WATANABE SATO (1807) FY2026 Q3 Earnings Report

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Executive Summary

The company reported higher profits despite lower revenue, with improved construction profitability and non-operating income (dividends received) driving net income. Revenue amounted to ¥23.05B (-14.5% YoY), while Operating Income increased to ¥0.31B (+31.7%), Ordinary Income to ¥0.58B (+73.4%), and Net Income to ¥0.38B (+136.7%), securing profit growth across all levels. The primary drivers of higher Operating Income were an improvement in the gross profit margin (9.0%, versus 7.4% in the previous year) and the containment of SG&A expenses (+0.6% YoY). In addition, non-operating income, including ¥0.19B in dividends received, significantly amplified the growth in Ordinary Income and Net Income.

Factors Affecting Performance

【Revenue】Revenue was ¥23.05B, down 14.5% YoY. The company operates a single segment, the Construction Business, and the decrease in completed construction revenue appears to have been the primary cause of the decline. Accounts receivable from completed construction contracts declined to ¥10.97B (¥14.75B in the previous year, -25.6%), indicating a reduction in receivables and reflecting changes in construction progress and billing cycles. Meanwhile, costs on uncompleted construction contracts increased substantially to ¥2.54B (¥0.85B in the previous year, +198.2%), while advances received on uncompleted construction contracts rose to ¥1.40B (¥0.68B in the previous year, +106.6%), indicating simultaneous expansion in funding for ongoing projects and customer advances.

【Profit and Loss】Operating Income was ¥0.31B (+31.7% YoY), and the Operating Income margin improved to 1.3% from 0.9% in the previous year. The main drivers of profit growth were the improvement in the gross profit margin to 9.0% from 7.4% and the fact that SG&A expenses remained almost flat (+0.6%) despite the 14.5% decline in Revenue. Ordinary Income was ¥0.58B (+73.4% YoY), reflecting ¥0.30B in non-operating income, primarily consisting of ¥0.19B in dividends received, in addition to Operating Income. Net Income was ¥0.38B (+136.7% YoY), while extraordinary gains and losses were immaterial, each being less than ¥0.01B. In conclusion, the company achieved higher profits despite lower revenue.

Segment Analysis

The Group operates a single segment, the Construction Business, and does not disclose segment-specific information.

Key Financial Indicators

【Profitability】The Operating Income margin of 1.3% and Net Income margin of 1.6% both improved from the same period of the previous year (0.9% and 0.6%, respectively), but remain low in absolute terms. The gross profit margin improved by approximately 1.6pt to 9.0% from 7.4% in the previous year, suggesting improved construction profitability or a change in the project mix.【Cash Flow Quality】The amounts of Operating CF, Investing CF, and Financing CF are outside the scope of disclosure. However, while accounts receivable from completed construction contracts declined by 25.6%, indicating progress in receivables reduction, costs on uncompleted construction contracts increased by 198.2%, indicating greater funds tied up in ongoing projects.【Investment Efficiency】Annualized ROE was 2.3%, while annualized ROIC was 1.4%; both remained low. Total asset turnover was approximately 0.92x, and the company cannot be considered a high-turnover business given its asset structure, which includes substantial land, property, plant and equipment, and investment securities.【Financial Soundness】The Equity Ratio was 65.6%, and the current ratio was approximately 227.8%, both high. Short-term borrowings declined to ¥1.40B, down 50.0% YoY. All interest-bearing debt is short-term, requiring ongoing monitoring of refinancing conditions.

Cash Flow Analysis

As the individual amounts in the statement of cash flows are not included in the disclosed information, funding trends are analyzed based on balance sheet changes. Accounts receivable from completed construction contracts declined 25.6% to ¥10.97B from ¥14.75B in the same period of the previous year, with the reduction in receivables associated with lower Revenue having a positive effect from a cash flow perspective. Meanwhile, costs on uncompleted construction contracts increased approximately 198.2% to ¥2.54B from ¥0.85B in the same period of the previous year, indicating increased investment of funds in ongoing projects. Advances received on uncompleted construction contracts also increased approximately 106.6% to ¥1.40B from ¥0.68B in the same period of the previous year, partially offsetting the funding burden arising from the increase in costs on uncompleted construction contracts. Cash and deposits amounted to ¥4.63B, more than three times the ¥1.40B in short-term borrowings, indicating sound short-term liquidity.

