SK, GS shares tumble as new wholesale price cap weighs on earnings outlook

[Sources : SK E&S, GS EPS]

Shares of SK Inc. and GS Holdings Corp. have tumbled in a month after the Korean government placed a cap on the wholesale price of electricity generated by their power-producing subsidiaries.

Shares of SK, the holding entity of power generation company SK E&S Co., fell 14 percent to 186,500 won ($149.82) on Jan. 6 from 217,500 won on Dec. 21. GS Holdings, which controls GS EPS Co., also a private electricity provider, slipped 12 percent to 42,050 won from 47,850 won over the same period. The two recouped some losses on Monday. SK added 3.2 percent to trade at 192,500 around noon in Seoul, while GS Holdings rose 1.8 percent to 42,800 won.

Their recent falls were mainly caused by the cap on system margin price (SMP) placed by the government early last month, according to market analysts. In the first week of when the price regulation was implemented, SK shares lost 7 percent and GS Holdings 5 percent. Their falls accelerated since Dec. 28, when the two holding firms announced their dividend payment plan for the year.

SMP refers to the wholesale electricity price at which private power suppliers, like SK E&S and GS EPS, charge to state-run utility firm Korea Electric Power Corp. (KEPCO). The government set the cap on the SMP to help reduce the snowballing losses for KEPCO amid rising energy costs.

Market analysts forecast the price cap will cut down the sales of the private power suppliers by as much as 1 trillion won.

Yuanta Securities analyst Cho Nam-kon projected sales of SK E&S to decline by 1.29 trillion won and that of GS EPS by 519 billion won this year. Posco Energy Co., another major Korean power generator that recently merged with Posco International Corp., is expected to see its sales fall by 655 billion won.

The estimated losses are calculated with the assumption that the private power suppliers would be able to impose only 190 won per kilowatt-hour (kWh) of electricity even if the SMP comes to 250 won per kWh, based on the revised rule on the SMP cap.

SK E&S, in which SK owns a 90 percent stake, recorded a net income of 1.2 trillion won alone in the third quarter of 2022. That is the largest profit delivered by SK affiliates to the holding company.

GS EPS, in which GS Holdings owns a 70 percent stake, earned 224.3 billion won in net income over the same period to deliver the second-largest income to the holding company after GS Energy Corp.

[Photo by MK DB]

Both SK E&S and GS EPS operate natural gas power plants in Korea and supply electricity to KEPCO. Analysts anticipate the two to report record earnings for fiscal 2022 as their profits are expected to have jumped on the rise in electricity wholesale price amid sharp growth in global energy prices. They both have been importing natural gas directly from overseas suppliers since the early 2000s and the latest change in global market price is expected to have had little impact on their balance sheets.

Posco International completed its acquisition of Posco Energy just in November 2022 but it is already experiencing a sharp fall in its share price, slipping 11 percent to 21,150 won in a month.

Posco Energy generates 72 percent of its revenue from the power plant operation. Its net profit from January to September 2022 amounted to 165 billion won, which accounted for 32 percent of Posco International’s total net profit for the same period.