OBAYASHI CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥1.16T
• Operating Income: ¥80.08B
• Net Income: ¥56.18B
• EPS: ¥110.84

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 Integrated Analysis

Analysis integrating XBRL data (GPT-5) and PDF earnings presentation (Claude)

Executive Summary

Obayashi Corporation (TSE: 1802) delivered a sharp profit recovery in FY2026 Q2 despite a modest revenue contraction, underscoring strong margin improvement and better project execution. Revenue declined 5.0% year on year to ¥1,161.3bn, but operating income surged 78.0% YoY to ¥80.1bn, lifting the operating margin to roughly 6.9%. Net income reached ¥78.0bn (+42.9% YoY), with a reported net profit margin of 6.71%, reflecting favorable project mix, cost control, and likely normalization from prior-year cost pressures. DuPont analysis shows ROE of 6.36% driven by a 6.71% net margin, 0.403x asset turnover, and 2.35x financial leverage—consistent with a capital-intensive general contractor leveraging a sizable asset base. Gross margin of 10.1% and an 8.3% EBITDA margin (¥95.8bn) indicate improved underlying profitability versus typical mid-cycle construction margins. Interest coverage is strong at 35.2x, signaling manageable financial risk and low sensitivity to funding costs in the near term. Liquidity appears adequate with a current ratio of 124.5% and working capital of ¥356.1bn, although the quick ratio matches the current ratio due to unreported inventories in the dataset. Operating cash flow was negative at -¥56.6bn, contrasting with positive earnings and indicating a working capital outflow typical in the construction cycle when projects ramp up and receivables expand. Total assets stood at ¥2,883.4bn and total equity at ¥1,225.6bn, implying an approximate equity ratio of about 42.5% (despite the equity ratio field being unreported), which aligns with a solid solvency position for a major contractor. The dataset shows income tax expense of ¥22.5bn; applying this against pre-tax earnings implies a plausible effective tax rate in the mid‑20s percent, even though the automated metric shows 0.0% (unreported). Dividend fields (DPS and payout) are undetailed in this dataset; large domestic contractors typically aim for stable dividends, but we cannot infer policy or coverage from the provided numbers. Free cash flow cannot be reliably derived because investing cash flows and capex are unreported; thus, FCF coverage of dividends cannot be assessed from this snapshot. The overall picture is of a company benefiting from improved project profitability and strong interest coverage, tempered by negative OCF likely driven by working capital timing. Key watch points include order intake quality, price pass‑through on materials/labor, progress on large projects, and normalization of working capital to support cash conversion. Data limitations (notably several unreported items) warrant caution in drawing definitive conclusions on liquidity buffers, capital intensity, and dividend capability. Even with these caveats, the profitability rebound and balance sheet scale suggest a resilient competitive position heading into the second half.

From Earnings Presentation: Obayashi Corporation's Q2 FY2026 (March 2026 period) financial results presentation shows consolidated revenue of 1,161.2 billion yen (down 5.0% YoY), a decrease in revenue, but significant profit increases with operating income of 80.0 billion yen (up 78.0%), ordinary income of 84.5 billion yen (up 72.2%), and net income attributable to parent company shareholders of 78.0 billion yen (up 42.9%). In the construction business, domestic building construction revenue decreased but overseas building construction revenue increased, and civil engineering also increased, with gross profit margin on completed construction work improving significantly to 13.7% from 9.6% in the same period last year. Order intake decreased significantly in both domestic building construction and civil engineering, but overseas orders increased substantially in both building construction and civil engineering. Full-year forecasts were significantly revised upward to revenue of 2,570.0 billion yen (up 10.0 billion yen from August forecast), operating income of 165.0 billion yen (up 43.0 billion yen), and net income of 149.0 billion yen (up 49.0 billion yen). Annual dividend maintained at 82 yen (41 yen for interim period). Operating cash flow turned positive to 20.6 billion yen (from negative 56.6 billion yen in the same period last year). Interest-bearing debt decreased to 352.2 billion yen (down 10.5 billion yen from end of previous fiscal year). Concerns about working capital pointed out in GPT analysis showed improvement during the period.

