OTEC CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥14.60B
• Operating Income: ¥1.74B
• Net Income: ¥1.24B
• EPS: ¥78.84

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Strong Q2 FY2026 with broad-based margin expansion and sharp earnings acceleration, underpinned by robust operating cash flow. Revenue rose 18.0% YoY to 146.02, with gross profit of 42.36 and operating income surging 149.7% YoY to 17.36. Ordinary income climbed 130.4% YoY to 18.75, aided by 1.81 in non-operating income (notably 0.96 in dividends). Net income jumped 148.6% YoY to 12.21, translating to EPS of 78.84 JPY. Profitability was healthy: gross margin at 29.0%, operating margin at approximately 11.9%, EBITDA margin at 13.0%, and net margin at 8.4%. Basis-point changes versus last year cannot be precisely quantified due to absent prior-period margin data, but the magnitude of YoY profit growth versus revenue implies significant operating margin expansion. Earnings quality was high, with OCF of 24.17 running at 1.98x net income and readily covering capex of 3.41. The balance sheet is strong: current ratio 226.2%, quick ratio 215.2%, and low leverage (D/E 0.47x, interest coverage 86.97x). Total comprehensive income of 25.48 materially exceeded net income, likely reflecting valuation gains on investment securities (85.33 on balance sheet). ROE is 5.0% and ROIC 6.9%, approaching typical 7–8% targets for capital efficiency but with room for improvement. Non-operating income contributed a modest 14.8% of operating income, suggesting earnings are predominantly operating in nature. Tax rate at 33.5% looks normalized. Dividend data were not disclosed; a reported “calculated” payout ratio of 238.1% appears inconsistent with undisclosed DPS and should be treated as not reliable. Forward-looking, sustained order intake and disciplined project execution will be key to maintaining the new, higher operating margin level. Monitoring OCI sensitivity to market movements in investment securities is also important given the sizable comprehensive income gap. Overall, momentum is solid with healthy cash conversion and liquidity, positioning the company well for the second half.

Profitability Analysis

ROE decomposition (DuPont): ROE 5.0% = Net Profit Margin 8.4% × Asset Turnover 0.403 × Financial Leverage 1.47x. The biggest driver of the YoY uplift in profitability is operating leverage: revenue grew 18.0% while operating income grew 149.7%, implying material improvement in the margin layer (OPM ~11.9%). Net profit margin benefited from both higher operating margin and modest non-operating income (1.81), partially offset by a normalized effective tax rate of 33.5%. Asset turnover at 0.403 (based on period data) is subdued, reflecting a cash-rich balance sheet (cash 98.26 and investment securities 85.33), which dilutes turnover. Financial leverage is conservative at 1.47x, limiting ROE amplification but lowering risk. The primary business reason for margin expansion likely lies in improved project mix and execution efficiency (COGS discipline; gross margin at 29.0%), plus SG&A control (SG&A 25.00 rising slower than operating profit, though YoY SG&A growth is undisclosed). Sustainability: margin gains look partly structural if tied to mix/efficiency, but some upside may be cyclical; continued cost control and order selection will be critical to maintain double-digit OPM. Watchouts: we cannot verify whether SG&A outpaced revenue due to missing YoY SG&A data; however, the current margin profile suggests operating leverage remains favorable.

Growth Assessment

Top-line expanded 18.0% YoY to 146.02, indicating healthy demand and/or improved project throughput. Operating income rose 149.7% YoY to 17.36, outpacing sales growth and signaling stronger operating leverage and cost execution. Ordinary income (+130.4% YoY) and net income (+148.6% YoY) confirm broad-based profit growth beyond pure non-operating items. Current margin levels (GPM 29.0%, OPM ~11.9%, NPM 8.4%) are significantly higher than implied prior-year levels, though exact bps expansion cannot be calculated due to missing prior-period margins. Non-operating income (1.81) added but did not dominate results; dividend income (0.96) provides a modest recurring cushion. Comprehensive income (25.48) far exceeding net income indicates favorable market valuation effects, which are non-cash and potentially volatile. Outlook: sustainability hinges on order backlog quality, price discipline in fixed-price contracts, and labor/material cost management. With ROIC at 6.9%, incremental gains toward 7–8% would support durable value creation. Key swing factors for H2 include seasonality in construction activity, project timing, and any changes in the securities portfolio’s valuation feeding into OCI.

