HAZAMA ANDO (1719) FY2027 Q1 Earnings Report

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Executive Summary

This quarterly financial performance marked an increase in both revenue and earnings, with improved profitability in the Building Business driving company-wide profits. Revenue was ¥105.04B (+12.4% YoY), Operating Income was ¥6.48B (+22.3% YoY; operating margin of 6.2%), Ordinary Income was ¥6.34B (+41.7% YoY), and Net Income attributable to owners of the parent (hereinafter the same) was ¥4.24B (+34.9% YoY). Growth in both revenue and profit in the Building Business more than offset the decline in revenue and earnings in the Civil Engineering Business, while improvements in non-operating income and expenses also enabled Ordinary Income to grow faster than Operating Income.

Factors Affecting Financial Performance

【Revenue】Company-wide Revenue was ¥105.04B (+12.4% YoY). By segment, the Building Business grew significantly to ¥68.03B (+24.6%), leading the company-wide increase in revenue. Meanwhile, the Civil Engineering Business declined to ¥28.71B (-10.5%), the Group Business (consolidated subsidiaries) was ¥21.22B (+17.1%), and Other Businesses were ¥1.52B (+1.9%). The increase in revenue from the Building Business (approximately ¥13.5B) substantially exceeded the decrease in revenue from the Civil Engineering Business (approximately ¥3.4B), securing company-wide revenue growth.

【Profit and Loss】Operating Income was ¥6.48B (+22.3%), and the operating margin improved to 6.2% from 5.7% in the prior year, an improvement of +0.5pt. The gross profit margin was 13.9% (prior year 13.8%, +0.1pt), while the SG&A expense ratio was 7.7% (prior year 8.1%, -0.4pt), with improved SG&A efficiency contributing to the higher profit margin. By segment, Operating Income in the Building Business increased substantially to ¥6.47B (+73.3%; margin of 9.5%), driving company-wide earnings. In contrast, the Civil Engineering Business recorded ¥1.91B (-47.7%; margin of 6.7%), a significant decline, suggesting the impact of higher costs and project mix. The Group Business improved modestly to ¥0.29B (+111.9%; margin of 1.3%). Ordinary Income was ¥6.34B (+41.7%), exceeding the growth rate of Operating Income, because net non-operating expenses, including foreign exchange losses and interest expenses, declined from ¥0.83B in the prior year to ¥0.15B in the current period. Net Income was ¥4.24B (+34.9%). The prior year included extraordinary gains, such as gains on the sale of investment securities, totaling ¥0.39B net, whereas the current period included only ¥0.02B in extraordinary losses. This absence of extraordinary gains was the factor behind the slightly slower growth in Net Income compared with Ordinary Income. Overall, the company achieved higher revenue and earnings, with improved profitability in the Building Business serving as the structural growth driver.

Segment Analysis

The Building Business generated revenue of ¥68.03B (64.8% of total; +24.6%) and Operating Income of ¥6.47B (+73.3%; margin of 9.5%), increasing its contribution to earnings as the company’s core business. The Civil Engineering Business recorded revenue of ¥28.71B (27.3% of total; -10.5%) and Operating Income of ¥1.91B (-47.7%; margin of 6.7%), representing declines in both revenue and earnings. Its margin fell substantially from approximately 11% in the prior year, suggesting deterioration in costs and project profitability. The Group Business (consolidated subsidiaries) recorded revenue of ¥21.22B (+17.1%) and Operating Income of ¥0.29B (+111.9%; margin of 1.3%), while Other Businesses recorded revenue of ¥1.52B (+1.9%) and Operating Income of ¥0.18B (+43.5%; margin of 11.7%). The margin gap between the Building and Civil Engineering Businesses (9.5% versus 6.7%) has widened from the prior year, and the dispersion of profitability within the business portfolio may be affecting company-wide capital efficiency.

