Blog

1. Stock Performance and Financial Context

Kansai Electric Power Company (KEPCO) delivered a remarkable earnings recovery in FY2024 and FY2025, with net income rebounding from ¥17.7 billion (FY2023) to ¥441.9 billion and ¥420.4 billion, respectively. However, the company forecasts a 29.8% drop in FY2026 net income to ¥295 billion, triggering investor concerns about sustainability of earnings and dampening stock sentiment.

Following a modest rally, KEPCO’s share price began a gradual decline starting in May 2024, reflecting a shift in investor sentiment from optimism about short-term earnings to caution over long-term structural challenges and declining visibility on EPS growth.

2. Drivers of FY2026 Profit Decline

While FY2024–2025 profits were supported by favorable tailwinds, KEPCO’s earnings guidance for FY2026 reflects normalization and renewed cost pressures.

Key Reasons Behind Decline:

• Fuel Cost Adjustment Reversal
  In FY2024–25, KEPCO benefited from a time lag in fuel cost adjustments—falling LNG and coal prices boosted profit margins. These temporary gains are expected to unwind in FY2026 as electricity tariffs reset and fuel savings normalize.

• Declining Power Margins
  The company expects less favorable electricity margin contributions amid flat demand and intensified competition in the liberalized market.

• Rising Fixed Costs
  Capital expenditures for nuclear safety, zero-carbon infrastructure, and grid modernization are adding to depreciation and maintenance expenses, reducing operational leverage.

• Regulatory Headwinds
  KEPCO remains exposed to cost-recovery caps in regulated businesses, limiting upside despite investment commitments.

3. Stock Decline Since May 2024 – Investor Caution Returns

Despite strong FY2025 financials, KEPCO’s stock has underperformed since May 2024 due to the following factors:

Peak Earnings Perception

• The market interpreted FY2024–25 results as transitory rather than sustainable. The FY2026 guidance reinforced the view that profitability has peaked.

CapEx Burden and ROE Concerns

• Ambitious capital investment in carbon-neutral assets and nuclear infrastructure has raised concerns about free cash flow pressure and long-term return on equity.

Decarbonization Costs vs. Revenue Growth

• While KEPCO leads in Japan’s energy transition, the revenue contribution from renewables and new businesses remains limited, creating a lag between investment and earnings realization.

Valuation Compression

• KEPCO had traded at a low P/E of ~4x during FY2025, but this valuation was based on peak EPS. With FY2026 EPS forecasted to fall from ¥436.09 to ¥264.80, investors have re-rated the stock downward.

4. Key Metrics (Consolidated)

5. Strategic Outlook

KEPCO is pursuing a dual agenda: ensuring stable electricity supply and executing a long-term carbon-neutral strategy. The company is investing in:

• Renewable energy and grid resilience

• Nuclear restarts and safety upgrades

• Hydrogen/ammonia co-firing technologies

• Digital solutions and overseas expansion (telecoms, energy services)

While these initiatives position KEPCO for structural relevance, investors may need to wait several years for tangible returns on these investments.

6. Investment Consideration

KEPCO offers stable dividends, fortified balance sheet, and leadership in Japan’s energy transition. However, short-term earnings visibility is limited, and capital intensity may weigh on free cash flow.

Investor Takeaway

The stock may appeal to income-focused or long-term ESG-aligned investors, but earnings normalization and high CapEx risk could continue to cap upside in the near term.