IHI (7013)

Signal panel

Investment thesis

1. Underlying profit is growing faster than guidance implies. Q1 OP excluding the property gain was ¥33.1bn against ¥20.9bn a year earlier. Aftermarket engine demand, nuclear work, carbon-solution lifecycle business and turbocharger repricing drove it (filings/2027-03_Q1_説明会_20260805.pdf p.5, p.7). The full-year underlying guide rises only from ¥143.1bn to ¥157bn (+9.7%) (p.14). (Reported fact, company guidance)
2. The guide is built on conservative assumptions. It assumes ¥145/USD from Q2, against a Q1 average of ¥160.52 and ¥158.3 on 2026-10-14. Sensitivity is ¥1.5bn of Q2–Q4 OP per yen, so the current rate is worth roughly +¥19bn if it holds (p.5, p.14). The company-wide adjustment also includes a ¥20bn risk buffer for restructuring an overseas energy subsidiary (p.15). (Company guidance; the FX effect is an inference)
3. The growth engine is commercial aftermarket. Commercial engine sales are guided at ¥480bn (+27%), with spare parts about 59% of them, and USD spare-parts revenue grew 15% YoY in Q1 (p.9–10, p.26). Defence sales are guided at ¥300bn (+41%) (p.26). Aerospace segment OP guidance is ¥137bn at 15.7% (p.15). (Company guidance)
4. Headline earnings overstate the run rate. FY2026/03 OP of ¥165.5bn included ¥22.4bn of property gains, and FY2027/03 includes ¥93bn (p.14). Underlying EPS is roughly ¥100 against the guided ¥161.67. ROE of 28.4% is likewise inflated. The company's own ROIC excluding property gains was 9.5% (filings/2026-03_FY_説明会_20260508-2.pdf p.16). (Inference from reported facts)
5. Phase 1 (FY2026–2028) is an investment phase, not a cash-return phase. Planned 3-year OCF is ¥350bn against ¥650bn of investment, with ¥160bn of R&D inside both. Property sales of ¥100bn or more fill the gap, and shareholder returns stay at a "stable, growing dividend" until OCF expands from FY2029 (deck p.12, p.15; Q1 deck p.17). (Company guidance)

Business and earnings

IHI has four segments. Aerospace, Space & Defence (航空・宇宙・防衛) had 38% of FY2026/03 segment sales and earned ¥112.4bn of the ¥152.8bn reportable-segment profit. Its income comes from a ~15% share in the PW1100G-JM (A320neo) programme, V2500, GE programmes, and Japanese defence engines and rocket motors. The other segments are Resources, Energy & Environment (資源・エネルギー・環境, at a 1.6% margin), Industrial Systems (産業システム・汎用機械, turbochargers, parking and rotating machinery, at a 6.8% margin) and Social Infrastructure (社会基盤, bridges, at a 2.8% margin) (factsheet Segments). Airlines buy spare parts as engines fly more hours. An installed base on best-selling narrowbody engines gives decades of aftermarket revenue, and that is the durable advantage. Overseas sales are 50.7%, and North America alone is 25.7%.

Q1 FY2027/03 (2026-08-05): sales ¥374.5bn (+10.9%), OP ¥73.2bn reported or ¥33.1bn underlying (8.8% margin, +2.6 pts) (Q1 deck p.5). The ¥12.3bn underlying OP increase broke down as aerospace +¥1.2bn, energy +¥6.2bn and industrial +¥5.2bn. Inside aerospace, volume and aftermarket gains of +¥7.4bn and FX of +¥2.9bn were offset by R&D and staff upfront spending and a −¥4.5bn FX revaluation of the PW1100G programme (p.20). Q1 aerospace margin fell from 21.9% to 18.9%, because new engine shipments carry lower margin (p.19). Portfolio pruning removed sales: 10 disposals since 2024-10, plus the 80% sale of IHI Logistics & Industrial Systems (ILM) to Toyota Industries on 2027-04-01 (p.18) and the German Steinmueller sale (disclosed 2026-09-29).

