TAISEI (1801) FY2027 Q1 Earnings Report

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Executive Summary

The Company secured higher revenue and operating income, primarily due to the expansion of completed construction revenue. However, the operating margin declined slightly due to an increase in selling, general and administrative expenses, making the ability to convert revenue growth into profit margins a key focus going forward. Revenue was ¥5,212.1B (+18.4% YoY), operating income was ¥453.2B (+15.3%), ordinary income was ¥458.6B (+11.5%), and net income attributable to owners of the parent was ¥309.1B (+4.8%). Gross profit margin improved to 16.4% from 15.4% in the prior year, but SG&A expenses increased at a pace exceeding revenue growth, causing the operating margin to decline to 8.7% (8.9% in the prior year). The relatively modest growth in net income reflects the increase in the effective tax rate and the limited growth in underlying earnings power after excluding the impact of extraordinary income, including gains on the sale of investment securities.

Factors Affecting Earnings

【Revenue】Revenue increased substantially to ¥5,212.1B (+18.4% YoY). By segment, Construction (the core civil engineering and building operations) increased 19.5% to ¥1,772.9B, total construction increased 21.0% to ¥3,155.8B, and Development increased 6.5% to ¥461.5B, with all contributing to the increase in revenue. Completed construction revenue, which increased 20.1% YoY to ¥4,690.5B, was the primary driver, while revenue from development and other businesses also increased 4.4%, resulting in growth driven by both the construction and development businesses.

【Profit and Loss】Operating income was ¥453.2B (+15.3% YoY), ordinary income was ¥458.6B (+11.5%), and net income was ¥319.5B (+5.6%; net income attributable to owners of the parent was ¥309.1B, +4.8%). Gross profit margin improved to 16.4% (15.4% in the prior year), but SG&A expenses increased substantially by 41.1%. The primary factor was the increase in amortization of goodwill (from ¥1.3B in the prior year to ¥29.8B), causing the operating margin to decline slightly to 8.7% (8.9% in the prior year). In terms of segment profit, Construction (Building) increased 199.1% YoY and Development increased 46.2%, while Engineering (Civil Engineering) declined 37.9%, with the former two segments driving the increase in consolidated profit. Extraordinary income of ¥44.2B, including a gain on the sale of investment securities of ¥43.9B, was recorded in pretax income and was the primary factor behind the difference of +¥43.1B between ordinary income and pretax income. The effective tax rate increased to 36.3%, limiting net income growth. In conclusion, the Company achieved higher revenue and profit.

Segment Analysis

By segment, Construction (Building, revenue of ¥3,155.8B, composition ratio of 60.5%) was the largest contributor to operating profit, with operating income of ¥250.2B (+199.1% YoY) and a margin of 7.9%. Engineering (Civil Engineering, revenue of ¥1,772.9B, composition ratio of 34.0%) reported operating income of ¥153.3B (-37.9%), with its margin also declining to 8.6%. Development (revenue of ¥461.5B, composition ratio of 8.9%) reported operating income of ¥93.4B (+46.2%) and maintained high profitability, with a margin of 20.2%. The significant increase in Construction profit offset the decline in Engineering, resulting in higher consolidated profit. Changes in profitability balance within the business portfolio will be a key area of focus going forward.

Key Financial Indicators

【Profitability】The operating margin of 8.7% (8.9% in the prior year) and net profit margin of 6.1% (6.9% in the prior year) both declined slightly from the prior year, while the gross profit margin improved to 16.4% (15.4% in the prior year). 【Cash Flow Quality】Accounts receivable from completed construction contracts declined 15.9% YoY to ¥8,070.9B. The fact that receivables have not expanded during a period of revenue growth is positive from a collection perspective, although the balance remains substantial, accounting for 31.8% of total assets. Advances received on construction contracts in progress of ¥2,408.4B exceeded costs on construction contracts in progress of ¥950.0B, with the excess advances supporting working capital. 【Investment Efficiency】Annualized ROE was 13.1%. A DuPont decomposition based on pretax income of ¥501.7B indicates a structure in which both net profit margin and financial leverage (total assets/net assets) contribute. 【Financial Soundness】The equity ratio was 38.4% (improving from 34.9% in the prior year), and the current ratio was approximately 119.3%. Interest-bearing debt was ¥3,477.8B, including ¥400.0B in bonds. Cash and deposits were ¥2,073.2B, down 25.5% from the same period of the prior year.

Cash Flow Analysis

Although explicit data from the cash flow statement is unavailable, an examination of funding trends based on changes in the balance sheet shows that cash and deposits declined ¥710.1B YoY to ¥2,073.2B. Accounts receivable from completed construction contracts decreased ¥1,529.5B, indicating strong collections during a period of revenue growth. Meanwhile, advances received on construction contracts in progress decreased ¥425.0B, potentially indicating that the decline in advances accompanying construction progress restrained cash inflows. Accounts payable, construction-related unpaid expenses, and other liabilities also decreased ¥407.7B, indicating that a contraction on the payment side occurred alongside improvements on the collection side. These movements are reflected in the decline in cash balances as the result of fund allocation to working capital, investments, and shareholder returns. The breakdown of future uses of funds therefore requires close monitoring.

