DAI-ICHI CUTTER KOGYO (1716) FY2026 Q2 Earnings Report

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Executive Summary

In the first half of FY2026, the Company achieved profit growth substantially exceeding its revenue growth rate, with improved construction profitability driving earnings growth. Revenue was ¥10.89B (+1.1% YoY), Operating Income was ¥1.39B (+16.1%), Ordinary Income was ¥1.48B (+15.9%), and Net Income was ¥1.21B (+45.6%). The substantial increase in Net Income included the one-time factor of a ¥0.34B gain on the sale of investment securities, while the increase in Operating Income more accurately reflects the underlying improvement in the core business.

Factors Affecting Business Performance

【Revenue】Revenue was ¥10.89B, an increase of +1.1% YoY. The core Cutting and Drilling Construction Business recorded ¥10.57B (+1.0%), while the Building Maintenance Business recorded ¥0.32B (+6.6%), with both businesses securing revenue growth. However, the Company-wide growth rate was below the construction industry median of 8.0%.

【Profit and Loss】Operating Income was ¥1.39B (+16.1% YoY) and Ordinary Income was ¥1.48B (+15.9%), representing profit growth substantially exceeding revenue growth. The gross profit margin on completed construction contracts improved to 32.7% from 30.1% in the same period of the previous year, an improvement of 266bp, while Company-wide expenses were contained at ¥0.58B (-4.0%), which were the primary factors behind the earnings growth. The segment profit margin of the Cutting and Drilling Construction Business improved by 147bp to 18.4% and accounted for 98.8% of Company-wide profit. Meanwhile, although the Building Maintenance Business increased revenue, segment profit declined 14.0% and its profit margin decreased to 7.4%. Net Income was ¥1.21B (+45.6%), supported by ¥0.34B in extraordinary income, including a ¥0.34B gain on the sale of investment securities. Overall, the Company achieved revenue and profit growth supported by improved profitability in its core business, while the magnitude of Net Income growth was boosted by one-time factors.

Segment Analysis

The Cutting and Drilling Construction Business achieved revenue of ¥10.57B (+1.0% YoY), segment profit of ¥1.95B (+9.7%), and a profit margin of 18.4% (+147bp YoY), delivering revenue and profit growth as the core business accounting for 98.8% of Company-wide profit. The Building Maintenance Business increased revenue to ¥0.32B (+6.6%), but segment profit decreased to ¥0.024B (-14.0%), and its profit margin declined to 7.4% (-179bp). The gap in profit margins between the two businesses reached approximately 11.0pt, leaving improvement in the profitability of the Building Maintenance Business as an opportunity to enhance Company-wide earnings in the future.

Key Financial Metrics

【Profitability】Operating margin was 12.8% (+165bp from 11.2% in the same period of the previous year), Net Profit Margin was 11.1% (+343bp from 7.7% in the same period of the previous year), and Ordinary Income margin was 13.5%, with all metrics improving from the same period of the previous year. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥1.17B, equivalent to 0.96x Net Income, which was generally sound. However, the cash conversion rate against EBITDA of ¥1.78B was 0.66x, as working capital constrained cash generation, primarily due to a ¥0.52B increase in accounts receivable. 【Capital Efficiency】Annualized ROE of 12.2% can be decomposed under the DuPont analysis into Net Profit Margin of 11.1% × total asset turnover of 0.94x × financial leverage of 1.16x, indicating that the high profit margin is the central driver of earnings efficiency. Capital expenditures of ¥1.17B reached 3.0x depreciation and amortization expense of ¥0.39B, placing the Company in a growth investment phase. 【Financial Soundness】The Company maintained a net cash position, with an Equity Ratio of 86.0%, interest-bearing debt of ¥0.14B, and cash and deposits of ¥9.73B. It also maintained a high level of financial flexibility, with a current ratio exceeding 555%.

Cash Flow Analysis

Operating Cash Flow (OCF) was ¥1.17B, an increase of +5.1% YoY, and its ratio to Net Income of ¥1.21B was 0.96x, indicating no significant concern regarding accrual quality. However, the ¥0.52B increase in accounts receivable and the ¥0.13B decrease in accounts payable were sources of working capital cash outflows, resulting in a cash conversion rate of only 0.66x against EBITDA of ¥1.78B. Investing Cash Flow was negative ¥0.86B, including capital expenditures of ¥1.17B, which reached 3.0x depreciation and amortization expense of ¥0.39B; proceeds of ¥0.34B from the sale of investment securities partially offset the outflow. Financing Cash Flow was negative ¥0.50B, primarily due to dividend payments of ¥0.46B. Free Cash Flow, calculated as the sum of Operating Cash Flow and Investing Cash Flow, remained positive at ¥0.31B, while cash and deposits at period-end of ¥9.73B secured ample liquidity.

