OBAYASHI (1802) FY2026 Q3 Earnings Report

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Executive Summary

The most important point in these results is that Operating Income increased substantially due to improved construction project profitability despite a decline in Revenue. Revenue was ¥1,832.43B (-3.6% YoY), Operating Income was ¥142.72B (+46.2%), Ordinary Income was ¥151.65B (+42.8%), and Net Income (quarterly net income attributable to owners of the parent) was ¥131.76B (+37.3%). The primary driver of the substantial profit increase amid declining Revenue was improved construction project profitability, particularly in domestic building construction, with the gross profit margin rising to 14.4%, approximately 3.5pt above 10.9% in the same period of the previous year. Net Income also benefited from extraordinary income, including a gain on the sale of investment securities of ¥39.91B; therefore, the degree of improvement in the core business excluding temporary factors should also be assessed.

Factors Affecting Performance

【Revenue】Consolidated Revenue was ¥1,832.43B, down -3.6% YoY. Domestic building construction, the core business, declined substantially by -16.9% and weighed on the Company as a whole, while overseas civil engineering increased by +33.1% and real estate increased by +49.0%, significantly mitigating the overall decline. Overseas building construction was ¥35.95B and essentially flat, while domestic civil engineering remained solid at ¥31.98B. Completed construction Revenue was ¥1,727.93B (-5.4%), but gross profit on completed construction increased to ¥240.89B (+27.5%), and the gross profit margin on completed construction improved by approximately 3.6pt to 13.9%.

【Profit and Loss】Operating Income was ¥142.72B (+46.2%), and the Operating Income margin improved substantially to 7.8% from 5.1% in the same period of the previous year. The Operating Income margin for domestic building construction improved sharply to 9.3% from 4.3%, making it the largest growth driver and accounting for approximately 53.9% of consolidated Operating Income. Provision for construction losses declined substantially to ¥4.17B from ¥16.73B in the previous year, and the reduced burden from unprofitable construction projects supported the improvement in profitability. Ordinary Income of ¥151.65B was generated after adding a ¥8.92B surplus in non-operating income and expenses, including ¥6.01B in dividend income, indicating low dependence on non-operating income. Net Income of ¥131.76B benefited from ¥40.58B in extraordinary income, including a ¥39.91B gain on the sale of investment securities; attention should be paid to the inclusion of one-time factors. Overall, the results represent a decline in Revenue but an increase in profit.

Segment Analysis

Among the five segments, domestic building construction was the largest, with Revenue of ¥847.05B (46.2% of total), but declined by -16.9% YoY, while its Operating Income margin improved sharply to 9.3% from 4.3%. Domestic civil engineering recorded Revenue of ¥319.76B (+4.8%) and maintained stable profitability with an Operating Income margin of 9.9%. Overseas building construction generated Revenue of ¥359.51B and was essentially flat, while its Operating Income margin was 2.7%, the lowest among the five segments, indicating a substantial profitability gap versus the domestic businesses. Overseas civil engineering posted Revenue of ¥232.31B (+33.1%) and improved its Operating Income margin to 4.7%, resulting in increases in both Revenue and profit. Real estate generated Revenue of ¥58.86B (+49.0%) and had the highest Operating Income margin at 20.5%, making it the most profitable segment and contributing significantly to the quality of consolidated earnings.

Key Financial Metrics

【Profitability】The Operating Income margin was 7.8%, improving from 5.1% in the same period of the previous year, while the Net Income margin rose to 7.2% from approximately 5.0%. The gross profit margin of 14.4% remains structurally low for the construction industry, but improved by approximately 3.5pt from 10.9% in the same period of the previous year, indicating a favorable trend.【Cash Flow Quality】Cash and deposits were ¥335.09B, down from ¥394.73B at the end of the previous fiscal year. Advances received on uncompleted construction contracts were ¥273.07B (+41.2% versus the end of the previous fiscal year), indicating an accumulation of advance payments before construction, while costs on uncompleted construction contracts also increased to ¥57.72B (+50.3%), reflecting greater investment of funds in ongoing projects.【Investment Efficiency】ROE was 14.4% on an annualized basis and remained high, supported by the improvement in the Net Income margin and financial leverage.【Financial Soundness】The Equity Ratio was 39.7%, nearly unchanged from 39.8% at the end of the previous fiscal year. With total assets of ¥3,145.71B and net assets of ¥1,248.30B, the capital base remains stable.

Cash Flow Analysis

As the disclosed data from the statement of cash flows is limited, fund movements are analyzed based on changes in the balance sheet. Cash and deposits declined by ¥59.64B from ¥394.73B at the end of the previous fiscal year to ¥335.09B at the end of the current period. During this period, costs on uncompleted construction contracts increased by ¥19.32B, indicating greater investment of funds in ongoing construction, while advances received on uncompleted construction contracts increased by ¥79.64B, with increased advance payments supporting liquidity. Treasury stock increased by ¥31.16B compared with the same period of the previous year, suggesting that cash expenditures related to shareholder returns may have contributed to the decline in cash. Property, plant and equipment showed an increasing trend to ¥75.68B, indicating continued investment in the business foundation. Overall, the increase in advance payments associated with operating activities and the use of funds for investment and shareholder returns are proceeding in parallel.

Earnings Quality

The increase in profit for the current period consists of both improved core-business profitability and temporary factors, which should be evaluated separately. The improvement in Operating Income and Ordinary Income was primarily attributable to a decline in unprofitable construction projects, as indicated by the substantial decrease in the provision for construction losses from ¥16.73B to ¥4.17B. Dependence on non-operating income, including dividend income of ¥6.01B and interest income of ¥3.73B, is low, suggesting an improvement in recurring earnings power. Meanwhile, pretax income includes ¥40.58B in extraordinary income, primarily consisting of a ¥39.91B gain on the sale of investment securities, and net extraordinary gains and losses of ¥39.29B accounted for approximately 20.6% of pretax income of ¥190.93B. Accordingly, the growth in Net Income (+37.3%) includes a one-time boost from asset sales, and the underlying strength of the core business should preferably be evaluated primarily through Ordinary Income (+42.8%) and Operating Income (+46.2%). Comprehensive Income was ¥154.00B, exceeding Net Income of ¥134.88B, primarily due to a ¥17.56B increase in valuation difference on securities.

Earnings Forecast and Guidance

Progress against the full-year Company forecast for cumulative Q3 was 71.3% for Revenue, 73.2% for Operating Income, 74.0% for Ordinary Income, and 77.5% for Net Income, generally tracking near the standard level of approximately 75%. Progress for Operating Income and Ordinary Income was slightly below the standard level, while Net Income was ahead, partly due to the gain on the sale of investment securities. The full-year plan calls for Revenue of ¥2,570.0B (-0.8%), Operating Income of ¥195.0B (+36.9%), and Ordinary Income of ¥205.0B (+34.7%). In the second half, the degree of recovery in domestic building construction Revenue and the maintenance of construction project profitability will be key to achieving the plan.

Shareholder Returns

The Q2 dividend was ¥41.00 per share, while the full-year Company forecast calls for an annual dividend of ¥87.00 per share. Based on forecast EPS of ¥244.03, the Payout Ratio is approximately 35.7%, below the generally recognized sustainability guideline of 60%. Treasury stock increased by ¥31.16B from ¥14.83B in the same period of the previous year to ¥45.99B, indicating one aspect of the Company’s shareholder return stance. However, the amount of share repurchase expenditure during the current period cannot be identified solely from changes in the balance, so the Payout Ratio and Total Return Ratio should be considered separately.

Risk Factors

1. Risk of continued Revenue decline in domestic building construction: External Revenue from the core domestic building construction business declined substantially by -16.9% YoY. Although profitability improved, continued declines in construction volume could hinder a recovery in Company-wide Revenue.

2. Low-profitability structure of overseas operations: The Operating Income margin was 2.7% for overseas building construction and 4.7% for overseas civil engineering, below the levels of domestic building construction (9.0%) and domestic civil engineering (9.9%). Cost overruns, construction delays, and foreign exchange fluctuations could affect profitability.

3. Construction receivables and short-term funding structure: Accounts receivable from completed construction contracts were ¥1,168.85B, accounting for approximately 37% of total assets, and collection delays could affect liquidity. In addition, the short-term liabilities ratio is relatively high, requiring close monitoring of refinancing and changes in the funding environment.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Median data showing the Company’s relative position within the industry was not provided; therefore, the Company’s figures serve as standalone reference information.

Growth and Capital Efficiency

Revenue declined, but the combination with increased profit suggests a phase of profitability improvement within the industry.

※Source: Compiled by the Company

Key Takeaways from the Results

1. The fact that Operating Income increased by +46.2% despite declining Revenue, with substantial improvements in the gross profit margin and Operating Income margin, can be interpreted as structural profitability improvement accompanied by a reduction in unprofitable construction projects, as indicated by the substantial decrease in the provision for construction losses.

2. Although domestic building construction experienced a decline in Revenue, its Operating Income margin improved sharply from 4.3% to 9.3%, making it the primary driver and accounting for more than half of consolidated Operating Income. Meanwhile, overseas building construction and overseas civil engineering maintained lower profit margins than the domestic businesses, confirming variation in profitability among businesses.

3. Net Income benefited from extraordinary income, including a ¥39.91B gain on the sale of investment securities, and the high full-year progress rate of 77.5% includes temporary factors. Reviewing the progress rates for Operating Income and Ordinary Income (73.2% and 74.0%, respectively) together is useful for understanding the quality of earnings.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,067–¥2,189 for ±1% in the cost of equity, and ¥2,119–¥2,138 for ±0.1 in ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• As 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 values based solely on publicly disclosed data; these are not forecasts of the market share price or recommendations of any specific investment action, and do 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 professionals as necessary.

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