Kepco Tariff Brake on Economy Spurs Jump in Bonds: Korea Markets
Korea Electric Power Corp. (015760)’s dollar bonds are the nation’s best performers as the government’s approval of tariff increases helped the utility post its first annual profit since 2007.
The yield on 2016 U.S. currency notes sold by Korea Midland Power Co., a unit of the company known as Kepco, has declined 68 basis points over the past three months to 1.22 percent, the biggest drop among such debt offered by local companies, according to data compiled by Bloomberg. Average global utility bond yields have fallen 19 basis points during the period to 2.81 percent, Bank of America Merrill Lynch data show.
South Korea boosted electricity prices last year to curb soaring demand that’s caused shortages, a move the Korea Iron & Steel Association said was “shocking.” The increase may hamper Asia’s fourth-largest economy, where mourning for its worst ferry accident in four decades is damping consumer spending. The Seoul-based utility, which generates around 90 percent of power consumed nationwide, is also benefiting from a 2 percent gain in the won against the dollar this year that cuts its import bill.
“Kepco bonds are a good diversification play and the best proxy to the ongoing growth story of the country,” said Clifford Lau, the head of fixed income for Asia-Pacific at Threadneedle Investments Singapore Pte., which is part of Ameriprise Financial Inc. with over $700 billion of assets under management. “The company’s profit turning positive is a pleasant surprise too.”
Kepco posted 532.3 billion won ($518 million) net income excluding minority interests for the first quarter and an operating profit of 1.23 trillion won, according to a company statement on May 12. Its earned 238.3 billion won in 2013 after South Korea’s government approved two power tariff price increases.
Shares in the power distributor closed yesterday at the highest level since December 2007. The stock has advanced more than 20 percent since the end of 2013, versus little change in the Kospi index. The won traded at 1,021.5 per dollar as of 11:58 a.m. in Seoul yesterday, compared with 1,049.8 at the end of last year.
“The fundamental picture looks good,” Bum Su Jin, a Seoul-based analyst at Samsung Securities Co., said by phone on May 9. “A combination of tariff hikes, stable fuel costs and a stronger won gives Kepco a big advantage. The company will likely keep its improved fundamentals.”
Moody’s Investors Service, which has an A1 rating on Kepco, its fifth-highest level, said the strong improvement in the utility’s first-quarter operating profit was credit positive, according to a report dated May 13.
Kepco will keep trying to improve its financial profile and profitability by making business adjustments, selling assets and reducing costs, Ko Weon Gun, the utility’s treasurer, said by e-mail on May 14.
South Korea increased power prices by an average of 5.4 percent in November and 4 percent in January last year. The government has kept electricity costs artificially low to contain inflation and help exporters make products cheaper.
That’s helped boost power consumption in South Korea to almost twice the average of countries in the Organization for Economic Co-operation & Development relative to the size of its economy, according to a Hyundai Research Institute report from Seoul dated June 19, 2013. The nation’s energy demand is expected to rise 2.5 percent this year, according to the Korea Energy Economics Institute.
The 6.4 percent increase in power rates for industrial plants and buildings may add extra costs of 268.8 billion won in the steel industry, which is already in a slump, the Korea Iron & Steel Association said in an e-mailed statement in November.
Korea’s economy expanded more than expected in the first quarter as exports weathered the won’s appreciation and private consumption increased. The central bank last month raised its 2014 growth forecast to 4 percent from 3.8 percent projected in January and predicted a 4.2 percent expansion for next year.
A 5 percent boost in industrial electricity costs may cut economic growth by 0.09 percent and weigh on capital spending, the Korea Energy Economics Institute said in December.
Average dollar-bond yields for Korean issuers touched 2.7364 percent on April 14, the least since May 2013, and were at 2.7646 percent on May 13, JPMorgan Chase & Co. indexes show. That compares with an average investment-grade yield in Asia of 4.1404 percent.
South Korea’s 10-year won government-bond yield has slipped 15.2 basis points to 3.452 percent this year. The extra yield investors demand to hold Kepco’s five-year won-denominated bonds has fallen by 10.5 basis points to 17, Bloomberg-compiled data show. A basis point is 0.01 percentage point.
Korean corporate bond spreads are tightening “across the spectrum,” Threadneedle Investments’ Clifford said. “The economy is on an improving trend with anticipation of higher export growth due to improving global trades.”
In line with Korea’s call on state-owned enterprises to trim their balance sheets, Kepco plans to curb its debt-to-equity ratio to 143 percent by 2017, below the government’s proposed target of 145 percent, the utility said in March. It expects the gauge to be 145 percent this year.
The company will sell assets worth 5.3 trillion won, including stakes in Korea Electric Power Industrial Development Co. and LG Uplus Corp. It will also save 3 trillion won via business adjustments and cut costs by 4.2 trillion won.
“We expect the company’s credit quality to strengthen over the next one to two years with increasing profits and cash flows from operations,” said Mic Kang, a senior analyst at Moody’s in Hong Kong.