KMTUY - Komatsu: Favorable Sales Mix And Price Hike Reinforce My Buy Rating

2023-11-16 08:46:21 ET

Summary

• Komatsu derived about 67% of its sales from the parts & service and mining equipment businesses, which are expected to be resilient even though the macroeconomic environment is weak.
• KMTUY has guided for a +3.5% price hike in the second half of the current fiscal year.
• A Buy rating for Komatsu is maintained after analyzing the company's revenue mix and its guidance for price increases.

Elevator Pitch

I continue to assign a Buy investment rating to Komatsu ( KMTUY ) [6301:JP] stock.

I have previously highlighted the "high probability that Komatsu can register an earnings beat for fiscal 2023" in my prior September 5, 2023 write-up . It is noteworthy that Komatsu's most recent Q2 FY 2023 net profit of JPY100.1 billion beat the sell-side's consensus bottom line estimate of RMB91.5 billion (source: S&P Capital IQ ) by +9%.

Note that Komatsu refers to FY 2023 as the financial period between April 1, 2023 to March 31, 2024.

My attention turns to Komatsu's revenue mix and the company's price hike guidance in the current article. The company derived two-thirds of its most recent quarterly revenue from the resilient parts & service and mining equipment businesses. Also, KMTUY has the capacity to raise prices again in the second half of the fiscal year, as its actual price hikes have lagged its peers. These factors support my view that Komatsu still warrants a Buy rating.

Komatsu's shares can be traded on the Over-The-Counter market and in Japan. The three-month mean daily trading value for the company's shares listed on Tokyo Stock Exchange was around $100 million (source: S&P Capital IQ ). Investors can deal in Komatsu's Japan-listed shares by engaging the services of US stockbrokers with foreign markets access such as Interactive Brokers. In comparison, the average daily trading value for Komatsu's OTC shares for the past three months was approximately $3 million. This implies that the trading liquidity for Komatsu's Over-The-Counter shares is pretty good in absolute terms.

Parts & Service And Mining Equipment Businesses Should Remain Resilient

The strength in KMTUY's mining equipment and parts & service businesses is expected to more than offset the weakness for its construction equipment business in 2H FY 2023.

The company has guided for a positive +4% growth in the sale of parts for full-year FY 2023. At its Q2 FY 2023 results call (event transcript sourced from S&P Capital IQ ), Komatsu cited data from the company's internal data tracking system known as KOMTRAX which suggests that the utilization rate for its mining equipment remains high. The mining equipment utilization metric tends to be a leading indicator for Komatsu's revenue generated from parts sales and services.

For the mining equipment business, there are a number of signs suggesting that this segment will continue to perform well in the second half of fiscal 2023.

Firstly, S&P Global Market Intelligence's data indicates that "capital expenditure of the 30 top miners globally is expected to grow 6.2% in 2023" as per an October 19, 2023 article . Komatsu also noted at the company's second quarter earnings briefing that "we were informed" that the "mining majors will increase their CapEx for the next fiscal year."

Secondly, KMTUY shared at its most recent quarterly results call that the company's "order backlog for mining equipment" has stayed "at a very high level." It is reasonable to assume that the large part of this mining equipment order backlog should be realized in time to come, as the end-September 2023 fulfillment rate of Komatsu's mining orders was as high as 90%.

Thirdly, specific commodities such as copper and nickel benefit from sustained demand driven by the secular growth trend for electric vehicles, which is a positive factor for Komatsu's mining equipment business.

Construction Equipment Business' Sales Contribution Is Relatively Lower

Komatsu derived 52% and 15% of its Q2 FY 2023 top line from mining equipment and parts & services, respectively as indicated in its October 2023 corporate presentation slides . Construction equipment contributed the remaining 33% of the company's recent second quarter revenue.

The near-term outlook for Komatsu's construction equipment business is poor. KMTUY acknowledged at the company's Q2 FY 2023 results briefing that "a slowdown of the Chinese economy" and "higher interest rates in many geographies" are headwinds for its construction equipment division.

However, the construction equipment business has a relatively smaller revenue contribution (33%) as compared to the top line of the parts & services and mining equipment businesses combined (67%). This explains why the market is still forecasting reasonably good +4.8% top line expansion and +13.8% growth in net income for Komatsu in full-year FY 2023 as per S&P Capital IQ's consensus data.

Company Is Still Expecting A Price Hike For 2H FY 2023

With my previous early-September article, I highlighted that Komatsu "still has key bottom line expansion levers such as price increases." Indeed, Komatsu's +4.1% price hike (source: recent quarter earnings briefing) in Q2 FY 2023 was a key factor that drove a +9% second quarter earnings beat mentioned at the beginning of the current article.

Looking forward, KMTUY is of the view that it can continue to raise its overall pricing by +3.5% in the second half of fiscal 2024. The company has the confidence to increase prices going forward, because its recent price increases were "less than half compared with the price hike or price action taken by our competitors" as per Komatsu's management comments at the Q2 FY 2023 results call.

Concluding Thoughts

The market currently values Komatsu at undemanding consensus forward next twelve months' price-to-sales and EV/EBITDA multiples of 0.94 times and 6.4 times, respectively as per S&P Capital IQ data. I think that Komatsu deserves a Buy rating, as its valuations haven't factored in positives relating to its sales mix and price hikes.

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