Earnings Quality

Ordinary Income of ¥1.48B generally reflects the earnings power of the core business. However, Net Income of ¥1.21B included ¥0.34B in extraordinary income, including a ¥0.34B gain on the sale of investment securities, resulting in a temporary-factor-driven gap of approximately ¥0.33B between Profit Before Tax of ¥1.81B and Ordinary Income. Non-operating income of ¥0.09B primarily comprised small items such as dividend income, with no unusual factors evident in the composition of non-operating income and expenses. Comprehensive Income was ¥0.99B, below Net Income of ¥1.21B, primarily due to a negative ¥0.25B in valuation difference on securities. Although the accrual ratio was low and the divergence between earnings and cash was limited, caution is warranted in extrapolating the 45.6% Net Income growth rate as an indicator of future recurring earnings power.

Earnings Forecast and Guidance

The full-year earnings forecast is revenue of ¥20.50B (+1.3% YoY), Operating Income of ¥1.925B (+16.9%), and Ordinary Income of ¥2.055B (+14.7%). Based on first-half results, progress rates were 53.1% for revenue, 72.5% for Operating Income, and 71.8% for Ordinary Income, all representing high progress exceeding the 50% benchmark for the first half. In particular, the high progress rates for Operating Income and Ordinary Income indicate that the improvement in construction profitability during the first half progressed beyond expectations. At the same time, the full-year forecast Operating margin of 9.4% is below the first-half actual result of 12.8%, indicating that the Company’s plan is conservative and assumes a decline in profitability in the second half. The earnings forecast was revised during the current quarter.

Shareholder Returns

The Q2-end dividend was ¥0 per share, while the Company’s full-year forecast is an annual dividend of ¥40 per share. Based on forecast EPS of ¥146.07, the forecast Payout Ratio is approximately 27.4%, below the generally accepted sustainability benchmark of 60%. Cash dividend payments during the first half totaled ¥0.46B, exceeding first-half Free Cash Flow of ¥0.31B. However, given cash and deposits of ¥9.73B and the low level of interest-bearing debt, there is no apparent issue with short-term payment capacity. The dividend forecast was not revised. The current-period data does not explicitly state the status of share repurchases; therefore, the evaluation is based solely on the Payout Ratio.

Risk Factors

1. Dependence on the core business: The Cutting and Drilling Construction Business accounts for 98.8% of segment profit, creating a structure in which fluctuations in orders, utilization rates, and construction profitability in this business directly affect consolidated profit.

2. Deterioration in working capital: As accounts receivable increased by ¥0.52B and accounts payable decreased by ¥0.13B, the conversion rate of Operating Cash Flow to EBITDA remained at 0.66x. Continued deterioration in collection periods could place pressure on Operating Cash Flow.

3. Declining profitability in the Building Maintenance Business: Although revenue in this business increased 6.6%, segment profit declined 14.0%, and its profit margin decreased to 7.4%. If the decline in profitability continues, its earnings contribution as a growth area will remain limited.

Industry Benchmark (For Reference; Based on Company Research)

Industry Benchmark (construction)

Profitability and Returns

Profitability is substantially above the industry median, positioning the Company as a high-margin operator within the construction industry.

Growth and Capital Efficiency

The revenue growth rate is below the industry median, indicating that top-line growth is slower than the industry average.

※Source: Based on Company research

Key Points from the Earnings Results

1. Operating Income increased +16.1% against revenue growth of 1.1%, confirming the high quality of earnings growth supported by a 266bp improvement in the gross profit margin on completed construction contracts. However, the +45.6% increase in Net Income included a ¥0.34B gain on the sale of investment securities and should be distinguished from recurring earnings power.

2. Progress toward the full-year Operating Income forecast was high at 72.5%, but the Company’s plan assumes a full-year Operating margin of 9.4%, incorporating a decline from the first-half actual result of 12.8%. Maintaining profitability in the second half will be the key to achieving the plan.

3. While a working capital management signal is evident in the cash conversion rate of 0.66x, the net cash position, supported by an Equity Ratio of 86.0% and interest-bearing debt of ¥0.14B, is supporting the investment phase involving capital expenditures of ¥1.17B, equivalent to 3.0x depreciation and amortization expense.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,709–¥1,810 at ±1% for the cost of equity, and ¥1,758–¥1,759 at ±0.1 for ω.

Notes:

• Amortization of goodwill of ¥6.3 per share is added back to earnings (to account for a non-cash expense and comparability with IFRS companies).
• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are 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 (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated using only publicly disclosed data; this 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 responsibility, after consulting a professional as necessary.

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