300):

  • Recommendation: BUY with a 12-month target price of KRW58,000.
  • Valuation: The sector is valued at 0.5x P/E, below global peers and state-owned power firms.
  • Performance:
    • Domestic wholesale guaranteed return is expected to rise slightly in 2016.
    • Stake in Gladstone LNG project is projected to turn profitable in 2017.
    • ROE for 2016 is expected at 3.3%.
  • Dividend Yield: 1.7% as of 2016E.
  • Cash Liquidity: Expected to improve due to rapid account receivable collection and better debt management.

• Kepco KPS (051600 KS, KRW73,600):

  • Recommendation: No formal rating, but value investors may find it attractive.
  • Performance:
    • Shares have fallen 47.3% since September due to delayed orders and disappointing earnings.
    • The analyst believes the pullback has been excessive and the stock is a bargain.
  • Valuation: No target price given, but the analyst suggests it may be undervalued.

Key Information

• Electricity Consumption Growth:

  • The government forecasts Korea's electricity consumption to grow only around 1% annually from 2019.
  • Domestic LNG sales have contracted in the past two years after peaking in 2013.
  • The energy industry is entering a mature stage with low consumption volatility.

• Government Policies:

  • The government is investing in new energy projects and improving financial structures.
  • There is little chance of stiffer regulations or tariff cuts in 2016, with any cuts likely to be temporary.
  • The Ministry of Strategy and Finance aims to increase dividend payouts from public entities to 40% by 2020.

• Market Performance:

  • Kepco has shown strong performance, with a 28.9% increase in 12-month returns.
  • The stock offers a dividend yield of 5.3% and a target price of KRW85,000, implying a 40.7% upside from current prices.

• Financial Metrics:

  • ROE: Kepco's ROE is expected to reach 11.9% in 2016, outperforming global peers.
  • P/B: Kepco's forward P/B is at 0.72x, suggesting undervaluation.
  • EPS Growth: Kepco's adjusted EPS is expected to grow by 2.8% in 2016 and 27.3% in 2017.
  • Dividend Yield: Expected to rise to 5.3% in 2016, driven by government policies.

Summary Table

Additional Highlights

• LNG Prices:

  • LNG prices are expected to trend down due to lagging behind oil prices.
  • This should reduce Kepco's fuel costs, as it purchases LNG from Kogas.

• New Energy Investments:

  • The government's 10-project plan for the electricity sector is expected to drive long-term savings and growth for Kepco.

• Valuation Metrics:

  • Kepco's P/B is at 0.5x, significantly lower than the global average of 1.2x.
  • Kogas's P/E is at 0.5x, lower than the global average of 1.0x.

• Dividend Policy:

  • The government is pushing for higher dividend payouts, which should benefit Kepco and Kogas.
  • Kepco is expected to increase dividends to KRW3,000 in 2016, with a yield of 5.3%.

• Market Trends:

  • The Korean utilities sector is seen as undervalued compared to global peers.
  • Share prices for Kepco and Kogas have shown positive trends, with Kepco leading in performance.

Conclusion

The utilities sector in Korea is viewed as undervalued and profitable, with Kepco and Kogas as top recommendations. The sector is expected to benefit from government support, cost reductions, and improving financial metrics. Kepco's strong operating performance and improving ROE make it an attractive investment, while Kogas's future profitability from its LNG projects and improved cash liquidity also support its BUY rating. Kepco KPS is seen as a potential bargain despite recent underperformance.