Forecast test

• Guidance (2026-08-05): sales ¥1,840bn, OP ¥250bn (underlying ¥157bn plus ¥93bn of property gains), pretax ¥240bn, NP ¥172bn, EPS ¥161.67. The guide was raised from ¥240bn, ¥230bn and ¥165bn on 2026-05-08. Of the +¥10bn OP change, +¥7bn was aerospace and +¥3bn property (Q1 deck p.14, p.22). (Company guidance)
• Consensus (IFIS, 2026-10-16): FY2027/03 OP ¥258.3bn (+3.3% vs guidance, +6.8% over 3 months), NP ¥188.6bn. FY2028/03 OP ¥222.9bn and NP ¥162.7bn, lower because the property gains drop out. (External estimate)
• Progress: the fact sheet's Q1 OP progress of 29.3% against a 11.9% median is distorted by the property gain. On an underlying basis, Q1 is 21.1% of the ¥157bn guide, against 14.6% in FY2026/03 (¥20.9bn of ¥143.1bn). The fact sheet's median Q1 share of actual OP is 10.9%, and only FY2025/03 (21.7%) was as front-loaded. Q1 is +6.5 points ahead of last year's underlying pace, so the progress test favours upside but with a short clean history. (Inference)
• Track record: actual OP beat initial guidance in 5 of 6 years: +39.8%, +16.4%, +9.3%, +30.5% and +10.4%. The exception was FY2024/03 (−177.9%), when the PW1100G inspection charge hit. Beats are partly expected, so a modest raise would not be a surprise. (Reported fact)
• One-offs: ¥93bn of the OP guide is property. Restated without it, OP is ¥157bn, NP is about ¥105bn and EPS about ¥99, assuming the guide's ratios of ¥10bn net finance cost and NP/pretax of 0.717. (Inference)
• Orders and backlog: Q1 orders were ¥360.7bn (−15.0%), because a large energy order a year earlier did not repeat (energy −44%). Backlog was ¥1,743.6bn at Q1-end (−1.4% vs March) (p.19). The FY order guide is ¥1,770bn against sales of ¥1,840bn, a book-to-bill of 0.96. Aerospace backlog ¥642bn and defence orders guided at ¥280bn (+6%) support FY2028 sales, but a book-to-bill below 1 is not a growth signal. (Company guidance)
• Revision probability: High that underlying OP is raised at Q2 or Q3. FX alone is worth about ¥19bn, and the ¥20bn buffer may be released. Risks against this are a JAXA-related hit (the 5-month bidding ban started 2026-06-02) and PW1100G grounded-fleet costs running past the 2026 assumption.

Financial strength and capital allocation

• Balance sheet (2026-03): equity ratio 26.9% (28.3% at Q1), interest-bearing debt ¥489.9bn, cash ¥154.8bn, net debt ¥335.1bn, net D/E 51% (78% a year earlier), current ratio 1.23 (factsheet Balance sheet; Q1 短信 p.3). The PW1100G refund liability fell from ¥95.5bn to ¥53.5bn and runs off as cash (filings/2026-03_FY_有報_20260622.pdf p.114). Deferred tax assets are ¥127.6bn.
• Cash conversion: OCF/NP was 1.58 in FY2025/03, 0.75 in FY2026/03 and −¥43.2bn in Q1 FY2027/03. The Q1 outflow came from a ¥69.4bn working-capital build for engine ramp-up, and FCF was −¥19.6bn even with ¥40bn of property proceeds (Q1 deck p.12). The 有報 calls OCF improvement "an urgent issue" and says the CCC target was missed: 97 days against 100, or 109 days excluding PW items (有報 p.32–33). Receivables and inventory each grew ~13.5% in FY2026/03 against 1.0% sales growth (factsheet flags). OCF has been positive in each of the last 6 years.
• Capital efficiency: ROE was 26.3% and 28.4% in the last two years, but property and equity-method gains lift it. Company ROIC was 11.0% in FY2025/03, against an 8% target, or 9.5% excluding property gains; IFIS ROIC is 12.7% (有報 p.32; deck p.16). The phase-3 target (FY2032–2034) is ROIC of 13% or more and OP margin of 15% or more. Leverage (assets/equity about 3.7x) explains most of the gap between ROE and ROA (6.9%). Cost of equity is about 9% (analyst assumption), so underlying ROE in the mid-teens clears it. Peers: MHI ROE 12.2%, KHI 13.7% (Yahoo! Finance Japan, 2026-10-16, actual basis).
• Returns: DPS ¥23 planned (¥20 last year, 5 consecutive increases), payout 14% on headline EPS and about 23% on underlying. There are no buybacks in phase 1. Cross-shareholdings are being sold under a policy of not holding them (有報 p.86). Capex/depreciation was 1.12, and phase 1 commits ¥650bn to engines, defence and nuclear capacity.
• Gates: liquidity passes and there is no going-concern note. OCF passes: no negative years in the last 3 on an annual basis. Accounting integrity passes, with a governance caution: the JAXA billing misconduct at a subsidiary is a compliance failure, not a restatement. The 2026-05-12 deck correction and the 2026-05-25 XBRL data correction were minor clerical fixes. Theme exposure passes, because defence (¥300bn sales guide) and engine (¥480bn) exposure are quantified.

