Nippon Aqua (1429) FY2026 Q2 Earnings Report

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Executive Summary

Nihon Aqua reported higher revenue and earnings in Q2, confirming an improvement in operating profitability, while net income growth remained limited. Revenue was ¥16.97B (+6.2% year on year), Operating Income was ¥1.18B (+8.0%), Ordinary Income was ¥1.15B (+4.4%), and Net Income was ¥0.75B (+1.1%). Operating Income growth outpaced revenue growth primarily due to an improvement in the gross margin; however, higher interest expenses and the elevated tax burden restrained the growth rates at the Ordinary Income and Net Income levels.

Factors Affecting Performance

【Revenue】Revenue was ¥16.97B, representing a +6.2% year-on-year increase. Top-line expansion continued, supported by resilient demand for insulation construction.

【Profit and Loss】Cost of sales was ¥13.13B, with a cost ratio of 77.4%, while the gross margin improved by approximately +0.8pt year on year to 22.6%. Selling, general and administrative expenses were ¥2.66B, increasing by +10.7%, faster than revenue growth and partially pressuring the operating margin. However, the improvement in gross margin offset this impact, resulting in Operating Income of ¥1.18B (+8.0%). Ordinary Income was limited to ¥1.15B (+4.4%), primarily due to an increase in non-operating expenses, including interest expenses of ¥0.03B. Net Income was ¥0.75B (+1.1%), as the ¥0.39B income tax burden, representing an effective tax rate of approximately 34%, restrained earnings growth. Revenue and earnings increased.

Key Financial Metrics

【Profitability】The Operating Income margin improved from the previous year to 6.9%, while the gross margin also improved by +0.8pt year on year to 22.6%, reflecting contributions from cost control and an improved business mix. Meanwhile, the Net Income margin declined slightly from the previous year to 4.5%, as the higher tax burden and increased financial expenses constrained improvement at the Net Income level. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥1.43B, approximately 1.9 times Net Income of ¥0.75B, indicating strong cash backing for earnings. Cash generation capacity, including depreciation and amortization of ¥0.11B, was favorable, and Free Cash Flow was also ample at ¥1.26B. 【Investment Efficiency】ROE was 6.7%, shaped by the combination of the Net Income margin, total asset turnover, and financial leverage. Improved asset efficiency contributed to maintaining ROE. 【Financial Soundness】The Equity Ratio was 44.1%, slightly down from 45.1% in the previous year. Against total assets of ¥25.56B, net assets were ¥11.28B, indicating a generally stable capital structure. However, short-term borrowings of ¥5.0B account for the majority of interest-bearing debt, requiring attention to the funding structure.

Cash Flow Analysis

Operating Cash Flow was ¥1.43B, a substantial +62.6% increase year on year, confirming cash generation exceeding Net Income of ¥0.75B. The increase was supported by working capital improvement resulting from reductions in trade receivables and inventories. Investing Cash Flow was -¥0.18B, representing only a modest outflow primarily associated with capital expenditures of ¥0.04B, indicating a restrained investment stance relative to business expansion. As a result, Free Cash Flow was positive at ¥1.26B, a level sufficient to absorb the -¥0.91B in Financing Cash Flow, which included dividend payments and changes in borrowings. Cash and deposits increased from the previous year to ¥2.76B, indicating ample capacity for shareholder returns funded by internal resources.

Earnings Quality

The divergence between Operating Income and Net Income arose from non-operating income and expenses and the tax burden. Non-operating income was ¥0.06B, compared with non-operating expenses of ¥0.08B, of which interest expenses of ¥0.03B were a primary component, representing a level within the range of ordinary financing costs. Extraordinary items were minimal, with extraordinary income of ¥0.00B and extraordinary losses of ¥0.00B, resulting in virtually no impact on earnings from temporary factors. Income taxes were ¥0.39B, with an effective tax rate of approximately 34%, somewhat high and reducing pretax income of ¥1.15B to Net Income of ¥0.75B. The fact that Operating Cash Flow reached approximately 1.9 times Net Income suggests high earnings quality and a small gap between accounting earnings and cash, i.e., limited accruals.

Earnings Forecast and Guidance

Progress against the Full-Year plan was 45.9% for Revenue (¥16.97B/¥37.00B), 40.7% for Operating Income (¥1.18B/¥2.90B), 39.5% for Ordinary Income, and 38.3% for Net Income, all below the simple 50% benchmark for the first half. The insulation construction business appears to have a seasonal bias toward revenue generation in the second half. While the seemingly low progress rates partly reflect the characteristics of the business, restraining the increase in selling, general and administrative expenses and the pace of order fulfillment in the second half will be key to achieving the Full-Year plan.

