DBRS Confirms Komatsu 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 recognizes that the Company has performed as expected and continued to maintain a stable business and financial profile. Despite an ongoing weakness in the mining sector and a still weak Chinese construction market, DBRS expects the Company to continue to report comparable operating results, helped by a weak Japanese yen. Komatsu’s rating is to remain unchanged.

The Company faced some major headwinds in its key markets during the first nine months of F2014 (year ended March 31, 2015). The global demand for mining equipment declined sharply through calendar 2014 as mining companies scaled back new capital investment in response to the continued decline in major mineral prices. In addition, the construction sector in China has also suffered a slowdown from government actions to cool the domestic real estate market, which led to a marked decline in the demand for construction equipment in the first nine months of F2014. The Company’s business and geographical diversity was able to moderate the impact of these unfavourable developments with stronger demand for construction equipment in other regions, such as North America and Europe. Additionally, a sharp deterioration in the value of the yen relative to the currency of the Company’s key trading areas helped Komatsu report higher revenue and operating profits over the same prior period. The Company expects similar headwinds in its major markets in the near term, and the recent rapid decline in oil prices further adds to the challenge. The ongoing weakness in the mining sector, a still weak Chinese construction market and the uncertainty of the timing of a recovery in the Company’s major markets would weigh on its performance in the next 12 to 24 months. Nevertheless, a weak yen would help support comparable year-over-year operating results.

The Company continues to maintain a strong balance sheet and internal cash generation has consistently covered operating needs (excluding an unusual spike in working capital usage in F2012). Capital expenditures have been rising moderately to fund various growth programs and the rising trend is expected to continue. Nevertheless, DBRS expects internal cash generation to be flat on a year-over-year basis, in line with earnings, and continue to meet operating cash needs, and expects the balance sheet leverage to remain stable.

DBRS notes that the Company’s financial profile has adequate cushion to absorb a moderate deterioration in operating results and remains compatible with the current rating. Hence, the Company’s rating is to remain stable in the foreseeable future. However, a longer and sharper deterioration in the Company’s operating results or an unexpected large increase in leverage could lead to negative rating actions, although such a scenario is not anticipated.

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.