Financial Analysis

Profitability

ROE is 6.36%, decomposed as Net Margin 6.71% × Asset Turnover 0.403 × Financial Leverage 2.35. Operating margin is roughly 6.9% (¥80.1bn / ¥1,161.3bn), a substantial improvement given operating income grew 78% on a 5% revenue decline, highlighting strong operating leverage from better project mix and cost discipline. Gross margin stands at 10.1%, indicating improved conversion from cost of sales despite sector cost inflation headwinds. EBITDA of ¥95.8bn yields an 8.3% EBITDA margin, providing additional cushion for non-cash charges and interest. Ordinary income at ¥84.5bn exceeds operating income, suggesting positive non-operating contributions. Interest expense of ¥2.28bn is modest relative to EBITDA and EBIT, reflected in a healthy interest coverage of 35.2x. The magnitude of margin expansion versus top‑line contraction signals favorable close‑outs and/or improved pricing pass-through on ongoing projects. With asset turnover at 0.403x, efficiency is consistent with a large general contractor; ROE improvement would hinge on sustaining margins and improving turnover rather than leveraging the balance sheet further. The implied effective tax rate (tax expense/pre‑tax) is roughly in the mid‑20s percent, consistent with Japan statutory context, despite the 0.0% automated figure being unreported in the dataset.

Growth

Revenue declined 5.0% YoY to ¥1,161.3bn, but profits rebounded sharply: operating income +78.0% YoY and net income +42.9% YoY. The divergence suggests cyclical normalization and/or better execution on higher‑margin projects rather than broad-based volume growth. With gross margin at 10.1% and operating margin near 6.9%, profitability quality improved despite top-line softness, indicating sustainable pricing discipline and cost control. Ordinary income outpaced operating income, hinting at some non-operating tailwinds; sustainability should be judged on core operating margins. Given negative operating cash flow in the period, the quality of earnings hinges on subsequent quarters’ working capital normalization as projects progress and billings convert to cash. Outlook depends on order intake, backlog quality, and the ability to pass through wage/material inflation; if current margins persist, full-year profit trajectory could remain solid even on flattish revenue. The construction cycle and public/private capex pipelines will influence 2H revenue cadence; monitoring large project milestones is key.

Financial Health

Total assets are ¥2,883.4bn and total equity is ¥1,225.6bn, implying an approximate equity ratio around 42.5% (computed from provided balances; the reported equity ratio field is unreported). Total liabilities are ¥1,832.6bn, with current liabilities at ¥1,453.4bn. Liquidity is adequate with a current ratio of 124.5% and working capital of ¥356.1bn; the quick ratio equals the current ratio because inventories are unreported in the dataset. Debt-to-equity is 1.50x per the metrics, indicating moderate leverage for the sector, mitigated by strong interest coverage of 35.2x. Interest expense of ¥2.28bn is small relative to operating earnings, suggesting low near-term refinancing risk. The balance sheet scale provides flexibility to absorb project variability. Without reported cash and equivalents, we cannot comment on immediate liquidity buffers, but the overall capital structure appears sound given equity scale and coverage metrics.

Cash Flow

Operating cash flow is -¥56.6bn versus net income of ¥78.0bn, yielding an OCF/NI ratio of -0.73, indicative of significant working capital outflows during the period. Such timing is common in construction when receivables and work-in-process expand ahead of collections; confirmation requires subsequent period reversal. Investing cash flow is unreported (0 in dataset), and capex is not disclosed, preventing a reliable free cash flow calculation; the presented FCF of 0 should be treated as not available. EBITDA of ¥95.8bn and D&A of ¥15.8bn indicate healthy non-cash earnings capacity; however, cash conversion is currently weak due to WC dynamics. Key to earnings quality will be the alignment of revenue recognition with billing and collection in 2H, and the trajectory of advances from customers and retention releases.