Financial Health

Liquidity is strong: current ratio 226.2% and quick ratio 215.2%, with cash and deposits at 98.26 covering all short-term loans (14.14) multiple times. Working capital is robust at 113.84, and receivables (18.33) plus inventories (9.91) are modest versus current assets (204.05), indicating low near-term liquidity risk. Solvency is conservative: total liabilities 116.30 versus total equity 245.62 (D/E 0.47x), and interest coverage is very high at 86.97x, reflecting minimal interest burden (0.20). No warnings: Current Ratio is well above 1.0 and D/E is far below 2.0. Maturity mismatch risk is low; short-term debt (14.14) is comfortably covered by cash (98.26) and overall current assets. Off-balance sheet obligations were not disclosed; absent data may mask guarantees or operating lease commitments, but no specific issues are reported.

Cash Flow Quality

Earnings quality is high: OCF/Net Income is 1.98x, indicating profits are well-backed by cash. Free cash flow is approximately 20.76 (OCF 24.17 minus capex 3.41), sufficient to fund organic investment and provide optionality for shareholder returns or balance sheet strengthening. Working capital appears well-managed; given modest receivables and inventories relative to revenue and strong OCF, no signs of aggressive working capital pull-forward are evident from disclosed data. Financing CF of -4.74 suggests net repayment or distributions, consistent with conservative capital management. Investing CF details are unreported, limiting visibility into acquisition spend versus maintenance capex, but depreciation (1.56) and capex (3.41) suggest modest reinvestment needs.

Dividend Sustainability

Dividend data (DPS and total dividends) were not disclosed, and the reported calculated payout ratio of 238.1% conflicts with undisclosed DPS; thus, we treat it as unreliable. From a capacity standpoint, FCF of ~20.76 comfortably covers typical mid-cap dividend outlays, but confirmation requires actual DPS. With strong liquidity and low leverage, the balance sheet can support stable dividends; sustainability ultimately depends on maintaining double-digit operating margins and OCF conversion above 1.0x of net income. Policy outlook cannot be inferred without management guidance; watch for year-end DPS announcement and any DOE/ROE-linked targets.

Risk Assessment

Business Risks:

• Project execution risk in fixed-price contracts (cost overruns, delays) that could compress margins.
• Input cost inflation (materials, subcontractor labor) potentially eroding gross margins.
• Order timing and seasonality leading to revenue and margin volatility between halves.
• Client credit risk affecting receivable collections, though current balances look modest.
• Dependence on market conditions for investment securities affecting comprehensive income.

Financial Risks:

• Valuation volatility in the securities portfolio (85.33) impacting OCI and equity.
• Potential interest rate increases marginally raising financing costs (though current debt is small).
• Concentration of cash (98.26) introduces opportunity cost and asset turnover drag.
• Limited disclosure on investing CF could hide M&A-related cash needs.

Key Concerns:

• Sustainability of the newly elevated operating margin (~11.9%) into H2.
• Exposure to market-to-market effects driving a large gap between net and comprehensive income.
• Data gaps in dividends and SG&A breakdown limit assessment of cost structure durability.

Investment Implications

Key Takeaways:

• Earnings acceleration is chiefly operating-driven with high cash conversion (OCF/NI 1.98x).
• Balance sheet strength (current ratio 226%, D/E 0.47x) offers resilience and optionality.
• ROE at 5.0% and ROIC at 6.9% show improvement potential; raising asset turnover or modest leverage could lift ROE.
• Comprehensive income strength highlights OCI sensitivity; equity portfolio risk warrants monitoring.
• Free cash flow (~20.76) comfortably exceeds capex needs, supporting potential shareholder returns subject to policy.

Metrics to Watch:

• Order backlog and book-to-bill to gauge revenue sustainability.
• Gross and operating margin trajectory in H2 (bps changes), especially vs input cost trends.
• OCF/NI and working capital days (DSO, DIO, DPO) for cash conversion durability.
• ROIC versus WACC, and capital allocation between cash retention, capex, M&A, and returns.
• OCI movements tied to investment securities and any realized gains/losses.
• Dividend policy announcements (DPS, payout/DOE) and buyback activity.

Relative Positioning: Within Japan’s construction/engineering peers, the company exhibits stronger-than-average liquidity and interest coverage, a solid mid-teens EBITDA-to-OP conversion, and improving capital efficiency. ROIC is slightly below top-tier targets but trending toward the 7–8% range, with ample balance sheet capacity to support disciplined growth.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis