Chiyoda (TSE:6366) Signs Geothermal Pact, Is It Still A Bargain?

Chiyoda stock moves after geothermal collaboration with Sage Geosystems

Chiyoda (TSE:6366) drew fresh attention after signing an agreement with Sage Geosystems to study high pressure facilities for commercial scale power using enhanced geothermal systems technology.

The geothermal study lands at a moment when Chiyoda’s recent 1-month share price return of 5.44% and 90-day gain of 10.18% suggest improving short term momentum, while the year to date share price is still down 11.75% and the 1-year total shareholder return of 84% points to a much stronger longer run recovery story.

Scan beyond Chiyoda’s geothermal push and size up other potential beneficiaries of the energy transition narrative with a curated set of 91 nuclear energy infrastructure stocks.

Chiyoda now has a high profile geothermal partner and a strong engineering franchise, yet the share price only recently bounced off a weak year to date. Is that mismatch real value, or is it just a value trap in disguise?

Price-to-Earnings of 2.3x for Chiyoda: Is it justified?

On a simple earnings yardstick, Chiyoda looks inexpensive, with a P/E of 2.3x that screens as undervalued relative to both its peers and the broader construction sector.

The P/E ratio compares what investors pay for each unit of profit to what the business is currently earning. For an engineering and project-focused group like Chiyoda, this metric helps show how the market is weighing its current profitability against expectations for future contracts, project risk and the quality of its earnings profile.

Here, Chiyoda trades on a P/E of 2.3x versus a peer average of 11.8x and a JP Construction industry average of 10.9x, a steep discount that indicates the market is pricing in much lower future profitability than the sector. The internal fair P/E estimate sits at 4.7x, which is still well above where the shares currently trade and points to a level the valuation could move toward if sentiment and earnings expectations align with that benchmark.

For investors who want to go deeper into how that fair ratio is calculated and what it implies for Chiyoda over time, Explore the SWS fair ratio for Chiyoda.

Result: Price-to-Earnings of 2.3x (UNDERVALUED).

Still, Chiyoda’s annual revenue and net income both declined, and any further weakness in project wins or profitability could challenge the current value argument.

Find out about the key risks to this Chiyoda narrative.

Another view on Chiyoda’s value

The P/E story suggests Chiyoda looks inexpensive, yet the SWS DCF model paints an even starker picture. At ¥736, the shares trade at roughly a 49% discount to an estimated future cash flow value of ¥1,446.91. That gap signals potential upside. The key question is how comfortable you are with the assumptions behind it.

For readers who want to see how those cash flow assumptions are built and tested, 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 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

Chiyoda clearly stirs mixed feelings, with sharp valuation signals on one side and real questions on the other. Move quickly and test the data for yourself, then weigh both the upside and the caution signs by checking the 3 key rewards and 2 important warning signs.

Looking for more Chiyoda sized investment ideas?

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• Target potential mispricing and assess whether quality and value line up by scanning a curated set of 23 high quality undervalued stocks.
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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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