Shareholder Returns

The dividend paid in the first half was zero, while the Full-Year dividend forecast is ¥35, based on the dividend paid in the previous fiscal year. Against forecast Full-Year Net Income of ¥1.97B, the Payout Ratio, based on the assumed total dividends (actual interim dividend payment of ¥1.13B), is approximately 57%. Free Cash Flow of ¥1.26B is sufficient to cover the interim dividend payment. No share repurchases have been disclosed, and shareholder returns are centered on dividends.

Risk Factors

1. Dependence on Short-Term Funding: Short-term borrowings of ¥5.0B, which constitute interest-bearing debt, increased from ¥4.8B in the previous year. Compared with cash and deposits of ¥2.76B, the funding structure depends on rollover, or refinancing. This requires monitoring because funding costs may fluctuate readily when the interest-rate environment changes.

2. Working Capital Tied Up: Trade accounts receivable and notes receivable of ¥7.99B and inventories of ¥2.66B are large relative to the scale of revenue and may become sources of volatility in cash generation. While working capital compression contributed to improved cash flow in the current period, the effectiveness of collections and inventory management will affect capital efficiency as revenue expands going forward.

3. Rising Selling, General and Administrative Expenses: Selling, general and administrative expenses increased +10.7% year on year, exceeding the +6.2% revenue growth rate. Although the improvement in gross margin has maintained the Operating Income margin, the future impact on profitability margins should be monitored if expenses continue to increase faster than revenue.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Profitability exceeds the industry median, with both the Operating Income margin and Net Income margin at advantageous levels within the industry.

Growth and Capital Efficiency

The revenue growth rate is slightly below the industry median, placing the pace of growth around the middle of the industry.

※Source: Compiled by the Company

Key Points in the Earnings Results

1. The gross margin improved by approximately +0.8pt year on year to 22.6%, indicating contributions from cost control and the business mix, and driving the Operating Income margin up to 6.9%.

2. Operating Cash Flow reached ¥1.43B, approximately 1.9 times Net Income, while Free Cash Flow was also ample at ¥1.26B, confirming strong cash backing for earnings.

3. Progress against the Full-Year plan was around 40% for both revenue and earnings, below the simple 50% benchmark. Performance trends in the upcoming earnings data, taking into account second-half business progress and seasonality, will be closely watched.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥427–¥451 at ±1% for the cost of equity, and ¥437–¥442 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end were used (there is a timing difference from the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

Japan Aqua delivered a solid first-half FY2026 operating performance, with revenue and operating income both growing ahead of the prior year. Revenue increased 6.2% year on year to ¥16.97bn. Operating income rose 8.0% to ¥1.18bn, modestly outpacing sales growth. Gross profit increased to ¥3.84bn from ¥3.49bn, lifting the gross margin by approximately 75bp to 22.6%. The operating margin improved by approximately 12bp to 6.9%, reflecting positive gross-margin leverage despite higher overhead. SG&A expenses increased 10.8% to ¥2.66bn, faster than revenue growth, limiting the conversion of gross-profit gains into operating-profit expansion. Ordinary income rose 4.4% to ¥1.15bn, slower than operating income because non-operating expenses increased, including ¥0.31bn of interest expense. Net income increased only 1.1% to ¥0.76bn, and the net margin declined by approximately 23bp to 4.5%. The effective tax rate was 34.3%, resulting in a tax burden of 0.657x and contributing to the slower net-income growth. Cash generation was strong, with operating cash flow of ¥1.43bn, equivalent to 1.90x net income. Free cash flow was ¥1.26bn after only ¥0.41bn of capital expenditure. Working-capital cash generation was supported by a ¥2.35bn inventory reduction, although trade receivables increased by ¥3.09bn. The balance sheet remains liquid, with a 138.5% current ratio and a 119.8% quick ratio, but all ¥5.00bn of interest-bearing debt is short term. Full-year guidance is maintained, but first-half progress is 45.9% for revenue, 40.7% for operating income, and 38.3% for net income. The below-seasonal net-income progress rate means the second half must deliver a stronger earnings conversion, particularly through cost control, financing-cost discipline, and sustained gross-margin execution.

