Komatsu Earnings: Margins Supported by Mining Equipment Sales, but We Expect Europe, Asia Headwinds

Komatsu’s June quarter operating income of JPY 157 billion surpassed our previous estimate, due to price increases of aftermarket parts and higher sales of mining equipment. Quarterly revenue grew 7% year on year, with mining equipment sales growing 15%, while construction equipment sales declined 2% due to weak demand in Europe and Asia. We continue to project flat revenue growth for fiscal 2024, ending March 2025, based on higher mining equipment sales offsetting weaker construction equipment sales; however, we raised our operating margin assumption to 15.3% from 14.8% due to the stronger product mix. Our medium-term outlook remains unchanged, and therefore, we maintain our fair value estimate at JPY 5,000. We believe Komatsu is undervalued, as the market is underestimating its long-term prospects. As mining operators extract critical minerals that support renewable energy and electric vehicle-related demand, equipment maintenance will continue to be required, leading to aftermarket parts and service sales.