Mitsubishi Heavy Industries' Second-Quarter Results Mainly Within Our Estimates; Remains Undervalued

We maintain our earnings forecasts unchanged and fair value estimate at JPY 5,200 for Mitsubishi Heavy Industries, or MHI. We continue to believe MHI is undervalued on our assumption that earnings growth will resume in fiscal 2020 (year ending March 2021), due to reduced Mitsubishi Regional Jet, or MRJ, losses, and with cost efficiencies coming through. MHI’s second-quarter net profit improved 23% year over year to JPY 12.9 billion but the rebound mainly reflects reduced MRJ, losses while revenue and operating performance was generally flat. The second quarter has tended to be seasonally weak for the company so we remain comfortable that MHI can meet our full-year net profit estimate of JPY 99 billion, which is below Capital IQ consensus at JPY 112 billion and MHI’s unchanged guidance of JPY 110 billion. Our relatively subdued projection reflects our view that global trade issues will persist and the global slowdown will hit MHI’s industry and infrastructure segment profit. We also continue to forecast losses for MRJ through fiscal 2022, and news of the canceled Trans States Holdings' sales contract would support our view that losses could continue beyond MHI’s guidance.