Morningstar | Marginal Impact from MHI's Acquisition of Bombardier's CRJ Business, FVE Raised By 2%
Mitsubishi Heavy Industry's, or MHI's, confirmed acquisition of Bombardier's commercial regional jet, or CRJ, business for USD 750 million affirms our prior expectation that the deal would have a relatively minor impact on MHI. CRJ is a mature business and we see little growth, adding only around JPY 3 billion operating profit to our midcycle forecast. The purchase, we think could, however, help add expertise and a distribution and support network to boost MHI's own regional jet program. As a result, we move forward our assumption for the recently rebranded SpaceJet sales to breakeven by one year to MHI's financial year ending March 2023 (fiscal 2022). This lifts our fair value estimate by 2% to JPY 4,820 and we continue to see MHI as being fully valued.We expect the CRJ business to be loss making this fiscal year, lowering our fiscal 2019 net profit estimate for MHI by 1% to JPY 99 billion. But this should improve to a positive operating profit of JPY 4 billion in fiscal 2022 based on its backlog of orders, which it will continue to deliver from its existing facilities. The purchase, thus, is not cheap at over 41 times price/earnings based on our estimate. However, since the CRJ product is unlikely to be continued by MHI, the purchase mainly reflects the value of the distribution and support network to the SpaceJet business.
While reduced losses at SpaceJet will help the group, this uptick is already reflected in MHI's current share price. Our base case assumes that heavy expenditure for SpaceJet will decline and that deliveries of the MRJ90 will start in late fiscal 2020 assuming certification is obtained by end-2019 or early 2020. While the SpaceJet losses remain a drag, MHI has been seeing improving cash flow due to its ongoing efficiency exercises. The group's power systems and industry & infrastructure segments are still more important to the group's cash flow but reduced aircraft losses will drive EPS growth.
Mitsubishi Heavy Industries is a manufacturer of heavy machinery. Along with its affiliates, Co. is engaged in the design, manufacture, installation, sale and after-sales services of boilers, turbines, diesel engines, power generation facilities, passenger ships, liquefied natural gas ("LNG") ships, liquefied petroleum gas ("LPG") ships, container ships, oil tankers, offshore structure, civil aircraft and aero engine, defense equipment, space equipment, waste treatment systems, traffic systems, cranes, forklifts, construction and agricultural machinery, and others. Co. is also engaged in the sale, purchase and leasing of properties and the printing business.
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