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’s second-quarter fiscal 2019 (ending March 2019) EBIT increased by 72% year over year to JPY 103 billion on the back of a 12% year-over-year increase in revenue to JPY 672 billion. Its first-half fiscal 2019 results represent around 58% of its full-year EBIT guidance of JPY 345 billion. The sharp year-over-year improvement is mainly driven by strong performance in its construction, mining and utility equipment division, underpinned by strong sales recorded in North America, Europe, CIS, Asia (excluding China and Japan) and Oceania, but partly offset by the decline in Japan, Middle East and China; higher selling price for its construction, mining and utility equipment; higher EBIT at its retail finance business due to the reversal of bad debt allowance in China that was recorded in fiscal 2017; and 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. An interim dividend of JPY 51 was proposed, raised from the JPY 48 guidance given during its fiscal 2018 results. We are keeping our fair value estimate for Komatsu at JPY 3,750 per share while lowering our ADR's fair value estimate to $33.50 (from $34 due to the depreciating yen). Our no-moat and stable moat trend ratings on the firm remain intact. We think the shares are 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.

Sales in its construction, mining and utility equipment division increased by 10.4% year over year. Among the regions that saw the strongest year over year growth were Oceania and CIS which grew by 47% and 34%, 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) led to sales growth of 33%. In North America and Europe, sales grew by 13% and 11% respectively mainly due to strong demand for construction equipment, where the demand in North America is mostly energy and infrastructure related while demand in Europe was driven by Germany. In Japan, sales normalized falling by 16% as year-ago sales were lifted by customer prepurchases ahead of new emission controls regulations introduced in September 2017. In China, sales decreased by 3% as the environment remains competitive and infrastructure spending has slowed. Based on the year-to-date data on the excavator market share in China, Komatsu’s market share declined from 7.2% in 2017 to 5.7% in the first eight months of 2018. Given the risks of slowing growth in China, we suspect the government may look to relax some infrastructure project restrictions and this could help provide some growth to this segment in fiscal 2020.

Following a strong first-half result, management is raising its guidance for fiscal 2019. EBIT is expected to increase to JPY 384 billion from JPY 345 billion guided previously 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 226 billion guided previously. Management also plans to increase the dividend per share to JPY 102 (from JPY 96 guided previously) in fiscal 2019 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 14.8% from 12.1% in fiscal 2018.