Key Financial Indicators

【Profitability】The operating margin was 6.2% (prior year 5.7%, +0.5pt), the gross profit margin was 13.9% (prior year 13.8%, +0.1pt), and the net profit margin was 4.0% (prior year 3.4%, +0.7pt), with all three improving from the prior year.【Cash Flow Quality】Accounts receivable from completed construction contracts declined to ¥196.16B (¥200.66B at the end of the prior year, -2.2%), while costs on uncompleted construction contracts declined to ¥4.58B (¥5.45B at the end of the prior year, -16.0%). At the same time, advances received on uncompleted construction contracts increased to ¥38.47B (¥31.66B at the end of the prior year, +21.5%), indicating a strengthened advance-payment structure.【Investment Efficiency】ROE was 2.0%, which can be decomposed into a net profit margin of 4.0%, total asset turnover (Revenue/total assets) of 0.255 times, and financial leverage of approximately 1.9 times.【Financial Soundness】The Equity Ratio was 52.6% (50.9% at the end of the prior year, +1.7pt), the current ratio was 163.4%, total liabilities/equity was 0.90 times, and interest coverage based on Operating Income was 44.1 times (Operating Income of ¥6.48B/interest expenses of ¥0.15B), indicating an overall stable financial foundation.

Cash Flow Analysis

Cash and deposits were ¥6.446B, essentially unchanged from ¥6.466B at the end of the prior year (-0.3%). In terms of working capital, accounts receivable from completed construction contracts amounted to ¥196.16B and represented a significant proportion of assets, but declined from the end of the prior year, suggesting progress in collections. Costs on uncompleted construction contracts declined to ¥4.58B (¥5.45B at the end of the prior year, -16.0%), while advances received on uncompleted construction contracts increased to ¥38.47B (¥31.66B at the end of the prior year, +21.5%), with the strengthened advance-payment structure supporting working capital. Investment securities increased to ¥64.10B (¥49.54B at the end of the prior year, +29.4%), indicating that a portion of funds was allocated to market-linked assets. Short-term borrowings of ¥20.98B and long-term borrowings of ¥6.50B were both essentially unchanged from the end of the prior year, with no significant change in the borrowing structure. Overall, the reduction in working capital and increase in advance payments are considered positive factors for cash generation.

Quality of Earnings

Extraordinary items in the current period consisted only of ¥0.02B in extraordinary losses, indicating that temporary factors were limited. In contrast, the prior-year period included ¥0.42B in extraordinary gains, including ¥0.30B in gains on the sale of investment securities and ¥0.09B in gains on the sale of fixed assets. Accordingly, current-period earnings have shifted toward a more recurring nature. Non-operating income and expenses consisted of dividend income of ¥0.08B, interest expenses of ¥0.15B, foreign exchange losses of ¥0.04B, and other items, resulting in net expenses of ¥0.15B. This was a significant reduction from the prior-year net expenses of ¥0.83B and was the primary reason that the growth rate of Ordinary Income (+41.7%) exceeded that of Operating Income (+22.3%). The effective tax rate declined to 32.6% from 35.4% in the prior year, also contributing to the improvement in the net profit margin. Comprehensive income increased significantly to ¥13.87B from ¥5.35B in the prior year, primarily due to a ¥9.26B increase in valuation differences on investment securities. It should be noted that the gap between Comprehensive Income and Net Income of ¥4.24B resulted from market-linked equity items rather than recurring earnings power.

Earnings Forecast and Guidance

Progress against the company’s full-year forecast was 21.4% for Revenue (¥105.04B/¥490B), 19.1% for Operating Income (¥6.48B/¥34B), 18.9% for Ordinary Income (¥6.34B/¥33.6B), and 19.1% for Net Income (¥4.24B/¥22.2B). Although all were below the 25% benchmark for even quarterly progress, the construction industry has seasonality weighted toward the second half in line with construction progress, and the current-period progress rates remain within that range. As of the current quarter, no revisions have been made to either the earnings forecast or the dividend forecast.

Shareholder Returns

The company’s annual dividend plan is ¥84. The Payout Ratio against the company’s projected EPS of ¥141.51 is approximately 59.4%. No data on share repurchases has been disclosed, and shareholder returns are therefore evaluated solely on the basis of dividends. Given the financial foundation consisting of an Equity Ratio of 52.6% and cash and deposits of ¥6.446B, the company has secured the funds necessary to execute its dividend plan.

