Superb Valuation, High Dividend Yield: Consider Korea Electric Power

| About: Korea Electric (KEP)

Summary

In my opinion, KEP is an excellent combination of superb value and a high growth dividend stock, currently yielding about 5.4%.

The company delivered strong first quarter 2016 financial results which were better than expectations.

KEPCO is well positioned for continued growth. Fuel costs are expected to remain low in the next few quarters.

Moreover, the company uses a favorable power generation mix increasing the nuclear percentage as an energy source.

Regarding its valuation metrics, KEP's stock is considerably undervalued. The stock is trading way below book value, price to book is only 0.57, and the PEG ratio is exceptionally low.

The stock of the South Korean company Korea Electric Power [KEPCO] (NYSE:KEP) is not popular among American investors. In fact, only 806 of Seeking Alpha's subscribers have KEP in their portfolio. However, in my opinion, KEP is an excellent combination of superb value and a high growth dividend stock, currently yielding about 5.4%. On May 11, the company delivered strong first quarter 2016 financial results which were better than expectations, as LNG purchase prices and electricity purchase costs were more than 5% lower than expected.

The Company

Korea Electric Power Corporation, an integrated electric utility company, generates, transmits, and distributes electricity in Korea and internationally. The company operates through Transmission and Distribution, Electric Power Generation (Nuclear), Electric Power Generation (Non-Nuclear), Plant Maintenance & Engineering Service, and Others segments. It generates power from nuclear, coal, oil, liquefied natural gas, internal combustion, hydro, wind, solar, and biomass sources. As of December 31, 2015, the company had a total of 618 generation units, including nuclear, thermal, hydroelectric, and internal combustion units with an installed generation capacity of 73,282 megawatts. The company was founded in 1961 and is headquartered in Naju, South Korea.

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Source: Company Presentation May 2016

First Quarter 2016 Results

KEPCO posted historically high first quarter earnings. The company recorded in the first quarter sales of 15,680 billion South Korean Won ($13.2 billion, 1 U.S. dollar = 1,190 Won), up 3.7% year-over-year, and operating income of 3,610 billion Won, up 61% year-over-year, and 4.2% above consensus. As I see it, the continuous increase in the company's operating profit margin since 2012 is very impressive. In the recent quarter the operating profit margin was very high at 23% while the average profit margin in 2015 was at 19.2% and in 2014 was at 10.1%, as shown in the chart below.

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Source: Company Presentation May 2016

The company is benefiting from low fuel costs. Coal accounted for 45% of KEPCO's energy sources for electricity generation in the first quarter of 2016, while nuclear accounted for 39%, LNG 10%, oil 4%, and others 2%.

Source: Company Presentation May 2016

There was a dramatic decline in fuel costs year-over-year. Average coal price decreased 5.9%, LNG fell 25.3%, and oil price dropped 41.1%. As such, the company's total fuel expense in the first quarter of 2016 decreased 19.9% compared to the first quarter of 2015, as shown in the table below.

Source: Company Presentation May 2016

Growth

KEPCO has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was at 8.3%, and the average EPS growth was extremely high at 115.8%. The average annual estimated EPS growth for the next five years is also very high at 25%.

In my view, KEPCO is well positioned for continued growth. Fuel costs are expected to remain low in the next few quarters. Moreover, the company uses a favorable power generation mix increasing the nuclear percentage as an energy source. While nuclear represented 39% of energy source for electricity generation in the first quarter of 2016, its cost accounted for only 9% of fuel cost.

Source: Company Presentation May 2016

Furthermore, KEPCO is increasing investments in new energy businesses, including solar photovoltaic power, electric vehicle charging, and energy storage systems, which will improve its mid-term growth prospects. Electric vehicle charging and energy storage systems could be key growth engines for the company since KEPCO is capable of designing and operating power grids which give it a competitive edge over others. Demand for electric vehicle charging could have a significant impact on the entire power grid going forward, following an increase in the number of electric cars.

Valuation

Year-to-date, KEP's stock is up 20.6% while the S&P 500 index has decreased 0.2%, and the Nasdaq Composite Index has lost 5.9%. Moreover, since the beginning of 2012, KEP has gained 132.6%. In this period, the S&P 500 Index has increased 62.2%, and the Nasdaq Composite Index has risen 80.9%. Nevertheless, considering its compelling valuation and high growth prospects, shares could go much higher, in my opinion.

KEP Daily Chart

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KEP Weekly Chart

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Charts: TradeStation Group, Inc.

Regarding its valuation metrics, KEP's stock is considerably undervalued. The stock is trading way below book value, price to book is only 0.57, the trailing P/E is extremely low at 2.88, and the forward P/E is very low at 5.46. The price to cash flow is extremely low at 1.90, the fourth lowest among all 822 companies trading on American markets with a market cap greater than $7,000 million, and the price to free cash flow is also very low at 10.76. The price-to-sales ratio is very low at 0.65, and the Enterprise Value/EBITDA ratio is very low at 4.28. Furthermore, the PEG ratio is exceptionally low at 0.22, the fourth lowest among all 822 companies trading on American markets with a market cap greater than $7,000 million. The PEG ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means the stock is more undervalued.

The ten companies with the lowest PEG ratio among companies with a market cap greater than $7,000 million

The ten companies with the lowest price to cash flow ratio among companies with a market cap greater than $7,000 million

Source: Portfolio123

The company is paying a generous dividend currently yielding about 5.4% a year, and the payout ratio is only 15%.

Summary

In my opinion, KEP is an excellent combination of superb value and a high growth dividend stock, currently yielding about 5.4%. The company delivered strong first quarter 2016 financial results which were better than expectations. KEPCO is well positioned for continued growth. Fuel costs are expected to remain low in the next few quarters. Moreover, the company uses a favorable power generation mix increasing the nuclear percentage as an energy source. Regarding its valuation metrics, KEP's stock is considerably undervalued. The stock is trading way below book value, price to book is only 0.57, and the PEG ratio is exceptionally low at 0.22. All these factors bring me to the conclusion that KEP's stock is a smart long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in KEP over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.