MHI's 1Q Results Mixed but Mainly Within Our Estimates; Guidance Still Looks High

Mitsubishi Heavy Industries' first-quarter net profit of JPY 16.4 billion and revenue of JPY 919.3 billion reflect largely flattish growth, in line with our full-year projection. There were some bright spots, however, with power systems sales showing stronger revenue growth at over 8% and new order book pace in terms of units. This is within MHI's full-year guidance. Losses at the regional jet business, MRJ, were lower at JPY 5.1 billion due to timing factors, which helped lift contributions from the aircraft, defense, and space unit. We think the greater uncertainty comes from the industry and infrastructure division, which we believe will be more sensitive to the global slowdown as the U.S.-China trade war escalates. Our JPY 5,200 fair value estimate is unchanged; it prices MHI at an average 13.5 times price/earnings over our five-year projected period. MHI presently appears undervalued on our assumption that earnings growth will resume in fiscal 2020 (ending March 2021) on reduced MRJ losses and a pickup in power system (turbine and power plant and related services) sales.