DBRS Morningstar Confirms the Issuer Rating of Komatsu Ltd. at “A” with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Komatsu Ltd. (Komatsu or the Company) at "A" with a Stable trend. The confirmation reflects that the Company’s business and financial profiles are commensurate with the current rating. DBRS Morningstar expects Komatsu's financial profile to weaken in F2021 (year ended March 31, 2021) and recover solidly in F2022, supporting the continued Stable trend.

Komatsu continues to be among the global leaders in manufacturing construction and mining equipment and maintains a solid position in its major markets, which is supported by diversified product offerings and strong technological capacities. The Company's solid business profile is a key support for the current rating. Komatsu is making progress in its new Mid-Term Management Plan (MMP) announced in April 2019 which includes expanding its product offering in autonomous vehicles, digitizing its business processes, and modernizing its production facilities. The growth strategies of the MMP are (1) value creation by means of innovation, (2) growth strategies based on business reforms, and (3) structural reforms for growth. DBRS Morningstar notes that the Company’s execution of these strategies would strengthen its business profile.

DBRS Morningstar expected market conditions to be challenging in F2020 (year ended March 31, 2020) because of the ongoing trade dispute between China and the U.S. Market conditions were even weaker than anticipated. A sharp decline in coal prices reduced equipment demand in coal-producing regions, particularly Indonesia, a major market for Komatsu equipment. Furthermore, since early 2020, the impacts of the Coronavirus Disease (COVID-19) have caused a significant decline in global economic activities because of the restrictive actions imposed by governments to control the spread of the pandemic. A sharp decline in demand for equipment caused by the deterioration in market conditions led to the weak operating results in F2020 at Komatsu. The lower earnings weakened all key credit metrics. The Company's financial profile, although weaker, remains commensurate with the current rating.

DBRS Morningstar, in its base case scenario, assumes that (1) GDP will decline in 2020 by 5.0% in the U.S. and 4.5% in Japan, but will grow in 2021 by 4.5% in the U.S. and 3% in Japan; and (2) low coal prices will continue to weigh on the demand for machines in Asia, the U.S., and the Commonwealth of Independent States. Under this scenario, DBRS Morningstar expects market conditions in all Komatsu's industrial business to be weak in the first two quarters of F2021 but experience a recovery beginning in Q3 F2021 and gain momentum through F2022. DBRS Morningstar further anticipates operating results in F2021 to be weaker than F2020, with a full recovery in F2021 to the F2019 levels. Under the base case, DBRS Morningstar expects Komatsu's financial profile to weaken to levels at the low end of the range in F2021 and recover in F2022 to levels within the range for the current rating. DBRS Morningstar expects the rating to remain stable in the near term but would take negative rating action if Komatsu's financial profile falls or is unlikely to strengthen by the end of F2021 as assumed in DBRS Morningstar’s base case scenario. Furthermore, DBRS Morningstar does not anticipate taking any positive rating action in the near term in view of the challenging operating conditions.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Industrial Products Industry (February 5, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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