Profitability Analysis

Annualized DuPont ROE is 13.4%, comprising a 4.5% net profit margin, 1.328x asset turnover, and 2.27x financial leverage. This is a good ROE outcome relative to the 10-15% benchmark range, but it is supported materially by leverage rather than by a high net margin. The strongest operating improvement was in gross profitability: gross margin rose to 22.6% from approximately 21.9% in the prior-year period. Operating margin also improved to 6.9% from approximately 6.8%, though it remains below the 8% threshold typically associated with stronger profitability. SG&A grew 10.8%, versus 6.2% revenue growth, representing the principal constraint on operating leverage. Operating income growth of 8.0% therefore exceeded sales growth only modestly. The gap widened below operating income: ordinary income grew 4.4%, while net income grew 1.1%, due to higher non-operating costs and a higher effective tax rate. Interest coverage remains very strong at 37.87x on an EBIT basis and 41.27x on an EBITDA basis, so current interest expense is manageable. EBITDA was ¥1.29bn and the EBITDA margin was 7.6%. The JGAAP earnings profile does not appear materially affected by goodwill amortization, as intangible assets are only 0.5% of total assets. Sustaining ROE will depend on preserving the gross-margin gain, preventing SG&A growth from persistently exceeding sales growth, and avoiding further margin dilution below ordinary income.

Growth Assessment

First-half revenue growth of 6.2% indicates continued demand expansion, although it is below the 9.9% full-year revenue-growth assumption embedded in guidance. First-half revenue represents 45.9% of the ¥37.00bn full-year target, 4.1 percentage points below the standard 50% first-half pace. Operating income represents 40.7% of the ¥2.90bn full-year forecast, 9.3 percentage points below the standard pace. Net income represents 38.3% of the ¥1.97bn forecast, 11.7 percentage points below the standard pace and thus requires a notably stronger second-half contribution. The maintained forecast implies second-half revenue of ¥20.03bn, operating income of ¥1.72bn, and net income of ¥1.22bn. This requires second-half operating margin of approximately 8.6%, above the first-half 6.9% margin. Revenue growth quality is supported by operating-income growth exceeding sales growth and a higher gross margin. However, slower ordinary-income and net-income growth show that the current improvement has not yet translated fully into bottom-line leverage. Inventory declined ¥2.35bn year on year to ¥2.66bn, which supports inventory discipline and cash conversion. Receivables remain substantial at ¥7.99bn, with electronically recorded monetary claims of ¥1.12bn, making collection execution important to achieving the second-half cash and earnings plan. The forecast assumes a meaningful recovery in profit conversion rather than merely top-line growth.

Financial Health

Liquidity is adequate but not abundant. The current ratio is 138.5%, below the 150% healthy benchmark but comfortably above 1.0x, while the quick ratio of 119.8% confirms that liquidity is not dependent on inventory liquidation. Working capital is ¥5.47bn. Current assets of ¥19.66bn exceed current liabilities of ¥14.20bn, but liabilities are heavily concentrated in the current portion. Short-term loans total ¥5.00bn, representing 100% of interest-bearing debt and creating a refinancing-risk concentration. Cash and deposits of ¥2.76bn cover only 0.55x of short-term debt. The company therefore relies on operating cash generation, banking relationships, and rollover capacity rather than cash alone to address debt maturities. Debt-to-equity is 1.27x, above the conservative 1.0x benchmark but below the 2.0x aggressive-financing threshold. Debt-to-capital is 30.7%, within the sub-40% investment-grade benchmark range. Debt/EBITDA is 3.89x, elevated versus the 2.5x investment-grade reference but still below the 4.0x high-yield warning line. Interest-servicing capacity is strong, with EBITDA interest coverage of 41.27x. Intangible assets rose 50.4% year on year to ¥0.13bn, principally consistent with ¥0.40bn of intangible-asset purchases during the period; at only 0.5% of total assets, this does not create material balance-sheet concentration or M&A-related impairment risk. Property, plant and equipment totals ¥4.54bn, including ¥2.15bn of buildings and ¥2.06bn of land, giving the asset base meaningful tangible backing.

Notable B/S Changes

Intangible assets: +¥0.45bn (+50.4%) to ¥0.13bn - increase is consistent with ¥0.40bn of intangible-asset purchases; the absolute exposure remains immaterial at 0.5% of total assets, limiting impairment and M&A-balance-sheet risk.

Cash Flow Quality

Cash-flow quality is strong in the reported first half. Operating cash flow of ¥1.43bn exceeded net income of ¥0.76bn by 1.90x, well above the 1.0x high-quality threshold. Cash conversion, measured as operating cash flow divided by EBITDA, was also strong at 1.11x. The accruals ratio was negative 2.6%, consistent with cash realization exceeding accounting earnings rather than aggressive accrual-led profit recognition. Operating cash flow benefited from a ¥2.35bn inventory decrease. This benefit was partly offset by a ¥3.09bn increase in trade receivables and a ¥1.75bn increase in other receivables. The reported 86-day DSO is a material working-capital risk because it exceeds the 60-day alert threshold. Elevated receivable days can delay cash realization and increase sensitivity to customer payment timing, particularly in a construction-related business model with project billing and collection milestones. Trade payables increased modestly by ¥0.18bn, offering limited additional financing support. Free cash flow was ¥1.26bn after ¥0.41bn of capital expenditure, representing strong near-term funding capacity. However, CapEx/depreciation was only 0.39x, below the 0.7x underinvestment threshold. This may reflect temporary investment timing, but if sustained it could constrain equipment renewal, capacity maintenance, technology investment, and future operational competitiveness. Cash increased by ¥0.34bn despite ¥0.91bn of financing outflows, including ¥1.13bn of cash dividends paid, demonstrating robust first-half internal cash generation.

