Chiyoda (TSE:6366) Pullback Puts Its Low Valuation Back In Focus

Chiyoda (TSE:6366) has come back into focus for investors after recent share price swings, including a gain of 4.3% over the past day and a decline of 35.6% over the past 3 months.

See our latest analysis for Chiyoda.

The recent 4.3% one-day share price gain comes after a sharp 90-day share price return decline of 35.6%, while the one-year total shareholder return of 77.6% shows that longer term holders have still seen strong gains, suggesting momentum has cooled after a strong run.

If you are reassessing Chiyoda after this pullback, it can be useful to broaden your watchlist and check out other infrastructure related opportunities through the 35 power grid technology and infrastructure stocks

Bulls point to Chiyoda’s strong multi year shareholder returns and current discount to analyst and intrinsic estimates. Bears highlight recent revenue and net income declines. Which case do the current valuation markers support next?

Price to earnings of 2.1x for Chiyoda: Is it justified?

On a headline measure, Chiyoda looks cheap compared to the broader JP Construction industry, with a P/E of 2.1x versus an industry average of 11.4x and a peer average of 11.3x.

The P/E ratio compares the current share price to earnings per share. For a company like Chiyoda, which has reported high quality earnings and a very strong recent uplift in profits, this ratio is a useful shorthand for how much investors are paying for each unit of current earnings.

Chiyoda has become profitable over the past 5 years, growing earnings by 53.2% per year on average, and earnings growth over the past year was very large at 231.8%. That recent growth also outpaced the wider Construction industry, which reported earnings growth of 27.5%. Against that backdrop, a 2.1x P/E suggests the market is assigning a relatively low price tag to those current earnings.

The contrast with an estimated fair P/E of 6.8x is also clear. If market expectations moved closer to that level, the implied valuation would be meaningfully higher than where the P/E stands today. This underlines how compressed the current multiple looks against both peers and this fair ratio benchmark.

Explore the SWS fair ratio for Chiyoda

Result: Price-to-earnings of 2.1x (UNDERVALUED)

However, recent annual declines in revenue and net income, along with the 35.6% 90 day share price fall, could challenge the bullish Chiyoda valuation story.

Find out about the key risks to this Chiyoda narrative.

Another view on Chiyoda using the SWS DCF model

The low 2.1x P/E ratio presents Chiyoda as trading at a comparatively low multiple. The SWS DCF model provides another perspective, with an estimated future cash flow value of ¥1,365.4 per share compared to the current ¥659 price. This represents a 51.7% discount. How much importance you place on each signal is up 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 18 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

The combination of strong long-term returns and recent share price pressure around Chiyoda sends a mixed message. Move quickly to review the numbers, understand both the potential upside and the areas of concern, then weigh the 3 key rewards and 2 important warning signs.

Looking for more investment ideas beyond Chiyoda?

If you are serious about putting this Chiyoda analysis to work, broaden your opportunity set with a few focused screens that can surface stocks matching your style.

• Target potential mispricings by scanning for companies that combine quality and value through the 18 high quality undervalued stocks
• Strengthen your income toolkit by zeroing in on businesses with higher yields and resilience using the 42 dividend fortresses
• Reduce surprises by concentrating on companies that score well on financial robustness through the 58 resilient stocks with low risk scores

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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