Dividend Sustainability

Dividend per share and payout ratio are unreported in this dataset (shown as 0), so no direct assessment of cash returns to shareholders can be made from the provided figures. Given negative OCF in the first half and unknown capex, free cash flow coverage of any dividend cannot be determined at this time. Sustainability will depend on second‑half cash generation, working capital normalization, and management’s capital allocation policy under JGAAP. Historically, large Japanese general contractors tend to target stability in dividends, but confirmation for this issuer and period is not available in the provided data.

Business Outlook

Full-year forecast: Revenue of 2,570.0 billion yen (down 0.8% YoY), operating income of 165.0 billion yen (up 15.8%), net income of 149.0 billion yen (up 2.5%). The trend of decreased revenue with increased profit continues, with operating profit margin expected to improve to 6.4% (from 5.5% previous year). Domestic building construction revenue forecast at 1,170.0 billion yen (down 12.5% YoY) but gross profit margin expected to improve significantly from 7.6% to 9.1%. Civil engineering revenue forecast at 730.0 billion yen (up 11.8%) maintaining gross profit margin of 6.0%. Overseas building construction forecast at 505.0 billion yen (up 5.7%), overseas civil engineering at 315.0 billion yen (up 25.8%) with significant revenue increase expected. Real estate business performing well at 165.0 billion yen (up 34.1%). Full-year order intake revised upward to 2,920.0 billion yen (up 220.0 billion yen from August forecast), driven by overseas orders of 1,145.0 billion yen (up 71.0 billion yen, up 6.6% YoY). Overseas building construction 620.0 billion yen (477.0 billion yen previous year), overseas civil engineering 525.0 billion yen (596.8 billion yen previous year), with overseas ratio rising to approximately 39%. Financial soundness expected to further improve through enhanced operating cash flow generation capability and interest-bearing debt reduction (year-end forecast 320.0 billion yen, down 42.7 billion yen from end of previous fiscal year).

Management Guidance

Management has clearly stated a policy of continuing "order intake strategy focused on profitability," controlling projects without adequate profitability and shifting to high-value-added projects. Management explains that stabilization of raw material prices and progress in securing labor are the background to margin improvement. For overseas business, actively pursuing large-scale infrastructure and data center projects in North America (MWH, Webcor) and Asia (Singapore, etc.). Domestically, large-scale carryover projects such as Osaka IR, MUFG headquarters building, and Shibuya redevelopment are progressing smoothly. FY2025 is positioned as the year to achieve "structural improvement in earning power," aiming to establish gross profit margin on completed construction work in the 13% range. Maintaining payout ratio of 38.3%, aiming to improve total return ratio through stable dividends and share buybacks. Mid-term stance (inferred from materials) toward achieving ROE of 8% or higher and operating profit margin of 7% or higher.

Strategic Initiatives

• Expansion of overseas construction business: Maintaining order intake in the 2 trillion yen range through North American infrastructure (MWH) and large-scale Asian projects (Changi Airport, etc.)
• Reliable construction of major domestic redevelopment projects: High-profitability completion of carryover construction work exceeding 2 trillion yen including Osaka IR, Shibuya redevelopment, MUFG headquarters building, etc.
• Digital and technological innovation: Cost reduction and construction period shortening through BIM/CIM utilization, construction automation, and DX promotion
• Strengthening real estate development business: Focus as high-profit business with revenue of 165.0 billion yen (up 34% YoY) and gross profit margin of 20%
• ESG and decarbonization response: Expansion of orders for ZEB/ZEH, renewable energy-related facilities, and promotion of environmentally conscious construction
• Maintaining financial discipline: Interest-bearing debt below 320.0 billion yen, maintaining equity ratio in 40% range, balancing ROE improvement and shareholder returns

Risk Assessment

Business Risks:

