IHI (7013) Positive Outlook – Buffers Built into FY17 OP Forecast
Key Points
- ¥13bn “buffer” built into the company’s FY17 ¥65bn OP guidance brings management’s OP close to our forecast of ¥76bn.
- Split ¥11bn for CoGS and ¥2bn for SG&A, the ¥13bn buffer is “insurance” against potential project delays in the two loss-making divisions: Resources /Energy and Offshore /Infrastructure.
- A second, smaller buffer takes the form of a guided 30% YoY drop in Aero-Engine Division FY17 OP; we see, at most, a 15-20% drop given strong (high-margin) spare parts demand since H2 FY16.
- FY16 Aero-Engine Division actual OP of ¥53.0bn (-9.3% YoY) came 47% above original guidance of ¥36.0bn (-38.4% YoY). The FY17 company guidance of ¥37.0bn (-30.2% YoY) may prove less conservative but is once again shaped by IHI’s new president since FY16, Mr. Mitsuoka, who long headed the division and wishes no division OP shortfall.
- Aero-Engine Division sales are compressed 3-4% from Q4 FY16 onward as IHI ceases double-counting of commissions for its V2500 engine.
- We maintain our original ¥76bn OP forecast but lower our FY17 NP by 30% to ¥29bn to include losses assumed as per company guidance at both non-operating and extraordinary levels.
- We remain very positive on IHI and view it 15-40% undervalued whether taking the Aero-Engine division in isolation, or in a broader perspective due to its varied top-class business range of Turbochargers, Boilers, Thermal / Surface Treatment, Gas Processing Plants and Urban Development (of its valuable Tokyo real estate).
IHI is engaged in the manufacture and sale of heavy machinery. Resources, Energy and Resources segment offers boilers, power systems, motors for land and marine use, large marine motors and gas storage facilities and process plants. Social Infrastructure and Offshore Facilities segment offers bridges, water gates, steel structures, floating LNG storage facilities and offshore structures. Industrial Systems and General-purpose Machinery segment offers marine machinery, logistics systems, parking systems, steel manufacturing equipment and heat/surface treatment machinery. Aero Engine, Space and Defense segment provides aero engines, rocket systems, and defense systems.
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