Risk Factors

1. Deterioration in the profitability of the Civil Engineering Business: The Civil Engineering Business recorded revenue of ¥28.71B (-10.5%) and Operating Income of ¥1.91B (-47.7%), with the decline in earnings substantially exceeding the decline in revenue. The margin fell to 6.7%, and deterioration in costs and project profitability is having a significant impact on earnings. Future corrective trends will affect the company-wide profit margin.

2. Risk of fluctuations in the valuation of investment securities: Investment securities increased to ¥64.10B (15.6% of total assets), representing growth of +29.4% from the end of the prior year. The increase in Comprehensive Income to ¥13.87B depended primarily on valuation differences of ¥9.26B. Accordingly, fluctuations in Comprehensive Income and equity may widen when market conditions change.

3. Collection status of accounts receivable from completed construction contracts: Accounts receivable from completed construction contracts amounted to ¥196.16B and represented a significant proportion of assets. While the strengthened advance-payment structure, reflected in advances received on uncompleted construction contracts of ¥38.47B (+21.5%), supports working capital, collection trends for trade receivables remain an item requiring close monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Growth and Capital Efficiency

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. While the margin in the Building Business improved to 9.5%, the margin in the Civil Engineering Business declined to 6.7%, widening the profitability gap between the segments. As a structural change within the business portfolio, the increased dependence on the Building Business for profits is a notable feature of the financial results.

2. Comprehensive Income of ¥13.87B substantially exceeded Net Income of ¥4.24B. The difference was attributable to ¥9.26B in valuation differences on investment securities, which are equity items distinct from recurring earnings power and should be evaluated separately.

3. Advances received on uncompleted construction contracts increased to ¥38.47B (+21.5%), strengthening the advance-payment structure. This supports future revenue recognition in line with construction progress and provides a reference point for assessing the second-half-weighted progress toward the full-year plan.

Theoretical Share Price (For Reference)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,426–¥1,507 at ±1% for the cost of equity, and ¥1,464–¥1,468 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter 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 / Interest rate reference month: 2026-07 / This value does not forecast 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 summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own responsibility, after consulting a professional adviser as necessary.

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AI Financial Analysis

Executive Summary

Ando Hazama delivered a strong FY2027 Q1 earnings result, with revenue growth and margin expansion led primarily by the Building Construction business. Revenue increased 12.4% YoY to ¥105.04bn. Operating income increased 22.3% to ¥6.48bn, outpacing sales growth and demonstrating positive operating leverage. Profit attributable to owners rose 34.9% to ¥4.24bn. Gross profit rose 13.3% to ¥14.60bn. The gross margin improved by approximately 12bp YoY to 13.9%. The operating margin expanded by approximately 93bp to 6.2% from 5.2% in the prior-year quarter. The net margin rose by approximately 67bp to 4.0% from 3.4%. Ordinary income grew 41.7%, faster than operating income, because the prior-year comparison included materially higher non-operating expenses and the current quarter had only modest financial costs. The current effective tax rate was 32.7%, producing a tax burden of 0.671 and constraining the conversion of pre-tax earnings into net income relative to a normalized tax burden above 0.70. Building Construction was the core business by segment profit contribution, generating ¥6.47bn of segment profit, or roughly 73% of aggregate segment profit before corporate-cost adjustments. Civil Engineering revenue and profit both declined, partially offsetting the strong building result. The consolidated result was achieved despite an industry-typical low gross-margin structure, making project selection, cost control, and loss-provision discipline important determinants of future earnings resilience. The balance sheet remains liquid, with a 163.4% current ratio and cash equal to 3.07 times short-term borrowings. However, 76.3% of interest-bearing debt is short term, requiring continued refinancing capacity and cash management. The full-year forecast implies Q1 progress of 21.4% for revenue, 19.1% for operating income, and 19.1% for profit attributable to owners, all modestly below the standard 25% first-quarter pace. This pattern is consistent with the seasonal timing of construction completion and profit recognition, but it raises the importance of execution during the remaining three quarters. The ¥84 per-share full-year dividend forecast implies a 59.4% dividend payout ratio based on forecast EPS of ¥141.51, near but still below the 60% sustainability benchmark.

