MIELY - Mitsubishi Electric: A Mixed Picture

2023-09-18 12:29:03 ET

Summary

• Mitsubishi Electric Corporation suffered from an EBITDA miss in Q1 FY 2024, and the company's consensus full-year FY 2024 EBITDA forecast was cut in recent months.
• The company is allocating as much as JPY2.8 trillion to investments in high-growth areas in the next few years, and this should help to push up its future ROE.
• I award a Hold investment rating to Mitsubishi Electric, as I have a mixed view of the stock considering both its short-term outlook and medium-term prospects.

Elevator Pitch

Mitsubishi Electric Corporation ( MIELY ) [6503:JP] shares are rated as a Hold. On one hand, Mitsubishi Electric's prospects in the short term are affected by the company's exposure to the China market and slower demand for its factory automation systems. On the other hand, Mitsubishi Electric's shares are inexpensive, and ROE expansion might be a mid-term re-rating catalysts.

Mitsubishi Electric's shares are listed on both the Tokyo Stock Exchange and the Over-The-Counter or OTC market. The trading liquidity of Mitsubishi's Japan-listed shares is pretty decent, taking into account its three-month mean daily trading value of roughly $1 million (source: S&P Capital IQ ). The company's Japanese shares are relatively more liquid with a three-month average daily trading value of $70 million, and can be traded using US brokerages with international markets access like Interactive Brokers.

Company Description

Mitsubishi Electric is a Japanese holding company or conglomerate which owns businesses in different sectors and industries.

An Overview Of Mitsubishi Electric's Five Business Segments

The company's Life, Industry & Mobility, Infrastructure, Others, and Business Platform segments accounted for 33%, 29%, 17%, 14%, and 7% of Mitsubishi Electric's top line, respectively for fiscal 2023 (YE March 31). Separately, Mitsubishi Electric's home market Japan and international markets each represent half of the company's FY 2023 revenue.

Share Price Correction Driven By Factory Automation And China Weakness

MIELY's stock price pulled back by -15% from its 52-week peak of $30.00 recorded at market open on July 17, 2023 to close at $25.62 at the end of the September 15, 2023 trading day.

Mitsubishi Electric's most recent quarterly operating income fell short of the market's expectations, and the analysts have been lowering their full-year operating profit forecasts for the company in recent times

The actual Q1 FY 2024 (April 1, 2023 to June 30, 2023) EBIT for Mitsubishi Electric was JPY61 billion, or around -12% below the sell-side analysts' consensus forecast of JPY69 billion as per S&P Capital IQ data. The market's consensus full-year FY 2024 EBIT projection for MIELY was reduced from JPY326 billion in late-July this year to JPY320 billion (source: S&P Capital IQ ) as of September 15, 2023.

The weakness associated with Mitsubishi Electric's factory automation systems business (Industry & Mobility segment) and the China market were the key factors contributing to the company's first quarter operating earnings miss and the cut in its consensus EBIT forecasts.

The company's factory automation systems business saw its operating income decrease from JPY30.7 billion in Q1 FY 2023 to JPY28.7 billion for Q1 FY 2024. Furthermore, orders for Mitsubishi Electric's factory automation systems dropped by a substantial -43% YoY in the most recent quarter. This led Mitsubishi Electric to revise its FY 2024 operating profit guidance for the factory automation systems business downwards by -3.5% in July. In its Q1 FY 2024 earnings presentation , Mitsubishi Electric attributed the poor performance and weak outlook of its factory automation systems business to the fact that "global demand decreased for digital equipment such as semiconductors."

In its FY 2023 annual report, Mitsubishi Electric specifically referred to China, Japan and the US as key "regions with significant revenue from external customers." The company derived 10.5% of its most recent fiscal year revenue from the Chinese market. MIELY highlighted in its Q1 FY 2024 results announcement that "recovery (for the company's businesses in China) remained moderate due to slower production and export." Earlier, Seeking Alpha News mentioned in an August 31, 2023 article that production activities in China have slowed for the fifth straight month running in August 2023.

Undemanding Valuations And Double-Digit ROE Target

In the preceding section, I have highlighted that Mitsubishi Electric's near-term financial outlook could be negatively impacted by the company's factory automation systems business and its operations in China.

Looking beyond short-term headwinds, Mitsubishi Electric has the potential to benefit from a positive re-rating of its valuations, assuming that the company achieves its ROE goal.

Mitsubishi Electric's current valuations are undemanding, as the stock's key valuation metrics are close to its historical averages. The market values Mitsubishi Electric at a historical trailing P/B ratio of 1.20 times and a consensus forward next twelve months' normalized EV/EBITDA multiple of 6.77 times. As a comparison, the stock's five-year mean P/B and EV/EBITDA metrics were 1.21 times and 6.45 times (source: S&P Capital IQ ), respectively.

The company's ROE was 6.9% for FY 2023, and its annual ROE didn't exceed 10% since FY 2019. Looking forward, Mitsubishi Electric targets to improve its ROE to 10% by FY 2026 as highlighted in its May 2023 investor presentation slides . If the company does achieve an ROE in the double-digit percentage range, the stock should deserve to trade at higher valuation multiples.

In my view, Mitsubishi Electric's intermediate-term ROE target is realistic, taking into account its capital allocation strategy. The company aims to raise JPY3.4 trillion from working capital optimization and the divestment of non-core assets in the FY 2022-2026 time frame, of which JPY2.8 trillion will be allocated to investments in high-growth areas. The remaining JPY0.6 trillion will be set aside for shareholder capital return initiatives like dividends and share buybacks. I believe that the significant amount of monies (JPY2.8 trillion) allocated to growth investments will drive Mitsubishi Electric's ROE higher in the coming years.

Concluding Thoughts

I have a Neutral view of Mitsubishi Electric Corporation. On the positive side of things, the stock has valuation upside, taking into consideration the potential for improvement in the company's ROE. On the negative side of things, Mitsubishi Electric short-term performance might be below expectations, as a result of weakness relating to its factory automation systems business and the China market.

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