IR and management credibility

• 2023-11: the PW1100G charge was disclosed and quantified. The refund liability has since run down on schedule (¥95.5bn to ¥53.5bn).
• FY2023–2025 plan (グループ経営方針2023): the OP margin target of 7.5% was beaten at 10.1%, ROIC hit 11.0% against 8%, and the CCC target of 100 days was missed on the PW-adjusted basis at 109 days (有報 p.32). Promises were mostly kept, but cash lagged.
• 2026-05-08: the long-term "中長期の方向性" (2040 vision) published phase targets and an investment budget. Underlying OP excluding property gains was shown separately from that date, which is a good practice.
• 2026-06-02: an Investor Day was held on the same day as the JAXA bidding ban on IHI Aerospace, after false reports used in cost claims. The ban lasts 5 months, and the company says it will revise guidance if there is a P&L impact (Q1 短信 p.2). There was also an earlier compliance case at IHI Power Systems (2024, engine data). The repeat pattern is a governance discount.

Valuation and scenarios

EPS = (underlying OP − ¥10bn net finance) × 0.717 ÷ 1,060m shares, excluding property gains and the ILM sale gain (Inference). Bull assumes the yen stays near ¥155, aftermarket compounds at 15% or more, and defence ramps. Bear assumes the yen goes back to ¥140, PW grounded-fleet costs extend into 2027, and the energy restructuring needs the full buffer.

• Bands: forward PER on IFIS consensus is 15.35x against a 1-year mean of 17.07x (z −1.81). PBR is 3.85x against a mean of 4.30x (z −1.73). The IFIS theoretical prices are ¥2,809 (PER) and ¥2,823 (PBR). Both bands use headline EPS that includes property gains, so "cheap against its own history" overstates the discount.
• Peers (Yahoo! Finance Japan, 2026-10-16, company-forecast PER, actual PBR): Mitsubishi Heavy (7011) 33.6x and 4.02x. Kawasaki Heavy (7012) 16.6x and 2.16x. IHI 15.6x headline (about 25x underlying) and 3.85x. IHI sits between them: more aftermarket-rich than KHI, less defence and gas-turbine scale than MHI.
• What the price implies: at 22x underlying, ¥2,527 needs EPS of about ¥115, or underlying OP of about ¥180bn in FY2028/03. That is +15% on the FY2027/03 underlying guide, which is achievable but not a bargain. EV/EBITDA is 9.1x forecast (including gains) and 12.2x actual.
• Why the market may be right: cash conversion is poor, the earnings mix includes non-recurring property gains through FY2028, there are no buybacks for three years, and governance incidents repeat.

Bull case

• The yen stays at ¥155–160 and the ¥20bn buffer is released, taking underlying OP toward ¥185–195bn in FY2027/03, against a ¥157bn guide.
• Engine aftermarket revenue keeps growing at double digits as PW1100G engines return from inspection, and defence sales rise 41% as Japan's defence budget expands.
• Working capital unwinds in H2 as the company promises (Q1 deck p.11), and OCF reaches the ¥100bn guide or better.
• The stock is 46% off its high, below its 200-day average (¥3,076) and at −1.8σ on PER, so a clean Q2 could re-rate it.

