Mitsubishi Electric's Operating Margin Likely Bottomed Out in June Quarter; Maintain FVE

Mitsubishi Electric’s share price fell below its book value per share upon its June quarter announcement, likely from concerns over its air conditioning systems/home products and automotive businesses facing deteriorating margins from rising materials/logistics costs and weakening demand. In spite of near-term hurdles, we still expect margin recovery from the September quarter. Moreover, we think shares are undervalued, as the market is discounting its medium-term growth prospects of its factory automation, or FA, systems business. As one of the leading programmable logic controller market players in Asia, we think Mitsubishi Electric is well-positioned to capitalize on production automation trends in the region, including electric vehicle, or EV/battery-related applications and FA needs to deal with aging populations. With our outlook remaining unchanged, we maintain our fair value estimate at JPY 1,900. Further, we lower Mitsubishi Electric’s Morningstar Uncertainty Rating to Medium from High, as its diversified business portfolio and a postpandemic recovery of infrastructure investments should lead to a steady top-line growth over the next five years.