TEKKEN CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

In Q1 of the fiscal year ending March 2027, the Company’s core business continued to experience declines in both revenue and profit due to the contraction of the Construction and Real Estate Businesses, while Net Income increased significantly as gains on the sale of investment securities and fixed assets were recorded. Revenue was ¥404.3B (down 8.9% year on year), Operating Income was ¥13.6B (down 20.7%), and Ordinary Income was ¥15.8B (down 20.5%), all below the previous year. Meanwhile, Net Income attributable to owners of the parent increased to ¥19.3B (up 49.9%), but this was attributable to the recognition of ¥13.3B in extraordinary income (¥8.4B in gains on sales of fixed assets and ¥4.9B in gains on sales of investment securities), indicating that the underlying earnings power of the core business remained weak.

Factors Affecting Performance

【Revenue】Revenue was ¥404.3B, representing a year-on-year decline of 8.9%. By segment, the mainstay Civil Engineering Business was nearly flat at ¥212.5B (52.6% of total revenue, YoY -2.3%), while the Building Construction Business declined significantly to ¥175.4B (43.4%, -15.2%) and the Real Estate Business to ¥15.2B (3.8%, -27.3%), driving the overall revenue decline. The Ancillary Business secured a modest increase in revenue to ¥8.7B (+8.8%).

【Profit and Loss】Operating Income was ¥13.6B (down 20.7%), and the Operating Margin declined to 3.4% from 3.9% in the previous year. Although the gross profit margin on completed construction contracts improved to 10.1% from 9.4% in the previous year, SG&A expenses increased to ¥30.4B (+4.1%) despite the decline in revenue, offsetting the benefit of the improved gross margin. Ordinary Income was ¥15.8B (down 20.5%); while dividend income of ¥4.8B provided support, interest expenses increased to ¥3.1B, putting pressure on net financial income. Profit Before Tax was lifted to ¥29.0B by the recognition of ¥13.3B in extraordinary income, and Net Income attributable to owners of the parent was ¥19.3B (up 49.9%). At the Operating Income and Ordinary Income levels, both revenue and profit declined, and the increase in Net Income depended on temporary extraordinary income.

Segment Analysis

By segment, the mainstay Civil Engineering Business accounted for ¥212.5B in revenue (52.6% of total revenue), but Operating Income declined 34.7% to ¥6.8B, with the margin deteriorating to 3.2%, making it a drag on company-wide earnings. The Building Construction Business recorded lower revenue of ¥175.4B (down 15.2%), but Operating Income increased 89.4% to ¥2.7B as profitability improved, with the margin recovering to 1.5%. Although the Real Estate Business contracted to ¥15.2B in revenue (down 27.3%), it maintained the highest margin among all segments at 16.9%; however, its contribution to company-wide profit was limited due to the smaller scale. The Ancillary Business posted notable growth, with revenue of ¥8.7B (+8.8%) and Operating Income of ¥0.5B (+284.6%), although its scale remains small. Overall, the deterioration in profitability in the Civil Engineering Business was the primary factor behind the significant year-on-year decline in the total profit of the reportable segments.

Key Financial Indicators

【Profitability】The Operating Margin was 3.4%, approximately 50bp lower than the previous year’s 3.9%, as the increase in SG&A expenses offset the improvement in the gross profit margin on completed construction contracts to 10.1% from 9.4%. The Net Profit Margin, based on Net Income attributable to owners of the parent, was 4.8%, approximately 190bp higher than the previous year’s 2.9%; however, this was driven by the recognition of extraordinary income and runs counter to the decline in profitability at the Ordinary Income level, which warrants attention.【Cash Flow Quality】The provision for construction losses decreased slightly to ¥17.1B from ¥21.2B in the previous year, but remains at a high level and contains downside risk to project profitability.【Investment Efficiency】ROE was 2.6%, supported by the increase in Net Income from extraordinary income, and can hardly be considered a level that reflects recurring earnings power.【Financial Soundness】The Equity Ratio improved to 32.4% from 30.6% in the previous year, but Total Assets contracted to ¥2351.4B year on year, indicating progress in reducing the scale of both assets and liabilities.

Cash Flow Analysis

Although the statement of cash flows has not been disclosed, trends in the balance sheet indicate a tendency toward working capital compression. Cash and deposits were ¥214.0B, down ¥33.7B (-13.6%) from ¥247.7B at the end of the previous fiscal year, indicating a modest decline in the liquidity cushion. Accounts receivable from completed construction contracts were ¥1027.3B, down ¥102.5B (-9.1%) from the end of the previous fiscal year, potentially reflecting both the contraction in revenue scale and progress in receivables collection. Meanwhile, advances received on uncompleted construction contracts were ¥83.8B, down 13.4% from the end of the previous fiscal year, indicating a contraction in the cash buffer provided by advance receipts. Short-term borrowings were ¥524.2B (¥533.5B in the previous year) and remained broadly flat, leaving dependence on short-term funding at a high level. Overall, the simultaneous compression of assets and liabilities has not produced a major change in cash management, but the decline in cash balances and the reduction in advance receipts should be monitored as points affecting future cash-generation capacity.

