BESTERRA CO.,LTD FY2027 Q2 Earnings Report

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Executive Summary

Revenue growth and improved profitability in the core Demolition and Maintenance Business resulted in substantial increases in Operating Income and Ordinary Income, but Net Income declined due to valuation losses on securities and a high tax burden. Revenue increased significantly to ¥58.95B (+15.6% YoY), Operating Income to ¥5.74B (+154.1%), and Ordinary Income to ¥6.09B (+183.2%), while Net Income remained at ¥0.99B (-55.1% YoY). The main drivers of this profit growth were the improvement in the Operating Margin to 9.7% from 4.4% in the same period of the previous year, an improvement of approximately 530bp, and the increase in the gross margin to 21.8%, up approximately 360bp.

Factors Affecting Business Performance

【Revenue】Revenue was ¥58.95B (+15.6% YoY), with the core Demolition and Maintenance Business driving overall performance through growth of 18.7% to ¥58.60B. The completed construction gross profit margin of this business improved to 21.9% from 17.9% in the same period of the previous year, an improvement of approximately 400bp. Meanwhile, Other Businesses contracted to ¥0.36B (-78.2% YoY), and the diversification effect of the business portfolio remains limited.

【Profit and Loss】Operating Income increased to ¥5.74B (+154.1% YoY), while Ordinary Income rose to ¥6.09B (+183.2% YoY), expanding at a pace exceeding the Revenue growth rate. SG&A expenses were contained at ¥7.11B (+1.6% YoY), and the limited increase in expenses relative to Revenue resulted in strong operating leverage. However, against Extraordinary Income of ¥3.14B (gain on sale of investment securities), the Company recorded Extraordinary Losses of ¥5.00B, mainly valuation losses on investment securities, reducing Profit Before Tax to ¥4.23B. After Corporate Income Taxes and Other Taxes of ¥3.24B (effective tax rate of 76.6%), Net Income was ¥0.99B (-55.1% YoY). Improvements at the Operating Income and Ordinary Income levels have not translated into bottom-line profit, resulting in a structure where Revenue and Operating Income and Ordinary Income increased, while Net Income declined.

Segment Analysis

The Demolition and Maintenance Business reported Revenue of ¥58.60B (+18.7% YoY), Segment Profit of ¥12.82B (+45.4% YoY), and a margin of 21.9% (17.9% in the previous year), demonstrating improved profitability in addition to Revenue growth. This is the core business, accounting for 99.4% of total Revenue, and consolidated performance is highly dependent on its results. Other Businesses, including human resources services, contracted significantly, with Revenue of ¥0.36B (-78.2% YoY) and Profit of ¥0.03B (-93.2% YoY), making their contribution to Company-wide profit limited. After deducting Company-wide SG&A expenses of ¥7.11B, consolidated Operating Income was ¥5.75B.

Key Financial Metrics

【Profitability】The Operating Margin improved to 9.7% from 4.4% in the same period of the previous year, while the gross margin rose to 21.8% from 18.2%. Meanwhile, the Net Profit Margin declined to 1.7% from 4.3%, as Extraordinary Losses and the high tax burden pressured the bottom-line margin.【Cash Flow Quality】Operating CF was -¥4.73B, resulting in a negative ratio to Net Income and a significant divergence between earnings and cash flow. The primary factor was an increase in trade receivables of ¥6.42B, indicating continued challenges in converting earnings into cash.【Investment Efficiency】ROE (annualized) was 3.8%, mainly due to the decline in the Net Profit Margin. Total Assets expanded to ¥137.0B from ¥83.3B in the previous year.【Financial Soundness】The Equity Ratio declined to 38.3% from 64.8% in the previous year, with the procurement of ¥60.91B in long-term borrowings being the main driver of increased leverage. Cash and deposits were substantial at ¥76.50B, providing financial flexibility for short-term funding needs.

Cash Flow Analysis

Operating CF was -¥4.73B, deteriorating substantially from +¥11.95B in the same period of the previous year. The main sources of cash outflow were the ¥6.42B increase in trade receivables and the ¥0.32B decrease in trade payables and other liabilities, indicating that improvements in Operating Income and Ordinary Income have not translated into cash generation. Investing CF was +¥13.37B, primarily reflecting proceeds of ¥13.25B from the sale of investment securities. Financing CF was +¥53.52B, with ¥60.00B in long-term borrowings raising cash and deposits to ¥76.50B (+¥62.16B YoY). Free CF was reported at +¥8.64B; however, this includes a temporary Investing CF inflow from the sale of securities and therefore does not represent recurring cash-generating capacity.

