EUR 850.00 For Business Accounts Only

Morningstar | Komatsu’s 2Q Fiscal 2019 Remains Strong; Fiscal 2019 Guidance Raised; FVE Remains at JPY 3,750

Komatsu is the world's second-largest construction equipment manufacturer behind industry behemoth Caterpillar. While we agree that Komatsu offers higher-quality products and services than most of its peers in the industry, we do not believe it possesses an economic moat, given the significant decline in its market share in China and Indonesia over the past five years, a less efficient dealer network and financial services business, and the firm’s rigid pricing and product policy.Despite Komatsu's status as a top-tier industry brand, the significant decline in global construction and mining machinery demand has taken a toll on the firm. Nevertheless, after four consecutive years of global decline in construction and mining equipment demand, there is a high possibility of a gradual and gentle U-shaped recovery in capital expenditure for Komatsu’s customers over the next five years. We expect 6% average growth in volume and 1% in price for Komatsu’s construction, mining, and utility equipment by fiscal 2020, with the addition of 10% top-line growth from the consolidation of Joy Global in fiscal 2017. That said, the firm’s return on invested capital, adjusted by the account receivables of retail finance, is likely to average 12% by fiscal 2021. This is only slightly above our 6.3% estimate for its weighted average cost of capital, supporting our view of Komatsu's no-moat rating.In the long term, we think Komatsu could gradually ramp up its retail finance and information and communication technology businesses to strengthen customer relationships and protect its products from commoditization. In addition, it could make an effort to reduce costs and to consolidate the retail finance platform and dealer network with Joy Global. Despite the high level of uncertainty, if Komatsu were to do this, it would have a chance to build up its intangible assets and network effect.