September 12, 2023 - Japanese heavy equipment maker Komatsu is raising prices on a record scale again this fiscal year and is poised to deliver a bigger-than-expected earnings boost.

After the April-June quarter, the operating profit boost from price hikes on construction and mining machines now looks likely to come in at more than 120 billion yen ($811 million) for the fiscal year ending March 2024, Chief Financial Officer Takeshi Horikoshi told Nikkei.

A key battleground is the Americas, where industry leader Caterpillar has led the way on pricing. Price increases gave the U.S. company's earnings a $1.4 billion lift in the April-June quarter alone.

Caterpillar's moves have paved the way for Komatsu to follow.

Komatsu saw a 36.7 billion yen boost in the same period, which put it more than 30% of the way toward its initial full-year forecast of 116.8 billion yen.

In Europe, where there are more rivals and less leeway for raising prices, "we've pushed our distributors quite hard," Horikoshi said. In Japan, Komatsu raised its prices for all models of construction equipment and forklifts in February by an average of 10%.

Price hikes aren't the only tailwind for Komatsu. This fiscal year, the downward earnings pressure from high materials costs is seen easing to 13.8 billion yen, compared with 118.2 billion yen a year earlier. Komatsu forecasts an operating profit ratio of 14.5%, close to the all-time high of 14.8% reached in the year ended March 2008.

Firm demand in some sectors is giving Komatsu traction for raising prices. While there are signs of weakness in general equipment used in jobs like homebuilding amid economic uncertainty and rising interest rates, mining machines remain strong. In July, Komatsu downgraded its demand outlook for seven main types of construction equipment from a 0%-5% decline to a 5%-10% decline, but left its guidance on mining equipment unchanged at a 0%-10% increase.

"At this point, there is no indication that demand for mining equipment is slowing down," Horikoshi said.

Singapore futures for Indonesian thermal coal with an energy value of 4,200 kilocalories per kilogram are trading at a little over $50 a ton, down roughly 40% from the end of last year. But "the break-even point for local mining contractors is generally $30 to $40, so there's still some leeway," Horikoshi said.

Then there is the tailwind from a weak yen. Komatsu's operating profit increases by 4.1 billion yen for every 1-yen decline in the Japanese currency against the dollar. For the same change against the euro, the boost is 700 million yen.

Komatsu is assuming exchange rates of 125 yen per dollar and 133 yen per euro for the current fiscal year. Actual exchange rates have averaged around 140 yen and 153 yen, respectively, for the roughly five months through the beginning of September. If they hold steady at current levels, Komatsu could expect a more than 70 billion yen forex-related lift to earnings in total.

Komatsu is forecasting group net profit to fall 8% to 299 billion yen this fiscal year. But market forecasts compiled by QUICK point to a 10% gain to 357.5 billion yen, which would mark a second consecutive year of record profits.

Komatsu's Tokyo-listed share price touched 4,342 yen on Thursday, approaching an all-time high of 4,475 yen.

One earnings factor to watch is sales of parts and services for mining equipment.

Komatsu sells mining equipment directly instead of through distributors, making it easier to build long-term relationships with customers. This gives it room to increase orders for parts and services, which are more profitable than the machines themselves. Parts and services account for about 70% of sales in mining equipment.

Shares are trading at little more than 13 times forward earnings, a lower price multiple than the average of 16 times for the Tokyo Stock Exchange's prime market.

"Free cash flow is closing in on more than 400 billion yen, a record high," said Tomohiko Sano at J.P. Morgan. "In addition to growth investments, there is significant room for shareholder returns, including stock buybacks."