Morningstar | MHI's Move to Buy Bombardier's Regional Jet Business Will Help the MRJ but Still Questionable
We're not entirely convinced that Mitsubishi Heavy Industries', or MHI's, acquisition of Bombardier's CRJ business will garner positive economic profit to MHI. Nonetheless, we think the move, which is currently in advanced negotiations, will help save MHI's regional jet business by giving them access to engineering expertise and could ensure that the MRJ gets airborne. It is unlikely that the deal is accretive given the CRJ's ongoing losses but this will depend on the price paid by MHI and if there are synergies from combining the CRJ and MRJ programs.With the lack of financial information presently, we retain our fair value estimate of MHI at JPY 4,710. We believe MHI is fairly valued and a larger risk buffer is needed before we'd be buyers.
The drop in MHI's share price in relation to this news is testament to investor dislike of this move. Without any such move, we think MHI would be better off just shutting down the MRJ program. However, we note that the group is not ready to give up yet and we suspect the strategy would be to first, ensure certification of the MRJ to stem further losses. Acquiring the CRJ business could provide MRJ with a pool of aviation engineering expertise and access to maintenance support.
Our generally negative outlook for the regional jet business is unchanged. Basically we see limited demand for these smaller jets and this had been evident in the lack of sales growth by Bombardier for its CRJ series. Historically, Delta Airlines had been a key client but they are moving away from these smaller jets while United Airlines uses Embraer. Our current forecast just sees stagnant sales of 16-18 CRJ planes annually through 2023 which is not enough to be profitable so it would not be too surprising for MHI to cancel some of the CRJ series if they were to take over. The consolidation may help MRJ's prospects.
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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