Komatsu; Digging a way into Mother Earths heart & ESG PortfoliosDISCLAIMER
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. There is absolutely no financial advice here because the only financial advice I can give is to research, research, and research. The purpose of this analysis is to serve as an example of an investigation into a company's background, fundamentals, and assets through various lenses to determine what is a good potential investment. The function of this write up is to serve as an educational resource for investors looking to understand how to find good investments. So read and learn some things about a company that might just make mining a lot more eco- and human friendly.
Thesis
"That's one small step for man, one giant leap for mankind."
-Neil "Stretch" Armstrong
If progress is measured in leaps and bounds, then it is the slow crawl of the steady steps up that power human achievement. While this author would love to present a company that has developed innovative technology promising to revolutionize instantly, the closest thing available was a tried and true heavy machinery powerhouse rotating through decarbonization and bringing remote work and AI to the mining and construction site. On top of that, the company doesn't even meow. However, Komatsu has the foundation and ethos of a Japanese company of Olde with the clear and present desire to be the big dog of construction, mining, reforestation, and automating all of it. It is in this three pronged approach that Komatsu looks to amplify their growth; carbon neutrality, automation, and ESG.
Carbon neutrality is a silly term to use when discussing mining and construction, but the fact is that the world is using dirty machines to do a dirty job, and extremely inefficiently. Komatsu looks to take heavy machinery into a cleaner world with a goal of complete carbon neutrality by 2050, and halving CO2 by 2030. The most obvious methods are in developing heavy machines with alternative energy inputs, a project that Komatsu has titled "power agnostic". A major presentation on this will be at MINExpo 2021 on September 13-15. Intriguingly, Komatsu aims to, and does, use their vast experience in mining sites, and their ability to utilize modern digital equipment and technological software to analyze the physical workspace and create the most efficient network for actual labour. A 10% reduction in time to and from dumping is a 10% increase in trips done. Using simple, yet intelligent, steps to cut CO2 use where ever possible is an easy way to stack CO2 reductions and help Mother Earth.
Automation builds on to carbon neutrality, by developing an integrated network of machines, all meant to serve their function and move on, the mesh of the construction/mining site becomes infinitely efficient. Humans are still necessary for complex tasks, but mining isn't. Allowing machines to do the repetitive tasks mechanically, without standard deviations of human chaos, the machines will perform quicker and without risk to human life. Mining and construction are terribly dangerous, with 14 and 10 deaths per 100,000 workers per year, miles ahead of Finance's .4. Killing humans is bad for business for many reasons, and killing employees is often worse. Taking technological steps to reduce the need for physical labour at labour-sites provides a dramatic cut to the worse costs in business. Not to mention the wear and tear physical labour of the magnitude and scope as these professions, keeping people out of mines and out of construction sites is a net positive for society.
Leading to Komatsu's self-establishment as the ESG boy-wonder of the mining world. Doing what could never be thought done, making mining just a little more earth friendly. Taking on major projects and developing high throughput heavy machinery for reforestation projects. Establishing a culture of employee-enrichment and appropriate risk management, HR policies, and management behaviours. Any guidelines or criteria the SEC chooses to go with to police the ESG world, Komatsu will easily crush. Komatsu's PE of 20 is extremely undervalued given the extreme favourability and leverage put on other ESG darlings, especially the EV car manufacturers. In some regard, Komatsu, an EV manufacturer of excavators, dump trucks, diggers, and more, deserves a second look by major institutions and prominent investment groups looking for a cheap ESG pick.
Where Komatsu itself succeeds internally, they supersede externally with massive growth in Africa, the Middle East and Asia/Oceania (not China, RIP Evergrande). Komatsu recognized their need to rotate heavily into developing regions, and have found major success in 2021. While sales are still immature in these regions, their ~100% YOY gains suggest massive potential in strengthening Komatsu's global presence and long term profitability. Furthermore, leveraging their "power agnostic" platform to fill construction companies demands for decarbonization, Komatsu has significant long term profitability focused on key geographic regions while $CAT is focused on America's $3.5 trillion infrastructure deal.