Dividend Sustainability

No interim dividend was declared for FY2026 Q2. The full-year dividend forecast is ¥35 per share. Against forecast EPS of ¥61.84, the implied dividend payout ratio is approximately 56.6%, within the sub-60% sustainability benchmark. Based on average shares of 32.19 million, the indicated full-year dividend cash requirement is approximately ¥1.13bn. Reported first-half free cash flow of ¥1.26bn exceeds this indicated annual dividend amount by approximately 1.11x. This coverage is supportive, although the quality of future free cash flow should be assessed alongside receivable collection and the normalization of capital expenditure. Financing cash flow included ¥1.13bn of dividends paid, which reduced equity from ¥11.63bn to ¥11.28bn year on year despite first-half net income. The planned dividend is therefore supportable on the current forecast, but its durability depends on delivering the forecast second-half earnings recovery while preserving operating cash conversion.

Risk Assessment

Business risks include Margin-execution risk: SG&A increased 10.8%, materially faster than 6.2% revenue growth; continued overhead inflation would prevent the gross-margin improvement from translating into operating-profit leverage., Construction-related demand and project-execution risk: customer construction activity can be affected by housing and building cycles, labor shortages, material-cost inflation, weather disruption, regulatory changes, and project timing., Working-capital risk: DSO of 86 days exceeds the 60-day alert level, making cash conversion sensitive to progress-billing schedules, customer payment behavior, and collection discipline., Second-half delivery risk: net-income progress of 38.3% is 11.7 percentage points below the standard first-half pace, requiring a substantial acceleration in second-half profitability..

Financial risks include Refinancing risk is elevated because ¥5.00bn of interest-bearing debt is entirely short term; cash covers only 0.55x of short-term debt., Leverage is moderate rather than conservative, with debt-to-equity of 1.27x and debt/EBITDA of 3.89x., Interest-cost sensitivity remains relevant given short-term borrowing dependence, although current interest coverage of 37.87x is strong., Capital-maintenance risk is present because CapEx/depreciation is only 0.39x; prolonged underinvestment could defer rather than eliminate future capital needs..

Key concerns include Highest priority: execution of the implied second-half operating-margin recovery to approximately 8.6% needed to achieve full-year guidance., High priority: reduction in receivable days and conversion of revenue into cash without relying excessively on inventory releases., High priority: refinancing or renewal of short-term borrowings on acceptable terms before liquidity conditions tighten., Medium priority: confirmation that low capital expenditure reflects timing and efficiency rather than insufficient maintenance and growth investment., Medium priority: protection of gross margin against labor, materials, and subcontractor-cost inflation..

Investment Implications

Key takeaways include First-half operating performance improved, with revenue up 6.2%, operating income up 8.0%, and gross margin expanding approximately 75bp., Reported annualized ROE of 13.4% is solid, though leverage of 2.27x remains an important contributor to the return profile., Cash earnings are strong: operating cash flow was 1.90x net income and free cash flow reached ¥1.26bn., The maintained full-year plan requires stronger second-half earnings conversion, especially at the net-income level., Balance-sheet liquidity is adequate, but the 100% short-term debt structure and 0.55x cash-to-short-term-debt ratio require continued refinancing discipline..

Metrics to watch include Second-half operating margin versus the approximately 8.6% implied by full-year guidance, SG&A growth relative to revenue growth, Gross margin and exposure to materials, labor, and subcontracting costs, DSO and the balance of trade receivables and electronically recorded monetary claims, Inventory movements and whether operating cash flow remains strong after inventory normalization, Short-term loan balance, refinancing terms, and cash-to-short-term-debt coverage, CapEx/depreciation ratio and spending on productive-capacity maintenance.

Regarding relative positioning, The company combines mid-single-digit revenue growth, a 6.9% operating margin, solid annualized ROE of 13.4%, and strong cash conversion. Its principal relative limitations are an operating margin below the 8% good-profitability threshold, debt/EBITDA close to the 4.0x caution line, complete reliance on short-term debt, elevated receivable days, and low reinvestment intensity.