Mitsubishi Heavy Industries’ Jet Write-Offs Ugly but Core Operations Are Holding Up; FVE Unchanged

Mitsubishi Heavy Industries, or MHI’s, third-quarter performance was marred by significant losses at its SpaceJet commercial aircraft unit and weak demand for industrial equipment. As a result, the company lowered its fiscal 2019 (ending March 2020) operating profit forecast to zero from JPY 220 billion, but net profit is down just 10% to JPY 100 billion due to tax benefits. MHI management says visibility is low on the outlook presently but expects minimal Wuhan coronavirus related supply chain disruptions. However, demand for some industrial equipment, especially turbochargers, is weak presently and guidance on the Industry and Infrastructure, or I&I, segment operating profit has been cut to JPY 60 billion from JPY 110 billion. As we expect the Wuhan coronavirus outbreak to peak in the calendar second quarter and global demand to rebound thereafter, we see limited impact to our cash flow forecast for MHI. Our fair value estimate is unchanged at JPY 5,200.