No thesis can be without negatives, and Komatsu's OTC status is definitely a strong one. On one hand, there are no options available for Komatsu, preventing the usual derivative nonsense on main exchanges. On the other, OTC is poorly policed (as bad as the SEC do, they still do a lot but not there). To this end, this could be a very temporary issue that turns into a major positive as Japan is set to launch the Japanese stock exchange as a blockchain exchange, leading to a massive improvement in clearing, preventing basically every single problem that makes the stock market so easy to manipulate. To this end, this author strongly believes Japanese equities see a massive surge in the future as the inefficiencies of the current stock market infrastructure are removed and price discovery becomes unimpeded. And so the greatest issue with Komatsu falls to Japan's economy, and their ability to handle a major global financial crisis such as the one brewing. Previous articles illustrate this author's view on this matter, but nothing can change the brazen evidence that China's major financial groups are failing. Evergrande will collapse, whether into debtor's hands, or Xi Dada's welcoming arms, and with it, so will China's construction boom, and possibly the major construction projects across Asia and the Middle East that China has been funding through their bank in their attempt to financially consume smaller nations the same way the big banks did.
Komatsu's ability to thrive and grow relies on the world growing, and mining. While a "global financial meltdown" could hurt any company, there is little to assume that Goldman Sachs or JP Morgan collapsing would prevent Latin America, Africa and Asia to continue building and developing. In fact, any drastic rebalance in capitalist goals and foundations are sure to be towards an ESG compliance, especially with the ECB parroting the demand for business to fight climate change. While the world might want to stop coal mining immediately, it can't, and powering development will continue to use this. However, the resources need to make the future, and an ESG compliant future, relies on mining and construction. Combined with Komatsu's push into reforestation machinery, likely to be useful in future terraforming capacities, there is significant upside to current financial system risks.
Investor Relations Material Analysis/Breakdown + Fundamentals
Komatsu is a big company with their stuff in order. Thus, there are a lot of documents to cover, little nuggets to digest and data to breakdown. This analyst has a favourable view of the company's outlook, and thus data is looked at in a favourable scope. It is absolutely imperative to understand that no matter how many lenses any investor uses, there will always be an inherent bias towards an explanation of a datum. This section is a breakdown of key media, investor relations documents and interviews. There is a lot of overlapping information in these, but in an attempt to illustrate the reasoning behind the conclusion, and providing a thorough analysis of key documents.
The Komatsu Report
www.komatsu.jp
Part of analyzing is calling out bad data. Page 4 and 5 are graphs showing two different things; Page 4 is the demand in units from 1950 to 2000, showing a capped demand in units starting in 1988, while Page 5 is 2001 to 2019 net sales in Billions of Yen. If demand in units had increased from 2001 to 2020, it would have been one graph, which means they aren't getting an increase in demand, year over year, but that inflation is the key to their increased sales. Truth be told, in a time of hyperinflation, that business model works out well enough, after all, a company enabling growth, whose growth depends on global growth, in a time of unparalleled economic growth, is in a great spot. Plus, the real money comes from service contracts and technical training/repairs. As the total number of existing units increases, and the average age of those units increases, the profits will continue to build. This being illustrated on page 9.
Page 8 shows 4 case examples of Komatsu's innovation. The coolest one being the electric mini-excavators, especially the part where it comments on the reduction of noise pollution. Electric construction machinery will be quieter as the internal combustion engines on these beasts are so loud, and that is amazing to think about as this analyst has lived in an active construction zone.
Page 10 shows they relied on an acquisition to get a big chunk of their mine training portfolio, suggesting Komatsu knows what it is doing with those Investment expenses on their books.
