LS Securities said on the 16th that KEPCO E&C's results were weak last year but are expected to rebound sharply this year. It maintained a Buy rating and raised the target price to 150,000 won from 130,000 won. The previous trading day's closing price for KEPCO E&C was 113,400 won.
Sung Jong-hwa, an analyst at LS Securities, said, "KEPCO E&C's results in the first and second quarters last year were extremely weak due to process delays and completions in key nuclear power and energy projects."
Delays in processes such as the Shin-Hanul Units 3 and 4 basic design, the Wolsong Units 3 and 4 periodic safety assessment (O&M) project, and the Romania CTRF project pushed back revenue from basic and system design, while the end of the Jeju Hallim offshore wind project and the Indonesia PLN gas engine power plant project reduced revenue in new energy businesses, the analysis said.
However, the trend shifted completely in the second half of last year. Sung said, "In the third quarter, results rebounded sharply year over year, and that trend is expected to continue in the fourth quarter."
The backdrop was a structural recovery in revenue from high-margin nuclear power sales. As progress rates normalized for the Shin-Hanul Units 3 and 4 basic design and the Wolsong Units 3 and 4 safety assessment projects, revenue from nuclear basic design and reactor design development (system design) has begun to revive in earnest, the note said.
In addition, changes in accounting treatment for Small Modular Reactor (SMR) also supported the improvement in results. Sung explained, "From the fourth quarter, the accounting recognition method for revenue from SMR technology development tasks changed, leading to a sharp increase in sales and operating profit."
KEPCO E&C has been carrying out government tasks related to SMR system design and basic design together with Korea Hydro & Nuclear Power Co. (KHNP) and Korea Atomic Energy Research Institute (KAERI) from May 2024 to December 2027. Previously, task-related expenses were recognized as SG&A and revenue as non-operating revenue, but starting in the fourth quarter, expenses are recognized as cost of sales and revenue as sales. However, since non-operating revenue decreases, the impact on pre-tax profit is neutral, it added.
Total settled revenue for the SMR project is about 400 billion won, of which KEPCO E&C, in charge of the design share, accounts for about 100 billion won. It projected average quarterly revenue of about 7 billion won during the project period.
Sung estimated that consolidated fourth-quarter revenue was 210.2 billion won and operating profit was 32.5 billion won. Those figures are up 9% and 21%, respectively, from a year earlier. They exceed market expectations of 194.0 billion won in revenue and an operating margin of 12.8%.
The medium- to long-term growth environment is also seen as highly favorable. He said, "The Czech Temelin Units 1 and 2, UAE Barakah Units 5 and 6, Saudi Duwaihin Units 1 and 2, and Poland Pontnuf Phase 2 projects are all 'Team Korea' bids with high chances of winning," adding, "Over the long term, there is also potential to enter the U.S. large nuclear power plant rebuilding market and to resume new nuclear power projects in Korea."