Komatsu: Initiating Coverage of Japan's Largest Construction and Mining Equipment Company

We are initiating coverage of Komatsu with a JPY 5,000 fair value estimate and a narrow economic moat rating, supported by the company's established record of providing construction, mining, and utility equipment and its aftermarket support structure. Our projection assumes macroeconomic headwinds will lead to a slowdown in construction machinery demand until at least the end of the first half of fiscal 2024 (year ending March 2025), followed by a medium-term recovery. We expect mining equipment sales to be driven by demand for critical minerals (such as copper, nickel, and lithium) required for clean energy technologies as well as electric vehicle batteries. Further, global trends like infrastructure spending and factory construction due to reshoring should support top-line growth for construction equipment. We believe the shares are undervalued as the weakness in the next few quarters is already priced in and the market is overly pessimistic about recovery prospects from the second half of fiscal 2024 on.