Page 19 has an interesting tidbit on issuing green bonds. There isn't much to note here, actively growing and working companies issue debt all the time, but they also constantly pay off debt, this is a natural cycle. The green bonds mean Komatsu is going to position itself as the ESG-friendly construction/mining company. With a goal by 2050 to be carbon neutral, and by 2030 to halve 2010's CO2 production, Komatsu is making serious strides in this direction. This puts Komatsu in a great position for future funds and institutions to make space in their portfolios, as well as opens up Japan buying the bonds, and giving the company a huge investment. As of this time of writing, BOJ's Kataoka wants the government to increase bond purchases to ramp up the economy. Komatsu is a Japanese corporation, with shareholder mechanics insuring that 51% of equity in the company is Japanese. This could be a match made in heaven as Komatsu looks to rotate into carbon neutrality and the "eco-friendly" mining/construction phase.
Page 26 has a video-gamey picture of what the digital Smart mining space could look like, as well as serving as a great example of the usefulness and potential of the technology at this level and on.
Page 27 illustrates the safety issues in construction and mining, turning as much of that into remote/AI is going to be key, in congruence with national social buffering legislation to the tune of a Universal Basic Income to protect those whose jobs are no longer needed, for better or worse.
Page 28 has the biggest potential impact in the future, especially as the middle east and Africa build up their reforestation projects, and as this technology develops in an efficiency and productivity manner, meaning increased reforestation, Komatsu stands at the head of being the primary provider in a field with few others (CAT doesn't have this stuff, the same way Komatsu doesn't have some CAT stuff).
Page 32 through 53 illustrates the ESG vision and is a thorough report on why Komatsu belongs in an ESG heavy portfolio. Thing is, it's good and they're right. They are taking the steps, acknowledging the picture, and filling in every box way before the SEC even thinks to check. This is a great example for other companies in filling out their own. But most importantly, its actually ESG. It is clear that Komatsu has been taking massive steps in giving themselves the right image, if only for narcissism then still better than 99% of companies.
www.komatsu.jp
Secondary presentation with much the same as the longer, but worth the skim to shore up questions or looking for a summary after a long scroll.
Financial Documents
41% YOY increase in net sales with a 151% YOY increase in EPS.
Projections for 2022 show Komatsu believes in its future, with a 327% increase in EPS by March 31, 2022.
A super interesting point on Komatsu's Financial reports is this share treasury they have. I have often thought about this concept of a company playing market maker to itself, being able to profit off of their own short squeezes and taking advantage of maleficent attempts to short their stock, as well as creating a pool for immediate liquidity should the need arise; Komatsu has just under 28 million of its own shares, having bought over a hundred thousand of their own over the last quarter as well. While some investors might be wary of this, I don't see any need for Komatsu to raise capital from the stock market, and being a dividend stock, there are considerably great reasons to pull as many shares off the market and keep them for yourself as possible.
Komatsu's management performance report makes it clear that a significant part of Komatsu doing well is the Japanese Yuen depreciation (deflation for Japan) has given Komatsu strength in comparison to Japan's economy. This author has little ability in understanding how this macroeconomic event will impact Komatsu, as it is an international company based on growth and development in a critical field no matter the underlying economic condition of the country; gut feeling is Komatsu should remain unscathed by Japanese economic events at large due to the growth in sectors like India and Brazil (and as the world continues to develop no matter how much gold or dollars are worth). In truth, the only thing to do is to look at the global distribution of sales and compare year on year in the hopes of identifying the growing market. Page 7 is the table for just that. Basic rundown, North America is the biggest market, and grew 34% yoy, but it isn't by much. Latin America grew the same percent, and with these countries in a much more underdeveloped spaces as is, there is plenty more room to grow no matter a global downturn. Just because the economy is bad doesn't mean that 2nd and 3rd world countries aren't putting in the hours building and mining. Europe & CIS were miniscule parts and grew poorly, which is not a terribly large surprise. The biggest area of growth this author would truly like to see would be in Africa, Asia + Middle East. And it did. 120% yoy for Asia, 168% Middle East, 86% Africa. The real values are low, coming in at ~30% of total sales, but the most important component is creating a base and a name. As development continues in these regions, the need for construction and mining equipment will grow.
Furthermore, they have about 35 billion dollars of assets and 8 billion in debt. That leaves Komatsu at $27 billion in worth, with a market capitalization of $22.9 billion. With a PE ratio of 20 and PS (price to sales) ratio of 1, there looks like nothing but upside. Net increase of 930 million dollars on the books for the quarter (conversions from Yuen to USD are done at 1:.15). Page 15 showing Komatsu paying more debt than borrowing, of course the cycle of debt is obnoxious to see but that is how business works and is a completely normal sight.
There is no way to put it, but China is going to hurt. It is going to hurt potential growth, cutting the forecast from a super big positive % to a smaller positive %. Evergrande is going under in one form or another, and China is going to have to take a stranglehold of their economy, likely pulling back from Capitalism for another batch of years similar to their back and forth in the 2000s with the previous global financial crises. Invariably, this is going to less Komatsu construction machines going to China, and potentially decrease the already decreased sales into China. The most important thing to look out for is how this will also affect the rest of Oceania/Asia where China's bank has inserted itself and funded construction projects in developing countries. If this financial support collapses, and many construction projects get abandoned or cut in size, Komatsu could find that big growth in these sectors getting cut. Still, India, Brazil and Africa could carry a big chunk of the business.
Another element that tickles this author's noggin is the CAT infrastructure deal. While Komatsu will certainly reap something from the $3.5 trillion infrastructure deal, most likely from a secondary relationship as the bill will focus on American companies, CAT will get the biggest reward. However, CAT has a limited ability to produce, and perusing their technology selection, seem to be at the remote control business segment as well, but not past, meaning if Komatsu has the goods at MINExpo, it could force a fun play on Komatsu taking over the global segment as CAT funnels its supply line into America alone, and Komatsu could keep that global share as its technology dominates the field.
www.komatsu.jp
www.komatsu.jp
Backup presentation: www.komatsu.jp
Geographic Sales:
www.komatsu.jp
Perhaps the Piece de resistance of Evergrande's and China's upcoming issues, this document beautifully shows Komatsu's growth has been amazing in 2021, but China is drying up, preparing for Evergrande's collapse and the potential halt in major building projects across the country.
Interview covering Electric Excavators and "Power Agnostic" Dump trucks
im-mining.com
Great article covering 2 major business plans.
First, Komatsu looks set in going after electric excavators, with a lithium ion battery version coming into mass production in 2022.
Second, a clean definition of what Komatsu is developing and what they mean by "power agnostic":
Regarding mining dump trucks, we will proceed with the development of “power agnostic” dump trucks that can operate with a variety of power sources – such as engines, batteries, trolley systems and hydrogen fuel cells – by 2030.
What this means as far as if Komatsu is just using a burner line akin to something Lordstown would say, or if this means Komatsu has plans for all of these. The interview with the CEO shows a model of one of their massive dump trucks with a battery and hook-ups for a trolley-line, but investors should know better than to fall for that. The only thing giving credibility to Komatsu's claim is their proof of work in the Lead-acid battery mini-excavators, and the fact that Japanese CEOs who lie tend to wind up fleeing the country in boxes with breathing holes.
Earthbrain:
Komatsu + Sony + NTT DOCOMO
Komatsu gets 54.5% of the new company, offers their data, platform and heavy lifting (pun intended), while NTT DOCOMO will handle the AI and computer systems, SONY does the sensing equipment. A basic search for NTT Docomo yields nothing impressive; Japan's major mobile network operator, with a few patents that don't suggest a foundation in AI or robotics, the space is relatively mature enough that scooping up the right team isn't impossible, and Japanese academic labs are ripe with cheap talent and market ready products that it is completely reasonable to expect Komatsu to follow through. The only thing making this deal look bad is Nomura's role as the salesforce, mostly because Nomura gets very little right.
This definitely won't start as fully automating the field, but it does look like Komatsu et al are pushing towards that with the obvious statement of AI intent on NTT Docomo, but the general idea stands to be fleshed out as Sony fulfills their part and gives the tools necessary to make it happen.
gateway.smartconstruction.com
www.earthbrain.com
www.constructionequipment.com
www.komatsu.eu
Bull Theory
Keeping this brief as the entirety of this analysis feels like bull theory; Komatsu has more upside than downside, with the obvious twists and turns of the nascent market. This author is under the pretense that money does not disappear, but is stolen, and thus any market downturn is due to a large amount of money being taken out of it, and put somewhere else. In turn, the Global leaders understand that the only way to fix a problem on fiscal policy, is to make it very small, hence the push for hyperinflation right now by the Fed, ECB, BOJ, PCOB, etc, etc, etc. They fully see the inflation rates are well past their mark and far greater than transitory, but they also see the need to make the current problems not as big so as to manage them. This leads to a conclusion that the world governments will work out a plan so as to accelerate the hyperinflation, but to put a lot of these assets in developing the 2nd and 3rd world countries in Asia, Africa, Latin America. By offering technology and assistance, the hegemony remains in place and the G7 can avoid collapse, while actually doing a good thing. This has happened before, the 2008 financial collapse was absolutely central to a huge amount of international debt forgiveness and further developments in developing countries.
Back to Komatsu; this author is under the assumption that any global financial slow down would negatively affect Komatsu's growth, but not to a negative number. Furthermore, Komatsu has a strong history of remaining unaffected by the greater global financial ups and downs, mimicking the viewpoint that construction and mining are inflation, deflation, and collapse proof. As Komatsu fleshes out its autonomous fleet running on carbon neutral energy sources, they will secure their position as the global leader in construction and mining equipment, breaking down CAT's walls.
MINExpo is unlikely to be as significant a catalyst as one would expect with the unveiling of drastic technological upgrades, but a near-term tick up followed by some noise from the underlying system, should all lead to massive gains upward, especially as investors look for sympathy plays from the infrastructure bill with some major growth possibilities.
Bear Theory
Global Financial Collapse to end them all hits, economies crumble, armies can't get paid leading to all out anarchy and militaristic triads and elephants in the Alps, everything just goes to shit. Or, things just slowdown hardcore, governments go on austere measures and try to play the rules of their own game and dig out of the hole slowly, leading to a global recession similar to Japan's past few decades. The entire equities market sinks as investors leave for cryptocurrencies, bonds, gold, commodities or crowdfunded VC, etc., etc., etc. Because that is what it would take for Komatsu to not have an amazing run. CAT has no ability to suffocate them out, and supply chain alone keeps start-ups out of the game. If there is a downturn in Komatsu's stock price or sales, it would be entirely out of it's own hands, meaning they won't mess this up. Management has shown they can rotate well into whatever happens, and the internal departments understand the markets they need to continue to push in to secure their future. While many old school investors think ESG is bullshit, the fact is that the world government's do not, and with continued ecological devastation caused by pollution and the destruction of Earth's atmosphere: ESG is here to stay and will only get bigger. And thus the argument is skewed towards success, the inherent bias shown, and the reader left with a need to research and verify for themselves.
Disclaimer
Thank you for your time, I truly value it and hope that this brings value to it. This analysis is not to serve as primary financial advice, rhyme or reason. This work is to serve as an editorialized overview of the parts and pieces of the investment, as well as the different ways this author analyzes it. As of the date of publication, 9/2/2021, this author has no investment in Komatsu $KMTUY in any form.
As the primary purpose of this article is to be informative of the company, the stock market, and relevant market mechanics, please feel free to ask any questions.
Thank you.