• Project execution risk leading to cost overruns and margin erosion
• Input cost inflation (materials, subcontracting, labor) and price pass-through limitations
• Order intake volatility and backlog quality affecting revenue visibility
• Timing of public/private capex cycles in Japan and overseas markets
• Competition and bidding pressure in large-scale civil and building projects
• Schedule delays, claims, and liquidated damages on complex projects
• ESG and climate-related risks impacting project costs and design requirements

Financial Risks:

• Negative operating cash flow driven by working capital outflows
• Potential increase in interest rates impacting future financing costs
• Concentration of receivables and retention impacting cash conversion
• Leverage sensitivity if margins compress while liabilities remain elevated
• Unreported cash balances limiting visibility on immediate liquidity buffers

Key Concerns:

• Sustainability of margin expansion amid revenue softness
• Normalization of working capital and recovery of operating cash flow
• Visibility on dividend policy and cash returns absent disclosed DPS
• Exposure to large project risk and claims environment in 2H

Risk Factors from Presentation:

• Exchange rate fluctuation risk, geopolitical risk, and local regulatory change risk for overseas projects (particularly Asia and North America)
• Risk of renewed increases in material prices and labor unit costs (steel, cement, labor shortage)
• Risk of deteriorating construction profitability on large-scale projects (design changes, construction delays, additional cost occurrence)
• Risk of construction suspension and delays due to infectious diseases and natural disasters
• Risk of increased funding costs due to interest rate increases (currently maintaining low interest rates but requiring attention over medium to long term)
• Risk of deteriorating profitability due to intensified order competition (particularly domestic public works)
• Explicitly stated that future business forecasts are based on currently available information and certain assumptions, and actual results may differ significantly due to various factors

Investment Implications

Key Takeaways:

• Strong margin-driven profit recovery with operating income up 78% YoY despite a 5% revenue decline
• Healthy solvency and coverage metrics; implied equity ratio around the low‑40s percent and interest coverage 35x
• Negative OCF highlights working capital drag; cash conversion is the main near-term swing factor
• Ordinary income exceeding operating income suggests some non-operating support; sustainability to be monitored
• Dividend details not disclosed in the dataset; payout capacity hinges on 2H cash generation

Metrics to Watch:

• Order intake and backlog mix (civil vs. building, domestic vs. overseas)
• Operating margin and gross margin sustainability
• Working capital movements and OCF recovery in 2H
• Capex and investing cash flows to assess true FCF
• Interest coverage and debt metrics amid potential rate changes

Relative Positioning: Within Japan’s major general contractors, the period shows above-trend margin expansion and strong coverage metrics, consistent with a disciplined project portfolio; however, cash conversion trails earnings due to working capital timing, which will be critical for maintaining financial flexibility and shareholder returns.

Supplementary Insights (Key Highlights)

• Significant improvement in gross profit margin on completed construction work for domestic construction business: Building construction 13.1% (6.6% previous year), Civil engineering 17.9% (18.1% previous year)
• Significant increase in overseas orders: Building construction 440.0 billion yen (269.9 billion yen previous year, up 63.0%), Civil engineering 324.8 billion yen (371.0 billion yen previous year, down 12.4% but maintaining high level)
• Significant upward revision of full-year forecast: Operating income up 43.0 billion yen from August forecast (up 35.2%), approximately up 42% from initial forecast
• Interim dividend of 41 yen implemented, annual dividend forecast of 82 yen with payout ratio of 38.3% (zero dividend pointed out in GPT analysis was a misidentification)
• Major orders received: Changi Airport Terminal 5 underground construction work (Singapore), University of California dormitory construction (USA), and other large-scale overseas projects
• Share buyback of 32,470 million yen implemented (based on August resolution), demonstrating proactive stance toward improving capital efficiency
• Abundant construction backlog secured with order backlog carried forward to next period of 2,778.8 billion yen (up 265.4 billion yen, up 10.6% YoY)

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