Nippon Gas (TSE:8174) Could Be 33% Undervalued After Stock Split And Dividend Update

Nippon Gas (TSE:8174) has drawn fresh attention after its board approved a stock split tied to a large increase in authorized shares, along with revised year-end dividend guidance that keeps the pre split payout slightly higher.

The stock split decision and higher pre split dividend guidance come after a period where Nippon Gas has seen its share price at ¥3,049, with a 30 day share price return of 9.60% and a 90 day share price return of 13.30%. Total shareholder return sits at 9.34% over one year and more than doubles over five years, which suggests recent momentum has been building on top of longer term compounding returns.

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After that stock split announcement and the recent move in Nippon Gas shares, the bigger issue is the gap between the current ¥3,049 price and the range of value estimates. How far away from fair value does that really place the stock?

Price to earnings of 22x, is it justified for Nippon Gas?

On Simply Wall St’s estimates, Nippon Gas is trading at a 33% discount to an intrinsic value of ¥4,553.42 per share, despite a last close of ¥3,049. That gap sits alongside a P/E of 22x that is well above both its gas utilities peers and the level suggested by the SWS fair ratio model.

The P/E multiple compares the current share price with earnings per share and shows how much investors are paying for each unit of profit. For a utility stock like Nippon Gas, which often has steadier demand and regulated returns, the P/E can reflect how much the market is willing to pay for its earnings profile and capital discipline rather than high growth expectations.

Nippon Gas has grown earnings by 16.1% over the past year and 8.3% per year over the past five years, with net profit margins currently at 7%. Earnings are also forecast to grow 5.5% per year and return on equity is forecast at 25.4% in three years. Those profit and return metrics are supportive, yet the current 22x P/E is still well above both the Asian Gas Utilities peer average of 13.7x and the estimated fair P/E of 10.6x that the SWS fair ratio model points to as a level the market could converge toward.

The 22x P/E therefore implies investors are currently paying a premium for Nippon Gas relative to peers and fair ratio estimates. That premium may reflect confidence in its earnings quality and high return on equity rather than outsized growth expectations, given revenue and earnings are both forecast to grow more slowly than the wider Japanese market.

To understand how that fair ratio is derived and what would need to change for the premium to narrow or widen, review the Explore the SWS fair ratio for Nippon Gas.

Result: Price-to-earnings of 22x (OVERVALUED).

However, the Nippon Gas story could change quickly if earnings growth or return on equity assumptions are revised, or if sentiment toward gas utilities weakens.

Find out about the key risks to this Nippon Gas narrative.

Another view on Nippon Gas using the SWS DCF model

The P/E points to Nippon Gas looking expensive versus peers, yet the SWS DCF model paints a different picture. On that approach, Nippon Gas at ¥3,049 trades around 33% below an estimated fair value of ¥4,553.42. If both views are right, which one should carry more weight for you?

To see how the cash flow assumptions stack up against the earnings based view, and what would need to change for them to line up, 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 Nippon Gas 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 23 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

With Nippon Gas showing both appealing metrics and some clear question marks, it makes sense to look at the full risk and reward picture yourself. To see the balance of potential upsides against the concerns investors are flagging, start by reviewing the 3 key rewards and 1 important warning sign.

Looking for more Nippon Gas investment ideas?

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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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