Chiyoda (TSE:6366) Could Be 48% Below Fair Value As Shares Rebound

Chiyoda (TSE:6366) is back on investor radars after a recent move in its share price, with the stock closing at ¥705. Short term gains contrast with weaker performance over the past 3 months.

See our latest analysis for Chiyoda.

Recent trading suggests momentum in Chiyoda’s share price is trying to stabilise, with a 1 day share price return of 2.17% and 7 day share price return of 5.07%, set against a 90 day share price decline of 31.35%. The 1 year total shareholder return of 101.43% reflects a stronger longer term picture.

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After a sharp pullback over 3 months and a strong 1 year total return, Chiyoda’s recent rebound puts timing front and center. Is it worth leaning into the current price, or waiting for a clearer value cushion?

Preferred P/E of 2.2x: Is it justified?

On current data, Chiyoda screens as inexpensive against several valuation checks, with the stock trading at a P/E of 2.2x while last closing at ¥705.

The P/E ratio compares the company’s share price to its earnings per share, so a lower P/E suggests investors are paying less for each unit of earnings. For a business focused on engineering, procurement and construction services, earnings power and contract profitability often sit at the center of how investors look at value.

In Chiyoda’s case, that low P/E sits alongside a strong recent earnings profile, including high quality earnings, a current return on equity of 73.5% and current net profit margins of 16.7% compared with 5.4% last year. This mix points to the market assigning a lower earnings multiple than the level that some fair value models suggest is possible if conditions support those fundamentals.

The gap looks even wider when put against the broader Construction industry. Chiyoda’s P/E of 2.2x is below both the estimated fair P/E ratio of 6.7x for the company and the JP Construction industry average of 11.4x, as well as a peer average of 13.1x. That places Chiyoda at a discount to sector and peer valuations that the market could move towards if sentiment and earnings expectations align.

Explore the SWS fair ratio for Chiyoda

Result: Price-to-Earnings of 2.2x (UNDERVALUED)

However, Chiyoda’s annual revenue and net income growth have both fallen, and a large share of revenue from Qatar and the United States could magnify project or regional setbacks.

Find out about the key risks to this Chiyoda narrative.

Another view on Chiyoda’s value

That low P/E story is only one angle. Our DCF model values Chiyoda’s future cash flows at ¥1,356.6 per share, compared with the current ¥705 price, which also points to an undervalued setup. The question is whether those future cash flow assumptions still feel comfortable to you.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Chiyoda for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 19 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Given the mix of strong recent metrics for Chiyoda alongside clear areas of concern, it makes sense to move quickly and weigh the trade off for yourself using 3 key rewards and 2 important warning signs

Looking for more ideas beyond Chiyoda?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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