Komatsu's Revenue Outlook Too Ambitious
BMI View: Despite posting a lacklustre performance for FY2012/13 (April-March), Komatsu Ltd remains upbeat about the year ahead and forecast annual profit to rise 46% over the next year to reach US$1.8bn. Despite the positive impact of a depreciating yen, we believe the revenue outlook of Komatsu is too ambitious and that the boost to exports will be insufficient to offset the overall weakness in the mining sector. Indeed, we continue to see few bright spots that are capable of generating the stellar profit that the company is anticipating.
W e believe Komatsu Ltd , the world's top producer of mining equipment after Caterpillar , is set for a tougher ride over the coming quarters and that the company may be too optimistic about its future growth prospects. F or FY2012/13 , Komatsu's revenues from the construction and mining equipment segment were down 9.2% year-on-year ( y-o-y ) to reach US$20.3bn. With the notable exception of Americas, revenues from all other regions recorded a slump f rom the previous year . Demand for hydraulic excavators from China showed the most weakness, down 44.8% y-o-y. Despite the lacklustre performance, Komatsu remains upbeat about the year ahead and believes that the Chinese market has bottomed out. It expect s annual profit will rise 46% in FY2013/2014 to reach US$1.8bn, driven by the effects of a depreciating yen which will help to lift export competitiveness .
|Americas Bucking The Trend|
|Komatsu - Revenues By Geography (USD)|
While the weaker yen will be a boon for Komatsu, we do not believe this will be sufficient to offset the overall weakness in the global mining sector. In a sign of the current mining downturn, we note that the inventory days of Komatsu is at a historic high, having risen from 118 days in earl y 2011 to 165 days in March 2013 . This is in stark contrast to the industry's average of 119 days, and its peers such as Terex Corp and Atlas Copco , at 110 days and 121 days, respectively.
|Inventory Days At Historic High|
|Global - Select Companies, Inventory Days|
Our below consensus view on the Chinese economy will mean that equipment makers with heavy exposure to China are due for further headwinds. We expect the recent economic rebound in China to surrender to structural headwinds in H213, and forecast real GDP growth to reach 7.5% in 2013, compared wit h consensus estimates of 8.1%. Consequently , this will have knock-on implications on metal prices and by e xtension, the demand for mining equipments.
While China only constitutes 8.3% of Komatsu's revenues, we continue to see few bright spots that are capable of generating the stellar profit that the company is anticipating. We believe the Americas region will remain supportive of growth, on the back of our positive view on the mining sector, as well as our expectation for the US economy to continue gaining traction.
|US To Support Growth|
|Select Countries - Real GDP Growth (% chg y-o-y)|
Nonetheless, we believe pronounced weakness in Asia and Europe will be a drag to the overall financial performance of Komatsu over the remaining year. S everal traditional mining jurisdictions in Asia such as Indonesia and Australia will undergo slower growth in the coming years . As evidenced by the industry backlash over the past year, the regulatory uncertainty over the 2014 export ban on raw minerals in Indonesia will continue to weigh on investment sentiment and discourage miners from undertaking new projects. Within Australia, the softening of the mining boom is severely reducing demand for excavators, shovels and underground machinery, putting pressure on companies such as Caterpillar, Joy Global , Atlas Copco and Sandvik . Indeed, the order book of Atlas Copco and Sandvik fell by 15% y-o-y and 18% y-o-y in Q113, respectively.
|Komatsu Squeezed By Mining Downturn|
|Select Countries - Mining Industry Value, US$bn (% chg y-o-y)|
Outside of Asia, the protracted debt woes in Europe suggests that construction activity in many countries will remain subdued and that the region is unlikely to provide a tailwind for Komatsu anytime soon . The ongoing sovereign debt crisis, lower domestic demand from peripheral countries and tighter financing conditions are constraining the construction outlook for the region, which we believe will continue to limit growth for the foreseeable future.
|Up For Now|
|Komatsu - Share Price (USD)|
Although continued recovery efforts from the Japan ese Earthquake in 2011 will drive demand for Komatsu's products in its home market, we are aware that strong political commitment is required to address the financial demands for reconstruction and Japan is lacking in this regard. The country's tremulous political system, which suffers from frequent corruption scandals, changes of ministers and factional rifts within political parties remains a significant roadblock to the reconstruction efforts.