Mitsubishi Motors’ VW-style crash is justified

April 26, 2016

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Volkswagen-style crash in Mitsubishi Motors’ shares looks merited. The Japanese carmaker’s market value has plunged by about 45 percent, or $3.4 billion, in the few days since it admitted fiddling fuel-economy tests. Like the months-long emissions-testing affair at the German giant, this episode has a long way to run. But it is not hard to construct scenarios under which the current market reaction makes sense.

Though uncertainties abound, Mitsubishi Motors will probably suffer three types of damage. First, it will have to make payments to cheated customers, repay subsidies, compensate partner Nissan, and shell out for fines and legal fees. The bill could mushroom if trouble spreads Stateside, where authorities are also circling. Precise estimates are hard but Citi analysts say the eventual outlay could total “several hundreds of billions of yen”.

Second, revenue and profitability will suffer, as the bad publicity dents sales and fixing the problem distracts from other big tasks, like overhauling outdated car models. Finally, some investors in newly corporate governance-focused Japan are likely to avoid the stock – especially since Mitsubishi Motors is a repeat offender.

Before Mitsubishi Motors dropped its bombshell, its market capitalisation was about 850 billion yen ($7.65 billion). It had nearly 417 billion yen of net cash as of the end of March, on Nomura estimates. Analysts expected 200 billion yen of EBITDA for the year to March 2018, which means Mitsubishi Motors’ enterprise value was about 2.2 times that figure.

Now the company’s market value is just 468 billion yen. Suppose that payouts and fines cut the cash pile in half, and its enterprise value would be 260 billion yen. If Mitsubishi was valued on the same multiple as before, that would imply its EBITDA will be 40 percent lower than previously expected.

In practice, though, the uncertainty and stigma will hurt Mitsubishi’s market standing too. So it is more plausible to imagine EBITDA shrinks by a quarter and the already-miserly multiple falls to just 1.7 times.

In absolute terms, Mitsubishi’s trouble is nowhere near as large as VW’s, for which the German company has set aside $18 billion. Even so, investors’ fears look justified.

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