TEPCO a good investment?

September 9, 2015

Tepco’s index-topping gains fueled by electricity shake-up

http://www.japantimes.co.jp/news/2015/09/09/business/corporate-business/tepcos-index-topping-gains-fueled-electricity-shake/#.VfAQT5fwmic

Bloomberg

Japan’s reform of its energy market is proving a boon to investors in the company at the center of the Fukushima No. 1 nuclear plant disaster.

Tokyo Electric Power Co’s shares have surged 59 percent in the six months through Tuesday’s close, making it the best performer on the Nikkei 225 Stock Average and the 174-member Bloomberg World Utilities Index.

Tepco, owner of the wrecked plant, is seen as an early beneficiary of government-backed power reform. By April, residential power customers will be able to choose their provider for the first time. And by 2020, utilities will be required to separate their transmission, distribution and retail businesses.

“Looking towards the electricity market reform to be completed by 2020, a company the size of Tepco is an attractive investment,” Mana Nakazora, an analyst at BNP Paribas Securities (Japan) Ltd., said by email.

While the company’s stock price has surged this year, it is still less than half of where it was before the Fukushima disaster. The shares fell 3.1 percent to ¥751 at the close of Tokyo trading on Tuesday. They closed at ¥2,153 the day before Fukushima, but have increased 55 percent since Tepco announced on May 1 that it will transition to a holding company beginning in April.

Tepco was rated new overweight on Tuesday with a target price of ¥1,000 a share by Yuji Nishiyama, an analyst at JPMorgan Securities Japan Co.

Spokesman Tatsuhiro Yamagishi declined to comment on the performance of the company’s stock.

For Tepco, a more open energy market in Japan offers the opportunity for growth at a company whose survival was in question just a few years ago. The Fukushima disaster put it on the verge of default, with the head of Japan’s biggest stock market telling the company to file for bankruptcy protection. Tepco was saved by a ¥1 trillion infusion from the government in 2012, the nation’s largest bailout since the 1990s.

The power company received ¥5.61 trillion from the state-backed Nuclear Damage Compensation and Decommissioning Facilitation Corp. to deal with payouts to victims of the Fukushima meltdown, Tepco reported last month.

Under the April reorganization, Tepco’s nuclear operations will be placed into a holding company, while debt investors will be repaid from the funds of a spun-off power grid company.

Tepco’s probability of debt nonpayment has dropped to 0.309 percent from about 1.121 percent on Oct. 16, according to the Bloomberg default-risk model, which considers factors such as share prices and debt. The probability of debt nonpayment was as high as 6.156 percent in 2012.

“The company’s default risk has disappeared,” said BNP Paribas’s Nakazora.

The government’s power reform began this year with the creation of an organization to manage the nation’s supply and demand balance. Next year’s full retail liberalization, the second stage of the reform, will allow utilities to more freely expand outside their traditional regions. The government aims to remove rate regulations by 2020.

A drop in fuel costs saw Tepco increase operating profit threefold in the quarter ended June 30. The price of liquefied natural gas imported into Japan fell to a six-year low in June, while crude oil prices are near a record low.

“Investors expected first-quarter profits to have a big increase due to the drop in oil then liquefied natural gas,” Syusaku Nishikawa, a Tokyo-based analyst at Daiwa Securities Co., said by email.

Yet challenges remain. Liabilities related to the Fukushima disaster and Tepco’s responsibilities will continue to pressure the company’s credit quality in the long term, according to Mariko Semetko, a vice president at Moody’s Japan K.K., which rates the company’s outlook as negative.

Tepco, which operates the world’s biggest nuclear plant by capacity at its Kashiwazaki-Kariwa facility in Niigata Prefecture, has yet to restart any of its nuclear reactors. Resuming operations at the facility would boost profit by as much as ¥32 billion a month, the company has said.

“The recent improvements in profitability are definitely a plus,” Semetko said by phone. “But the company hasn’t yet started its Kashiwazaki-Kariwa plant and there are a lot of uncertainties around costs related to Fukushima. With all of that in mind, we haven’t been able to stabilize the outlook yet.”