Quality of Earnings

Of net income of ¥319.5B, pretax income of ¥501.7B included extraordinary income of ¥44.2B, primarily consisting of a ¥43.9B gain on the sale of investment securities. The difference of approximately ¥43.1B from ordinary income of ¥458.6B was primarily attributable to non-recurring factors. Non-operating income of ¥31.5B was mainly composed of dividend income of ¥17.0B and amounted to only 0.6% of revenue, indicating a limited impact on the earnings structure. The effective tax rate increased to 36.3%, causing net income growth of +5.6% to lag pretax income growth of +10.9%. Comprehensive income was ¥163.6B, below net income, primarily due to a ¥145.4B decline in valuation difference on other securities. The impact of changes in the market prices of held assets on net assets is an important consideration when evaluating the quality of net income.

Earnings Forecast and Guidance

The full-year forecast is revenue of ¥2兆4,200B (+15.8% YoY), operating income of ¥1,880B (+0.0%), and ordinary income of ¥1,870B (-4.5%). Q1 progress ratios were 21.5% for revenue, 24.1% for operating income, and 20.5% for net income, all at or below the standard progress ratio of 25%. Since the full-year forecast assumes flat operating income despite higher revenue, the full-year operating margin is expected to be approximately 7.8%, below the Q1 result of 8.7%. Continued improvement in profitability during the second half of the fiscal year will therefore be a condition for achieving the plan. As of the current quarter, there have been no revisions to the earnings or dividend forecasts.

Shareholder Returns

The full-year dividend forecast is ¥380 per share, and the payout ratio based on forecast EPS of ¥926.33 per share is approximately 41.0%. The expected total dividend of approximately ¥619B against the Company’s forecast net income attributable to owners of the parent of ¥1,510B implies earnings-based dividend coverage of approximately 2.4x, below the 60% benchmark for sustainability. Q1 net income attributable to owners of the parent of ¥309.1B represents only 20.5% of the full-year forecast, and payment of the full-year dividend depends on achieving the second-half earnings plan. Since extraordinary income includes a one-time gain on the sale of investment securities, recurring earnings power should be emphasized when assessing the dividend funding base.

Risk Factors

1. Construction Profitability Volatility Risk: The gross profit margin of 16.4% is below 20%, a level considered low for the construction industry, while the provision for construction contract losses remains substantial at ¥688.2B (down 9.9% from ¥764.0B in the prior year). Rising material and labor costs and design changes could place pressure on profitability.

2. Decline in Engineering Segment Profit: Operating income in Engineering (Civil Engineering) declined 37.9% YoY to ¥153.3B, resulting in a structure in which increased profits from Construction and Development are offsetting the decline in consolidated profit. Recovery in Engineering profitability will be an important variable for consolidated margins.

3. Decline in Cash and Deposits and Collection Management: Cash and deposits declined 25.5% YoY to ¥2,073.2B. Accounts receivable from completed construction contracts of ¥8,070.9B account for 31.8% of total assets, and delays in payments by clients or in acceptance inspections could affect liquidity.

Industry Benchmark (For Reference; Company Research)

Industry Benchmark (construction)

Profitability and Returns

The Company’s profitability is well above the industry median and ranks among the higher levels within the construction industry.

Growth and Capital Efficiency

The revenue growth rate is substantially above the industry median, indicating a high pace of growth within the industry.

※Source: Company research

Key Points in the Earnings Results

1. Although the Company secured higher revenue and operating income, the increase in SG&A expenses (including higher amortization of goodwill) exceeded revenue growth, resulting in a 22bp YoY decline in the operating margin. Whether revenue growth can be converted into improved profit margins will be a key focus in future earnings results.

2. Operating income in the Construction segment expanded sharply by 199.1% YoY and led the increase in consolidated profit, while Engineering declined 37.9%, indicating a change in the profitability balance among businesses.

3. Net income benefited from extraordinary income, including a ¥43.9B gain on the sale of investment securities. When evaluating recurring earnings power, emphasis should be placed on trends in the operating margin and construction profitability.

Theoretical Share Price (Reference Value)

Sensitivity: ¥7,256–¥7,684 at a ±1% change in the cost of equity, and ¥7,429–¥7,520 at a ±0.1 change in ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to 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: 2026-07 / This is a mechanical calculation based solely on publicly disclosed data and does not constitute a forecast of the market share price or a recommendation of any specific investment action, nor does it predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through analysis of 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 with professionals as necessary.

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