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Morningstar | Komatsu’s Q3 Fiscal-Year 2019 Remains Strong; on Track to Meet Fiscal-Year 2019 Forecast; FVE Raised. See Updated Analyst Note from 31 Jan 2019

Komatsu’s third-quarter fiscal-year 2019 (ending March 2019) EBIT increased by 11% year over year to JPY 97 billion on the back of an 8% year-over-year increase in revenue to JPY 701 billion. Its first nine months fiscal-year 2019 results are on track to meet its full-year guidance as it represents around 77% of its full-year EBIT guidance of JPY 384 billion. The year-over-year improvement is mainly driven by (1) strong performance in its Construction, Mining, and Utility Equipment division, underpinned by strong sales recorded in Japan, Latin America, Europe, CIS, and Asia (excluding China and Japan), but partly offset by the decline in China and Middle East; (2) higher selling price for its construction, mining, and utility equipment; and (3) strong performance in its Industrial Machinery and Others division supported by increased sales of machine tools to the autos industry and excimer laser to the semiconductor industry. Factoring in the strong third-quarter results, we made minor adjustments to our estimates and raised our fair value estimate for Komatsu to JPY 2,840 per share ($26 per ADR) from JPY 2,750 per share ($25 per ADR). Our narrow moat and stable moat trend ratings on the firm remain intact. We think the shares are slightly undervalued at the current price as we continue to expect the company to perform well this year, supported by demand from the construction and mining sectors. Our EBIT forecast for fiscal-year 2019 of JPY 401 billion is slightly above management guidance of JPY 384 billion on a more optimistic demand outlook.

Sales in its Construction, Mining, and Utility Equipment increased by 9% year over year. Among the regions that saw the strongest year-over-year growth were CIS and Europe, which saw sales grew by 39% and 17%, respectively, mainly driven by strong demand for construction and mining equipment. Continued strong demand for mining equipment in Indonesia, which is the largest market for Komatsu in Asia (excluding China and Japan), resulted in a sales growth of 15%. In Japan, sales grew by 11% as demand increased mainly from the rental industry underpinned by recovery work from natural disasters. In Latin America, sales increased by 11% supported by increased demand from Brazil and Chile, mitigated by a decline in demand from Argentina. In North America, sales only grew by 4% supported by demand from civil engineering and energy related sectors. In China, sales decreased by 15% as the environment remains competitive and uncertainty remains in infrastructure spending although the government has announced policies to increase the infrastructure spending in the near term.

Management is maintaining its fiscal 2019 guidance despite the strong year-to-date performance. EBIT is expected to increase to JPY 384 billion from JPY 300 billion in fiscal-year 2018 mainly driven by improving margins in both the Construction, Mining, and Utility Equipment segment and the Retail Finance segments. Net income is expected to grow to JPY 240 billion from JPY 196 billion in fiscal-year 2018. Management also reaffirmed its dividend per share target of JPY 102 in fiscal-year 2019 (an increase from JPY 84 in fiscal-year 2018) on the back of the earnings improvement. For fiscal 2019, we expect demand for Komatsu’s equipment to remain strong resulting in EBIT margin increasing to 14.7% from 12.1% in fiscal 2018, as opposed to the management guidance of 14.4%.