DBRS Confirms Komatsu Ltd. at A (low), Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Komatsu Ltd. (Komatsu or the Company) at A (low). The trend remains Stable. The confirmation reflects that Komatsu has performed as expected and in line with the challenging equipment market. The rating continues to be supported by a solid business position with expanding innovative product offerings. Near term, DBRS expects the equipment business to continue to face headwinds, especially in the mining sector. Operating results at Komatsu are likely to decline modestly in the next 12 months to 18 months. Nevertheless, the Company has a strong balance sheet and its financial profile still has ample cushion to weather the downturn and remain compatible with the current rating.

As anticipated, weak market conditions in Komatsu’s equipment businesses caused the decline in operating results through the first nine months of F2015 (year ended March 31, 2016). The slowing growth in China has placed the mining sector under severe pressure since calendar 2014 with commodity prices dropping to a multi-year low. Weak financial results at the global mining companies have led to drastic cuts in their spending to conserve capital. The deferral and even cancellation of capital projects, in turn, led to a sharp drop in the demand for mining equipment. Despite periodic government efforts, construction activities remained soft in China and the demand for construction equipment has continued to decline albeit at a slowing rate. The Company’s large exposure to the softening Chinese construction market has added more downward pressure to its overall performance. Most regions, with the exception of the Americas, reported lower equipment sales. DBRS expects current negative market conditions to persist. Additionally, the benefit of a weaker Japanese yen, which has moderated the decline in earnings so far, is likely to diminish in calendar 2016; hence, Komatsu’s operating performance in the near term would remain under pressure. Nevertheless, Komatsu’s balance sheet has strengthened through steady deleveraging actions in the last few years and the Company’s debt coverage metrics have actually strengthened despite weaker operating results.

Komatsu’s commitment to continuous improvement is demonstrated by its efforts to set targets through a series of three-year mid-range management plans with the current one to be completed on March 31, 2016. (DBRS expects the Company to announce a new three-year plan in due course.) Progress in the current plan has led to the introduction of innovative products and lower structural costs and has modestly strengthened its business profile. Komatsu is well positioned to benefit from the eventual recovery in the equipment market with its strengthening product offering and competitive cost structure.

Notes:
All figures are in Japanese yen unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Industrial Products Industry, which can be found on our web site under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.