Earnings Quality

The increase in Ordinary Income was driven by recurring factors based on improved core business profitability, whereas the decline in Net Income was primarily attributable to non-recurring and tax-related factors, namely valuation losses on investment securities of ¥5.00B and an effective tax rate of 76.6%. Extraordinary Income of ¥3.14B, consisting of gains on the sale of investment securities, and Extraordinary Losses of ¥5.00B, consisting of valuation losses on the same securities, were recorded simultaneously, resulting in net Extraordinary Gains and Losses remaining negative even after offsetting the two items. Non-operating income of ¥0.7B, including dividend income, and non-operating expenses of ¥0.4B, including interest expenses, were generally small, limiting their impact on Ordinary Income. From an accrual perspective, Net Income was positive while Operating CF was negative, indicating a divergence between earnings and cash flow primarily due to the increase in trade receivables. Caution is therefore warranted regarding earnings quality.

Earnings Forecast and Guidance

Against the full-year Company forecasts of Revenue of ¥130.0B, Operating Income of ¥10.0B, Ordinary Income of ¥10.2B, and Net Income of ¥5.30B, first-half Revenue progress was 45.3% and Operating Income progress was 57.4%. With the standard 50% benchmark in mind, progress was favorable particularly for Operating Income. Net Income progress was only 18.7%, but this was substantially affected by non-recurring factors, including the ¥5.00B valuation loss on securities recorded in the first half and the high effective tax rate, requiring an assessment different from that of progress at the operating level. Although the earnings forecast was revised during the quarter, there was no revision to the dividend forecast.

Shareholder Returns

The interim dividend was ¥15.00 per share. The Payout Ratio against first-half Net Income of ¥0.99B was approximately 140.9%, exceeding 100%. This was largely attributable to the temporary compression of first-half Net Income caused by valuation losses on securities and the high tax burden. The forecast Payout Ratio calculated from the Company’s full-year dividend forecast of ¥40.00 and full-year forecast EPS of ¥59.81 is approximately 66.9%. Although this is lower than the first-half result, it is slightly above the general benchmark of 60%. This assessment is based solely on dividends, and data on the Total Return Ratio, including share repurchases, has not been disclosed.

Risk Factors

1. Business concentration risk: The Demolition and Maintenance Business accounts for 99.4% of Revenue, creating a structure in which fluctuations in the order environment and project profitability of this business directly affect consolidated performance.

2. Cash flow quality: Operating CF was -¥4.73B, primarily due to the ¥6.42B increase in trade receivables. Improvements in Operating Income and Ordinary Income have not translated into cash generation, making the collection of receivables in the second half a key area of focus.

3. Leverage and securities-related risk: Long-term borrowings rose sharply to ¥60.91B, while the Equity Ratio declined to 38.3% from 64.8% in the previous year. In addition, the Company recorded valuation losses on investment securities of ¥5.00B, and fluctuations in the prices of held securities could destabilize Extraordinary Gains and Losses and Net Income.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Returns

The Operating Margin exceeds the industry median, while the Net Profit Margin is below the industry median due to the impact of Extraordinary Losses and the tax burden.

Growth and Capital Efficiency

The Revenue growth rate is close to the upper limit of the industry IQR and indicates strong growth relative to peers in the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. Revenue growth and the improvement in the gross margin of the core Demolition and Maintenance Business (21.9%, compared with 17.9% in the previous year) improved the Operating Margin to 9.7%. The increase in Operating Income and Ordinary Income reflects a recurring improvement in core business profitability.

2. Net Income declined by -55.1% YoY, primarily due to non-recurring and tax-related factors, namely the ¥5.00B valuation loss on investment securities and the effective tax rate of 76.6%, representing a different trend from the improvement at the operating level.

3. The Equity Ratio declined due to a sharp increase in long-term borrowings, while Operating CF was also negative. Liquidity itself remains substantial, with cash and deposits of ¥76.50B; however, the use of borrowed funds and the collection trend for trade receivables in the second half will be key points in evaluating future cash flows.

Theoretical Share Price (Reference Value)

Sensitivity: ¥596–¥629 at Cost of Equity ±1%, and ¥612–¥613 at ω±0.1.

Notes:

• Goodwill amortization of ¥5.1 per share is added back to profit (due to its non-cash nature and for comparability with IFRS companies).
• Net Income is substantially compressed relative to Operating Income due to the tax burden, acquisition-related expenses, and non-controlling interests (Net Income ÷ Operating Income 53%). This value reflects that compression at face value; if these factors are temporary, underlying earnings power may be higher.
• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-08 / A mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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

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