Profitability Analysis

Annualized DuPont ROE was 7.8%, comprising a 4.0% net profit margin, 1.020x annualized asset turnover, and 1.90x financial leverage. The principal positive change was margin expansion: operating margin increased to 6.2% and net margin to 4.0%, reflecting revenue growth faster than SG&A growth. Revenue increased 12.4%, while SG&A rose 7.0% to ¥8.11bn, lowering the SG&A-to-sales ratio to 7.7% from 8.1% and supporting operating leverage. The gross margin improvement was modest at 12bp, indicating that most of the operating-margin expansion derived from SG&A absorption rather than a material change in project gross profitability. The reported gross margin of 13.9% is below the 20% cross-industry quality-alert threshold; however, this is structurally more typical for general contractors than for asset-light industries. Its investment relevance is nevertheless high because small changes in construction project margins have an amplified effect on operating income. The five-factor DuPont analysis shows an EBIT margin of 6.2%, an interest burden of 0.974, and a tax burden of 0.671. Interest expense of ¥0.15bn was readily covered by EBIT, producing strong interest coverage of 44.11x. Building Construction segment profit increased 73.3% YoY to ¥6.47bn on 24.6% revenue growth to ¥68.03bn, lifting its segment margin to 9.5% from 6.8%. Civil Engineering segment profit declined 47.7% to ¥1.91bn as revenue fell 10.5% to ¥28.71bn, reducing its segment margin to 6.7% from 11.4%. Group Business revenue increased 27.2% to ¥6.79bn and segment profit more than doubled to ¥0.29bn, although its 4.2% segment margin remains below the two major construction segments. Other operations produced ¥0.18bn of segment profit on ¥1.51bn of revenue, while unallocated corporate costs remained broadly stable at ¥2.36bn. Annualized ROA is approximately 4.1%, indicating moderate asset productivity; improving the recurring project-margin mix is more important to returns than additional balance-sheet leverage.

Growth Assessment

Q1 sales growth was concentrated in Building Construction, where external revenue increased by ¥13.45bn YoY. This more than offset a ¥3.37bn decline in Civil Engineering revenue. Completed construction revenue rose 13.0% to ¥99.13bn, accounting for the majority of consolidated revenue growth. Completed construction gross profit increased 12.4% to ¥13.72bn, broadly tracking revenue and indicating a largely stable underlying construction gross-profit rate. The full-year plan calls for revenue of ¥490.00bn, up 11.5% YoY, and operating income of ¥34.00bn, up only 1.1% YoY. Accordingly, the forecast embeds significant operating-income generation in the subsequent quarters but also suggests that management expects Q1’s 22.3% operating-income growth rate to normalize. Q1 revenue progress against the full-year forecast was 21.4%, 3.6 percentage points below the standard 25% pace. Operating-income progress was 19.1%, 5.9 percentage points below the standard pace, and profit progress was also 19.1%. These deviations are not yet adverse in a construction business, where completion schedules, project mix, and fiscal-year-end activity can materially affect quarterly recognition. The sharp divergence between Building Construction strength and Civil Engineering weakness makes the sustainability of the earnings acceleration dependent on building-project execution and recovery in civil profitability. Provision for loss on construction contracts declined to ¥0.47bn from ¥0.61bn, which is favorable, although the absolute project-loss provision remains a relevant indicator of fixed-price contract risk.

