Strong Order Intake In GTCC And Aero Engines Will Support Future Expansion And Operational Success

Key Takeaways

• Increased order intake in key sectors and strategic initiatives improve operational efficiency, boosting future revenue and earnings projections.
  
• Depreciation of the yen and improved cash flow management enhance short-term profit margins and financial health.
  
• Supply chain vulnerabilities and technical challenges could lead to inefficiencies, impacting cash flow, revenue growth, and overall profitability.

Catalysts

Manufactures and sells heavy machinery worldwide.

• Increased order intake in sectors such as Gas Turbine Combined Cycle (GTCC), Aero Engines, and Metals Machinery is expected to continue driving future revenue growth. Strong performance in these areas indicates a robust demand pipeline, boosting revenue projections.
  
• Strategic initiatives, like the acquisition of equity stakes in Fukushima's Nakoso and Hirono Power Plant projects, aim to optimize operations and improve reliability, eventually contributing to enhanced earnings from improved operational efficiency and potential revenue growth from power plant activities.
  
• The depreciation of the yen positively impacts financial results, as many of Mitsubishi Heavy Industries' revenues are foreign currency-denominated. This currency effect enhances both revenue and profit margins in the short term.
  
• Increases in full-year forecasts for order intake, revenue, and profits across several segments, such as Energy Systems and Plants & Infrastructure Systems, suggest upward trends in future business opportunities and earnings, driven by strong market demand and execution of existing backlogs.
  
• Improved cash flow management and operational efficiencies increased this year's free cash flow forecast to zero from a previous negative outlook, indicating better financial health and potential for higher net income in future periods.

Mitsubishi Heavy Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mitsubishi Heavy Industries's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 6.4% in 3 years time.
• Analysts expect earnings to reach ¥387.4 billion (and earnings per share of ¥115.01) by about March 2028, up from ¥256.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥293.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.0x on those 2028 earnings, down from 30.4x today. This future PE is greater than the current PE for the JP Machinery industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.17%, as per the Simply Wall St company report.

Mitsubishi Heavy Industries Future Earnings Per Share Growth

Risks

• The increased trade receivables and inventories, while within normal fluctuations, could indicate potential inefficiencies in cash conversion cycles, potentially impacting future cash flow and liquidity.
  
• The decrease in profit in turbochargers due to production disruptions caused by supplier issues highlights vulnerabilities in the supply chain, which could negatively affect revenue and profit margins.
  
• The decision to book a ¥10 billion loss in international projects suggests ongoing difficulties in certain segments and could indicate future erratic expenses, impacting overall net margins and profitability.
  
• The Logistics, Thermal & Drive Systems segment experienced normalized revenue declines when excluding foreign exchange effects, signaling underlying issues that could hamper future revenue growth.
  
• Technical challenges in IGCC technology at the Nakoso and Hirono power plants, despite recent repairs, may lead to future operational issues and unplanned expenses, affecting revenue and operating margins if not managed effectively.

Valuation

• The analysts have a consensus price target of ¥2515.721 for Mitsubishi Heavy Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥2800.0, and the most bearish reporting a price target of just ¥1900.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥6048.3 billion, earnings will come to ¥387.4 billion, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of ¥2315.0, the analyst price target of ¥2515.72 is 8.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.