Quality of Earnings

The increase in profit for the current period was supported by both improved core business profitability and non-operating income, and these components should be evaluated separately. The improvement in Operating Income resulted from recurring factors—an increase in the gross profit margin and containment of SG&A expenses—making its quality relatively easy to assess as sustainable. Meanwhile, Ordinary Income exceeded Operating Income by approximately ¥0.27B, primarily due to ¥0.30B in non-operating income, of which ¥0.19B consisted of dividends received. Although these dividends represent stable income from investment securities, they may fluctuate depending on the dividend policies of investee companies and changes in market conditions; therefore, they should be distinguished from core business earnings power. Extraordinary gains and losses were minimal, consisting of an extraordinary gain of ¥0.004B and an extraordinary loss of ¥0.006B, and their impact on Net Income was limited. The substantial increase in costs on uncompleted construction contracts suggests future recognition of costs and expansion of accruals, and, together with the trend in the ¥0.03B provision for losses on construction contracts, indicates embedded risks of future changes in construction profitability.

Earnings Forecast and Guidance

Progress against the company’s Full-Year forecast was 62.3% for Revenue, 25.8% for Operating Income, 44.6% for Ordinary Income, and 44.1% for Net Income. Revenue progress was 12.7pt below the standard 75% benchmark, while Operating Income progress was 49.2pt below it, indicating a notable delay in progress. To achieve the Full-Year Operating Income forecast of ¥1.20B, the company must generate ¥0.89B of Operating Income in Q4 alone, approximately 2.9 times the cumulative Q3 amount, assuming that recognition of completed construction revenue will be concentrated toward the end of the fiscal year. The Full-Year forecast calls for Revenue of -8.5% YoY, Operating Income of +1.9%, and Ordinary Income of -2.1%; whether earnings recognition weighted toward Q4 materializes will determine Full-Year performance.

Shareholder Returns

The Q2 dividend was ¥40.00 per share, and the Full-Year dividend forecast is ¥80.00. The calculated Payout Ratio against cumulative Q3 Net Income of ¥0.38B is 68.2%, but this is a reference figure calculated at the interim point before Full-Year results are finalized. Based on forecast EPS of ¥136.51, the forecast Payout Ratio is approximately 58.6%, within the generally accepted sustainability guideline of 60% or less. However, cumulative Q3 progress against the Full-Year Net Income forecast is only 44.1%, making Q4 profit recognition important for the realization of the annual ¥80 dividend. The financial base, including cash and deposits of ¥4.63B and a current ratio of 227.8%, supports the capacity to pay dividends.

Risk Factors

1. Risk of concentration at the fiscal year-end to achieve the Full-Year forecast: Cumulative Q3 progress against the Full-Year Operating Income forecast of ¥1.20B was only 25.8%, requiring ¥0.89B of Operating Income in Q4, approximately 2.9 times the cumulative Q3 amount. This assumes a concentration of completed construction revenue recognition at the fiscal year-end, and its feasibility requires confirmation.

2. Sensitivity risk arising from the low-profitability structure: The gross profit margin of 9.0% and Operating Income margin of 1.3% are low, making profits susceptible to significant fluctuations if increases in material prices, subcontracting costs, and labor costs, or construction delays, cannot be passed on through pricing. Costs on uncompleted construction contracts increased +198.2% YoY, requiring close monitoring of cost trends for ongoing construction projects.

3. Refinancing risk on interest-bearing debt: Short-term borrowings of ¥1.40B comprise all interest-bearing debt. Although they decreased 50.0% YoY, the company remains exposed to changes in financial institution terms and interest rate conditions at the time of refinancing. Cash and deposits are 3.3 times short-term borrowings, limiting liquidity risk at present.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Returns

The Company’s Operating Income margin and Net Income margin improved from the previous year, but comparative data against the industry median is currently insufficient.

Growth and Capital Efficiency

Revenue declined YoY, and median data showing the Company’s relative position within the industry is currently insufficient.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Despite lower Revenue, the company achieved higher Operating Income through improvement in the gross profit margin (7.4%→9.0%) and containment of SG&A expenses (+0.6% YoY), demonstrating responsiveness in its cost structure.

2. Non-operating income, including ¥0.19B in dividends received, made a significant contribution to the substantial increases in Ordinary Income and Net Income. This should be evaluated separately from core earnings power, as reflected in the 1.3% Operating Income margin.

3. Progress against the Full-Year Operating Income forecast was low at 25.8%, creating a structure in which concentration of completed construction revenue recognition in Q4 will determine Full-Year performance. In addition, the 198.2% increase in costs on uncompleted construction contracts indicates greater funds tied up in ongoing projects, making continued monitoring of the provision for losses on construction contracts useful.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,849–¥3,006 at ±1% for the Cost of Equity, and ¥2,908–¥2,937 at ±0.1 for ω.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end 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 value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast 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 responsibility, after consulting with a professional as necessary.

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