Bear case

• Without property gains, the stock trades on about 25x underlying EPS. That is not cheap for a company with OCF/NP below 1.
• Phase 1 FCF is negative before asset sales, so dividends grow slowly and there are no buybacks until FY2029.
• PW1100G grounded-fleet assumptions (an average of 350 aircraft over 2024–2026) could extend, adding refund liability (有報 p.114, a key audit matter).
• The JAXA ban and the prior engine-data case point to control weaknesses, and further incidents would hurt defence and space credibility.
• Orders fell 15% in Q1 and the FY book-to-bill is guided at 0.96.

Catalysts

What would change the rating

• Upgrade if Q2 raises the underlying OP guide to ¥175bn or more, H1 OCF turns positive with working capital falling, and the price stays below ¥2,700.
• Downgrade if the underlying guide is cut, PW1100G costs rise, or H1 OCF is worse than −¥50bn with no H2 recovery plan.
• Thesis invalidated if underlying Q2 OP falls YoY (Q2 FY2026/03 was ¥48.6bn), or new compliance findings hit the defence or aerospace businesses.

Monitoring

Scorecard

Fact-sheet flags

Computed by factsheet.mjs. Each flag is a prompt to investigate, not a conclusion.

• ▲amberinventory-outpacing-sales inventory grew 13.6% in 2026/03 (444,066 to 504,223) against sales growth of 1.0%
• ▲amberreceivables-outpacing-sales receivables grew 13.5% in 2026/03 (493,394 to 560,200) against sales growth of 1.0%
• iinfoprogress-ahead-op 2027/03 Q1 op progress 29.3% vs median 11.9% (+17.4 pts): ahead of seasonal norm
• iinfoprogress-ahead-rp 2027/03 Q1 rp progress 34.1% vs median 18.1% (+16.1 pts): ahead of seasonal norm
• iinfoprogress-ahead-np 2027/03 Q1 np progress 31.1% vs median 14.1% (+17.0 pts): ahead of seasonal norm
• iinfoguidance-revised-up 2027/03 guidance raised on 2026-08-05: sales 1,830,000 to 1,840,000, op 240,000 to 250,000, rp 230,000 to 240,000, np 165,000 to 172,000
• ▲ambernon-operating-in-actual 2026/03 actual pretax profit (税引前利益) 185,490 exceeds OP 165,534 by 12.1% of OP: RP, NP, EPS, ROE and forecast PER include non-operating items; check the 短信 for one-offs
• iinfoconsensus-rising 2027/03 consensus OP changed +6.8% over 3 months to 258,265
• iinfoper-cheap Forward PER 15.35 vs 1-year mean 17.07 (+1σ 18.02), z -1.81: cheap vs own history
• iinfofar-below-52w-high Price 2,527 is -46.2% from the 52-week high 4,698

Sources and limitations

• filings/2026-03_FY_短信_20260508.pdf p.2 (printed 2), p.21 (property gains of about ¥39.3bn, subsequent event).
• filings/2026-03_FY_説明会_20260508-2.pdf (中長期の方向性), p.12, p.15–16.
• filings/2026-03_FY_有報_20260622.pdf p.27, p.32–33 (KPIs and the OCF issue), p.114 (PW1100G refund liability), p.209 (key audit matter).
• filings/2027-03_Q1_短信_20260805.pdf p.2–4 (printed 1–4), p.15–17 (segments, ILM held for sale).
• filings/2027-03_Q1_説明会_20260805.pdf p.3, p.5, p.7–12, p.14–15, p.17–26.
• IFIS snapshot 2026-10-16/17: feeds/stock_price.json, pages/report_disclose.html (TDnet list to 2026-09-29), pages/report_topix.html (broker actions to 2026-10-13), fact sheet analysis/2026-10-17/factsheet.md.
• Peers: Yahoo! Finance Japan 7011, 7012 (2026-10-16). FX: 松井証券 日銀為替市況 2026-10-14. Price-move context: Yahoo! Finance Japan 7013, ad-hoc-news TP cut.
• Limitations: no primary source explains the October 2026 fall (−9% over 1m). The Q2 results date (~11-04) comes from secondary sources. Q2 actual FX is not known. Underlying EPS is my estimate using the guide's finance-cost and tax ratios. The ILM sale gain and the FY2028 property gains are not disclosed. TDnet was not checked directly; the IFIS disclosure list runs to 2026-09-29.
• This is research, not individualised investment advice.