Financial Health

Liquidity is sound. Current assets of ¥285.82bn exceeded current liabilities of ¥174.94bn, resulting in working capital of ¥110.87bn and a current ratio of 163.4%. The quick ratio was also 163.4%, showing that liquidity is supported by assets other than inventories. Cash and deposits totaled ¥64.46bn, equivalent to 3.07x short-term loans of ¥20.98bn. Interest-bearing debt totaled ¥27.48bn, consisting of ¥20.98bn short-term loans and ¥6.50bn long-term loans. Interest-bearing debt represented approximately 12.7% of total equity, while debt-to-capital was 11.2%, indicating a conservative debt load. Total liabilities-to-equity were 0.90x, below the 2.0x high-leverage warning threshold. No current-ratio or debt-to-equity breach is evident. The principal maturity consideration is that 76.3% of interest-bearing debt is short term, above the 40% quality-alert threshold. The root cause is the concentration of borrowings in short-term facilities rather than a high absolute debt burden. In construction, short-term funding is common because project cash flows, advances, and settlement cycles are working-capital intensive; nevertheless, the concentration creates refinancing and liquidity-management sensitivity if credit conditions tighten or project collections slow. This risk is mitigated by the substantial cash balance, strong interest coverage, and positive working capital, but it remains relevant to financial flexibility. Construction receivables were ¥196.16bn, equal to 47.6% of total assets, underscoring the importance of collection discipline. Investment securities increased by ¥14.56bn, or 29.4% YoY, to ¥64.10bn and now represent 15.6% of total assets. The increase strengthened comprehensive income through valuation gains but also increases exposure of equity and comprehensive income to market-price movements. Total equity increased ¥74.63bn YoY to ¥216.84bn, supported by retained profitability and accumulated other comprehensive income.

Notable B/S Changes

Investment securities: +¥14.56bn (+29.4%) to ¥64.10bn - increased marketable-investment exposure; valuation gains supported comprehensive income but increase sensitivity of equity to market-price volatility. Accumulated other comprehensive income: +¥9.65bn (+29.6%) to ¥42.22bn - primarily reflects higher security valuation differences and contributed to the ¥13.87bn comprehensive-income result. Advances received on uncompleted construction contracts: +¥6.81bn (+21.5%) to ¥38.47bn - provides favorable project funding and supports working-capital efficiency. Deposits received: -¥6.01bn (-12.2%) to ¥43.39bn - reduces a source of operating funding and should be assessed alongside progress billing and project completion timing.

Cash Flow Quality

The balance-sheet working-capital pattern was supportive at the reporting date. Construction receivables declined by ¥4.50bn YoY to ¥196.16bn despite 12.4% revenue growth, which indicates that receivables did not expand in line with sales. Advances received on uncompleted construction contracts increased by ¥6.81bn YoY to ¥38.47bn, providing project-level funding support before completion. Costs on uncompleted construction contracts declined by ¥0.87bn to ¥4.58bn, limiting capital tied up in work in progress. Deposits received declined by ¥6.01bn to ¥43.39bn, partly offsetting the favorable increase in construction advances. The combination of lower receivables and higher advances is directionally favorable for cash conversion and does not indicate aggressive revenue-funded working-capital expansion. Cash and deposits declined modestly by ¥1.71bn YoY to ¥64.46bn while revenue and earnings increased. The construction business remains exposed to timing differences between progress billing, customer collections, subcontractor payments, and completion-based revenue recognition. Project-level cost overruns or delayed collections could therefore reverse the currently supportive working-capital profile. The low 13.9% gross margin means that cash conversion and project-loss provisioning remain especially important to earnings quality.

Dividend Sustainability

The company forecasts a full-year dividend per share of ¥84. Based on forecast EPS of ¥141.51, the implied dividend payout ratio is 59.4%. This is marginally below the 60% sustainability benchmark and indicates that the planned dividend is broadly aligned with forecast earnings. Using average shares of 156.88 million, the forecast dividend commitment is approximately ¥13.18bn, compared with forecast profit attributable to owners of ¥22.20bn. The implied retained portion of forecast profit is therefore approximately ¥9.02bn before considering any capital-allocation actions. Balance-sheet support is adequate, with ¥64.46bn of cash and deposits, low interest-bearing debt relative to equity, and strong interest coverage. Dividend capacity is principally dependent on delivering the back-end-weighted full-year earnings plan and preserving project margins, particularly in Building Construction. The forecast dividend policy appears earnings-funded rather than debt-funded under the stated full-year plan.

