MODEC (TSE:6269) Valuation in Focus After Upgraded Profits and Bigger Dividend

MODEC (TSE:6269) released fresh guidance, forecasting higher operating and net profit for the year even as revenue expectations came down. The company also announced a notable jump in its planned annual dividend payout to shareholders.

See our latest analysis for MODEC.

It’s no surprise that MODEC’s announcement of a bigger dividend and a more optimistic profit forecast sent its shares sharply higher, with a one-day share price return of 26.1% and a remarkable 66.5% jump over the past month. Momentum has been building all year, helping MODEC deliver a 276.9% total shareholder return over the last 12 months and cement its status as one of the market’s standout recovery stories.

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After this extraordinary run, is MODEC still undervalued based on future earnings potential or is the recent surge a signal that the market is already factoring in all the good news? This creates a dilemma for would-be buyers.

Price-to-Earnings of 24.9: Is it justified?

At a price-to-earnings (P/E) ratio of 24.9, MODEC trades at a significant premium compared to its Asian industry peers and the broader market. This is especially notable given its recent share price surge to ¥13,055.

The price-to-earnings multiple measures how much investors are willing to pay for each yen of MODEC’s earnings. In capital-intensive, cyclical sectors like energy services, the P/E ratio typically reflects the company’s earnings stability, growth prospects, and market sentiment about future profitability.

Currently, MODEC’s P/E ratio of 24.9 stands well above both the Asian Energy Services industry average of 17.1 and the peer average of 11.2. Even when compared to the estimated “fair” P/E ratio of 13.9, the current valuation appears extended. This suggests the market has rapidly built in not just MODEC’s recovery, but also optimism for earnings to remain on an elevated path. The market could eventually move closer to the fair ratio if expectations temper.

Explore the SWS fair ratio for MODEC

Result: Price-to-Earnings of 24.9 (OVERVALUED)

However, MODEC’s valuation could be challenged if revenue contraction persists or if market forecasts for sustained profitability are overly optimistic.

Find out about the key risks to this MODEC narrative.

Another View: SWS DCF Model Signals Undervaluation

While MODEC looks expensive based on its price-to-earnings ratio, our DCF model presents a very different perspective. The shares are currently trading almost 39% below our estimate of fair value using discounted cash flows, suggesting the recent rally may still leave room for upside.

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 MODEC 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 865 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own MODEC Narrative

If you have a different view or want to dig deeper into the numbers yourself, you can quickly build your own take in just a few minutes. Do it your way

A great starting point for your MODEC research is our analysis highlighting 3 key rewards and 1 important warning sign that could impact your investment decision.

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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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