Morningstar | MHI's Aircraft Unit Sued by Bombardier, Reminder of the Nightmare that MRJ Has Become
We retain our earnings forecast and fair value estimate of JPY 4,800 for no-moat Mitsubishi Heavy Industries, or MHI, following news that Bombardier is suing Mitsubishi Aircraft Corp, or MAC, for stealing its intellectual property on aircraft certification in North America. As it is, MHI is expecting losses of JPY 90 billion related to the Mitsubishi Regional Jet, or MRJ, project for the fiscal year ending March 2019 (financial year 2018). Our current fair value estimate assumes that losses will diminish for the MRJ project starting in fiscal 2019 but it will still be loss-making, albeit at lower levels, for the next five years. If the lawsuit further delays MRJ's certification, there is risk to our estimates, but we think MHI's current share price already reflects the risk of a write-down of the MRJ project. Given risks, we think MHI is fully valued at the present price level.Bombardier's lawsuit seeks to impose an injunction on MHI from using information gleaned from Bombardier's prior certification experience. The move alleges that former employees hired by MHI and AeroTech, which MHI hired to assist in the MRJ certification process, copied over proprietary test documents prior to leaving. MHI has denied the allegations. The MRJ has already logged more than 2,000 hours of flight time and is targeting to fulfill the 3,000 hours required by regulators in 2019 to obtain certification in the U.S. Any delay in certification would push back the first scheduled commercial delivery in 2020 and could lower our fiscal 2019-20 earnings estimates by around 10%.
Despite media reports, MHI has denied that it will be pumping more money into MAC as yet, although the subsidiary needs to recapitalize. However, if MHI does put in 64% of the estimated JPY 220 billion that media reports have indicated MAC needs, there could be combined downside risk that could reduce our fair value estimate to JPY 4,300, including the 10% cut in earnings estimates if the MRJ is delayed further.
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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