Nippon Aqua Co.,Ltd. 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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