Mitsubishi Electric Corporation (OTCPK: Mili) [6503:JP] The stock is rated Hold. On the one hand, Mitsubishi Electric’s short-term prospects are affected by the company’s exposure to the Chinese market and slowing demand for it. Factory automation systems. Mitsubishi Electric, on the other hand, is cheap and ROE expansion could be a catalyst for a mid-term rerating.
Mitsubishi Electric’s shares are listed on the Tokyo Stock Exchange and the Over-the-Counter Market. Considering the three-month average daily trading volume of Mitsubishi’s Japan-listed shares is about $1 million, its trading liquidity is quite good (Source: S&P Capital IQ). The company’s Japanese shares are relatively liquid, with a three-month average daily trading volume of $70 million, and can be traded through U.S. brokerage firms with international market access, such as Interactive Brokers.
Mitsubishi Electric is a Japanese holding company or conglomerate that has businesses in different fields and industries.
Overview of Mitsubishi Electric’s five business divisions
In fiscal 2023 (ended March 31), the company’s Lifestyle, Industrial & Mobility, Infrastructure, Others and Business Platform businesses accounted for 33%, 29%, 17%, 14% and 7% of Mitsubishi Electric’s revenue respectively. In addition, Mitsubishi Electric’s domestic market Japan and international markets each account for half of the company’s revenue in fiscal 2023.
Factory automation and China’s economic weakness drive stock price correction
MIELY’s stock price is down -15% from the 52-week peak of $30.00 recorded at the open of trading on July 17, 2023, and closed at $25.62 as of the trading day on September 15, 2023.
Mitsubishi Electric’s latest quarter operating income fell short of market expectations, and analysts have been lowering the company’s full-year operating profit forecasts in recent times.
Mitsubishi Electric’s actual EBIT for the first quarter of fiscal 2024 (April 1, 2023 to June 30, 2023) was 61 billion yen, about -12% lower than the sell-side analyst consensus forecast of 69 billion yen S&P Capital IQ data. The market’s consensus forecast for MIELY’s full-year EBIT in fiscal 2024 was lowered to 320 billion yen from 326 billion yen in late July this year (Source: S&P Capital IQ) as of September 15, 2023.
Weakness in Mitsubishi Electric’s Factory Automation Systems business (Industrial & Mobility Division) and the China market were key factors that led to lower-than-expected operating earnings in the first quarter and widespread reductions in EBIT forecasts.
Operating income from the company’s factory automation systems business fell to 28.7 billion yen in the first quarter of fiscal 2024 from 30.7 billion yen in the first quarter of fiscal 2023. In addition, Mitsubishi Electric’s orders for factory automation systems fell sharply -43% year-on-year. most recent quarter. This led Mitsubishi Electric to lower its fiscal 2024 operating profit guidance for its factory automation systems business by -3.5% in July. In its first-quarter fiscal 2024 earnings report, Mitsubishi Electric attributed the poor performance and weak outlook of its factory automation systems business to “declining global demand for digital equipment such as semiconductors.”
In its annual report for fiscal 2023, Mitsubishi Electric singled out China, Japan and the United States as key “regions that generate significant revenue from external customers.” The company derived 10.5% of its revenue from China in its most recent fiscal year. MIELY emphasized in its fiscal 2024 first quarter results announcement that “the recovery (of the company’s business in China) remains moderate due to slowdown in production and exports.” Earlier, Seeking Alpha News In an article on August 31, 2023, it was mentioned that China’s production activity slowed down for the fifth consecutive month in August 2023.
Modest valuation and double-digit ROE target
In the previous section, I highlighted that Mitsubishi Electric’s near-term financial outlook could be negatively affected by the company’s factory automation systems business and its operations in China.
Barring near-term headwinds, Mitsubishi Electric has the potential to benefit from a positive revaluation, assuming it achieves its ROE target.
Mitsubishi Electric’s current valuation is not high, as the stock’s key valuation metrics are close to its historical averages. The market values Mitsubishi Electric at a trailing trailing P/E ratio of 1.20 times and a 12-month normalized EV/EBITDA multiple of 6.77 times. For comparison, the stock’s five-year average P/E and enterprise value/EBITDA metrics are 1.21x and 6.45x, respectively (Source: S&P Capital IQ), respectively.
The company’s return on equity for fiscal 2023 was 6.9%, and its annual return on equity hasn’t exceeded 10% since fiscal 2019. Going forward, Mitsubishi Electric aims to increase return on equity to 10% by fiscal 2026, as highlighted in a May 2023 investor presentation slide. If the company does achieve an ROE in the double-digit percentage range, the stock should trade at a higher valuation multiple.
I think Mitsubishi Electric’s mid-term ROE target is realistic given its capital allocation strategy. The company plans to raise 3.4 trillion yen through working capital optimization and non-core asset divestitures during fiscal 2022-2026, of which 2.8 trillion yen will be allocated to investments in high-growth areas. The remaining 0.6 trillion yen will be used for shareholder capital return programs such as dividends and stock buybacks. I believe the large amount of capital allocated to growth investments (JPY 2.8 trillion) will drive Mitsubishi Electric’s ROE even higher in the coming years.
I am neutral on Mitsubishi Electric Corporation. On the positive side, there is room for upside in the stock’s valuation, given the potential for the company’s ROE to improve. On the downside, Mitsubishi Electric’s short-term results may be lower than expected due to weakness in the factory automation systems business and the Chinese market.
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