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Focus shifting from E&P momentum to receivables

2Q24 review and 2H24 outlook

For 2Q24, KOGAS reported operating profit of W465.7bn, beating the consensus (W256.3bn). E&P operating profit fell 42% YoY to W64.9bn. We expect cash flow to gradually stabilize from 3Q24, as KOGAS announced it would increase residential/general service gas rates by 6.8% from August. However, it remains to be seen whether this will lead to a meaningful reduction in outstanding receivables. Meanwhile, visibility on a potential resumption of dividend payouts should increase if cash flow does not deteriorate further, especially given the government’s drive to enhance shareholder value.

Focus shifts from East Sea gas field development to receivables reduction

This year, KOGAS’s stock briefly broke above W60,000 (hitting a post-2018 high) on E&P momentum related to potential gas field development in the East Sea. However, a wide range of conditions must be met before the company can fully benefit from such a project; not only is further exploration required to assess the project’s feasibility, but the company also needs to develop a road map to ensure profitability (e.g., an export strategy).

More importantly, to participate in such a large-scale E&P project, the company must have sufficient investment capacity backed by healthy financials. In this sense, a key priority is the recovery of overdue receivables, which currently stand at W15.4tr. The company’s debt-to equity ratio also remains high, at 423%.

Raise TP to W48,000, but maintain Hold

We maintain our Hold rating on KOGAS but lift our target price to W48,000 (from W27,000). Our target price is based on the average EV/EBITDA multiple of global gas utility peers (9x) and the value of the Mozambique gas field. We raised our target price due to upward revisions to our EBITDA estimates (reflecting gas tariff hikes) and a change in our valuation base (from 2024 to 12-month forward earnings). For 2024, we forecast DPS at W2,500, which translates to a dividend yield of 5%.

The stock is trading at a P/B of 0.4x, its highest level in three years. Shares have priced in most of the anticipated E&P momentum, despite the high level of receivables and associated financial burden. We think the current valuation may not be sustainable unless cash flow tangibly improves through the collection of receivables. Meanwhile, the sustainability of East Sea E&P momentum should hinge on the outcome of exploratory drilling and the project’s business structure.









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