Earnings Quality

Recurring earnings for the period consisted of gross profit from completed construction contracts and stable non-operating income, including ¥4.8B in dividend income. In contrast, the factor lifting Net Income was ¥13.3B in extraordinary income (¥8.4B in gains on sales of fixed assets and ¥4.9B in gains on sales of investment securities), which differs in nature from recurring earnings. Non-operating income was only approximately 1.3% of revenue, and most of it consisted of dividend income, indicating a high degree of stability. The gap between Ordinary Income of ¥15.8B and Net Income attributable to owners of the parent of ¥19.3B reached approximately 22%, and this difference was primarily explained by extraordinary income. With Operating Income slowing by 20.7% YoY, non-recurring items substantially lifted Net Income, indicating that attention is required regarding the sustainability of earnings quality.

Earnings Forecast and Guidance

Progress against the full-year forecast was 21.9% for Revenue (¥404.3B against ¥1850.0B) and 20.6% for Operating Income (¥13.6B against ¥66.0B), both below the simple quarterly progress benchmark of 25%. Meanwhile, Ordinary Income was at 27.7% (¥15.8B against ¥57.0B), and Net Income attributable to owners of the parent was at 30.6% (¥19.3B against ¥63.0B), exceeding the simple progress benchmark. However, this was due to the early recognition of ¥13.3B in extraordinary income and can hardly be considered a sustainable factor capable of offsetting the delays at the Revenue and Operating Income levels. The full-year Ordinary Income forecast calls for a 3.0% year-on-year decline, and recovery in Building Construction and Civil Engineering volumes and progress in cost management during the second half will be key to achieving the forecast.

Shareholder Returns

The Company plans a 2-for-1 stock split of its common shares, effective October 1, 2026, and the forecast year-end dividend of ¥115.00 for the fiscal year ending March 2027 reflects this split. Without taking the stock split into account, the forecast year-end dividend would be ¥230.00, representing an increase from the previous fiscal year’s actual dividend of ¥170. As the basis for per-share indicators differs before and after the stock split, caution is warranted when making a simple numerical comparison of the Payout Ratio; however, on a pre-split basis, the direction toward a dividend increase is clear.

Risk Factors

1. Construction Profitability Deterioration Risk: Operating Income in the mainstay Civil Engineering Business declined 34.7% year on year, with the margin falling to 3.2%. The provision for construction losses remains high at ¥17.1B (¥21.2B in the previous year), suggesting continued downside risk to profitability due to rising material and labor costs.

2. Financial Leverage and Liquidity Risk: Cash and deposits stood at only ¥214.0B against short-term borrowings of ¥524.2B, indicating a high degree of dependence on short-term funding. Although the Equity Ratio improved to 32.4% from the previous year, Total Assets and liabilities are contracting simultaneously, making it necessary to monitor changes in the funding structure.

3. Collection Risk on Accounts Receivable from Completed Construction Contracts: Accounts receivable from completed construction contracts amounted to ¥1027.3B, approximately 2.5 times quarterly Revenue. If credit issues or collection delays arise in large projects, an impact on working capital is possible.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Operating Margin is below the industry median, while the Net Profit Margin exceeds the industry median due to the contribution from extraordinary income.

Growth and Capital Efficiency

The Revenue Growth Rate is significantly below the industry median, positioning the Company as one experiencing a revenue contraction within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The 49.9% year-on-year increase in Net Income was primarily attributable to the recognition of ¥13.3B in extraordinary income (gains on sales of investment securities and fixed assets), while both Operating Income and Ordinary Income declined by double digits year on year. The overall earnings structure is characterized by a higher degree of dependence on non-recurring items than on the core business’s earnings power.

2. Operating Income in the mainstay Civil Engineering Business declined 34.7% year on year, with the margin falling to 3.2%. The profitability trend in this segment, which accounts for more than half of company-wide Revenue, is a structural factor that could determine full-year performance and therefore warrants attention.

3. Full-year progress was 27.7% for Ordinary Income and 30.6% for Net Income, exceeding the simple progress benchmark of 25%; however, Revenue at 21.9% and Operating Income at 20.6% were below the benchmark, indicating the coexistence of early recognition of non-recurring income and delays in the core business.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type, explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥4,586–¥4,847 at Cost of Equity ±1%; ¥4,689–¥4,729 at ω±0.1.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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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