DBRS Confirms Komatsu at A (low)

DBRS has today confirmed the ratings for Komatsu Ltd. and its subsidiaries (collectively, Komatsu or the Company) at A (low); the trend remains Stable. The ratings confirmation reflects the Company’s strong business profile as the world’s second largest construction and mining equipment manufacturer. DBRS has discontinued the Short-Term Debt rating as it is not being utilized by the Company. While DBRS acknowledges that the Company’s recent financial results are weak relative to historical norms, the deterioration in performance is primarily attributable to severe conditions in key end markets that depressed volumes sharply and does not reflect specific company performance, as Komatsu’s market share has held firm across most regions. Furthermore, it would appear that the worst of the downturn has passed, as the Company’s performance has been progressively improving through fiscal 2009 (F2009, ending March 31, 2010) – a positive trend that is likely to persist.

Komatsu’s results through the first nine months of F2009 are sharply weaker vis-à-vis prior year levels; in addition to substantially lower demand, the strengthening of the Japanese yen also adversely affected results. However, DBRS notes that the Company has proven quite resilient to the downturn by maintaining profitability, albeit at modest levels. Komatsu was able to partly offset the above negative factors through achieved efficiencies, with its high value-added products enabling it to sustain positive pricing levels despite the challenging environment. Additionally, parts and service revenues (which typically generate higher margins than equipment sales) helped moderate the negative effects of the downturn, as did Komatsu’s increasing exposure to emerging markets, particularly China.

Going forward, DBRS expects the Company’s results to continue improving, although earnings over the near term will likely remain well below historical norms, in line with the projected protracted recovery of the global economy. However, Komatsu’s performance should be bolstered by three positive factors, the first of which is the Company’s growing presence in emerging markets that are exhibiting stronger growth out of the economic downturn than developed markets. Second, Komatsu is well positioned, given its exposure to the mining sector, which is expected to undergo significant additional investment in the near to medium term. Finally, Komatsu’s proprietary tracking system, KOMTRAX (Komatsu Machine Tracking System, which generates IT-based market information), provides it with increasingly accurate demand forecasts, as well as a flexible production system, thereby increasing efficiency.

DBRS acknowledges that the Company’s financial profile has deteriorated as a result of the economic downturn and is weak for the current ratings; however, given the stronger future earnings projected, Komatsu’s financial profile should show improvement, gradually reverting to historical levels. DBRS also notes that the Company has typically adopted a conservative financial policy. As such, dividends, share repurchases and acquisitions are expected to be curtailed accordingly in the interim period until Komatsu’s balance sheet is well capable of absorbing such outlays.

DBRS expects the ratings to remain constant, with the Company’s earnings rebounding over the near to medium term as the global economy recovers. However, in the event that Komatsu’s improvement proves weak in forthcoming periods or the Company suddenly deviates from its historically conservative financial policy, DBRS would likely consider negative rating actions.

Notes:
The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporates (Industrials) rating.