Risk Assessment

Business risks include Project-margin risk: the 13.9% gross margin is low under the quality-alert framework, so labor, material, subcontractor, or design-change cost inflation can materially affect profitability. This is structurally common in Japanese general contracting, but it increases earnings sensitivity to execution., Civil Engineering deterioration: segment revenue declined 10.5% YoY and segment profit fell 47.7%, with the segment margin dropping from 11.4% to 6.7%. A prolonged weak civil project mix or cost overrun would reduce diversification benefits., Building Construction concentration: Building Construction generated approximately 73% of segment profit before corporate-cost adjustments. Its strong Q1 performance is the principal earnings driver, increasing exposure to building-project timing, fixed-price contract execution, and private-sector construction demand., Construction-cycle and execution risk: labor shortages, skilled-worker aging, steel and cement price volatility, weather disruptions, safety regulation, and delays in project approvals or completion can affect cost and revenue-recognition timing., Project-loss risk: provision for loss on construction contracts was ¥0.47bn. Although lower YoY, this provision confirms continued exposure to loss-making contracts and cost-estimate revisions..

Financial risks include Refinancing risk: 76.3% of interest-bearing debt is short term, above the 40% quality-alert threshold. The high short-term share requires regular access to bank funding and effective treasury management., Receivables concentration: construction receivables of ¥196.16bn represent 47.6% of total assets. Customer-payment delays or disputes could pressure liquidity, notwithstanding the current favorable receivable trend., Market-value risk in investment securities: investment securities increased 29.4% YoY to ¥64.10bn, and valuation differences on securities totaled ¥31.23bn. Equity and comprehensive income are therefore sensitive to security-price movements., Tax conversion risk: the tax burden of 0.671 and effective tax rate of 32.7% reduced net-income conversion from pre-tax profit..

Key concerns include The full-year plan requires acceleration after Q1: operating-income progress of 19.1% is 5.9 percentage points below the standard first-quarter pace., The low gross-margin alert is material because construction earnings can change sharply from relatively small revisions in project profitability., Short-term debt concentration is manageable given cash coverage of 3.07x and interest coverage of 44.11x, but it should be monitored alongside customer collections and project advance balances., The earnings mix has shifted toward Building Construction while Civil Engineering profitability weakened, making segment-margin convergence a key indicator of earnings durability..

Investment Implications

Key takeaways include Q1 operating income grew 22.3% YoY, faster than 12.4% sales growth, supported by operating leverage and strong Building Construction profitability., Building Construction segment margin improved to 9.5%, while Civil Engineering margin fell to 6.7%; segment mix and execution are central to the earnings outlook., Annualized ROE of 7.8% is supported by a 4.0% net margin, 1.020x annualized asset turnover, and 1.90x financial leverage., Liquidity and solvency are sound, with a 163.4% current ratio, 3.07x cash-to-short-term-debt coverage, 11.2% debt-to-capital, and 44.11x interest coverage., The ¥84 forecast dividend implies a 59.4% payout ratio, broadly supported by the full-year earnings plan..

Metrics to watch include Building Construction and Civil Engineering segment revenue, segment profit, and margin trends, Construction gross margin and provision for loss on construction contracts, Progress against the ¥490.00bn revenue and ¥34.00bn operating-income forecasts, Construction receivables, advances received on uncompleted contracts, and deposits received, Short-term debt ratio, cash-to-short-term-debt coverage, and refinancing conditions, Investment-security valuation movements and their effect on accumulated other comprehensive income.

Regarding relative positioning, The company combines a conservative absolute debt position and strong liquidity with a construction-industry margin profile that is more execution-sensitive than asset-light peers. Q1 profitability compares favorably with the stated operating-margin concern threshold, but annualized ROE of 7.8% remains at the lower end of the stated benchmark range. Relative performance will depend on whether the high-margin Building Construction contribution can be sustained while Civil Engineering profitability recovers.