TEKKEN (1815) 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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AI Financial Analysis

Executive Summary

FY2027 Q1 was operationally weaker, while reported net income growth was driven by substantial asset and securities disposal gains rather than core construction profitability. Revenue fell 8.9% year on year to ¥40.43bn, and operating income declined 20.7% to ¥1.36bn. Ordinary income also fell 20.5% to ¥1.58bn, confirming that the underlying earnings trend softened below the operating line as well. In contrast, profit attributable to owners rose 49.9% to ¥1.93bn. This divergence was caused principally by ¥1.33bn of extraordinary income, comprising a ¥0.84bn gain on sale of assets and a ¥0.49bn gain on sale of investment securities. These extraordinary gains equaled 69% of quarterly profit attributable to owners, indicating that reported bottom-line growth does not represent recurring earnings momentum. The operating margin contracted by 40bp year on year to 3.4% from 3.9%. Gross margin compressed by 50bp to 10.9% from 11.4%, as gross profit declined 5.1% while revenue fell 8.9%. SG&A expense rose 4.1% to ¥3.04bn despite the revenue decline, increasing the SG&A-to-sales ratio by approximately 90bp to 7.5% and creating negative operating leverage. Civil engineering remained the principal earnings contributor, although its segment profit declined materially. Construction receivables decreased by ¥10.25bn year on year to ¥102.73bn, which is directionally constructive for working-capital intensity, although cash-flow performance cannot be confirmed from the available figures. Liquidity is above the minimum threshold, with a 124.1% current ratio and ¥30.19bn of working capital. Nevertheless, the capital structure remains aggressive, with D/E of 2.08x and 71.7% of interest-bearing debt classified as short term. Cash of ¥21.40bn covered only 0.41x of short-term borrowings, leaving refinancing execution important. Full-year guidance implies a recovery in the remaining quarters, with operating income required to rise materially from the Q1 run rate. The key forward issue is whether construction margins recover sufficiently to support that guidance without further reliance on investment and asset realization gains.

Profitability Analysis

The reported annualized ROE is 10.1%, decomposed into a 4.8% net profit margin, 0.688x annualized asset turnover, and 3.08x financial leverage. Financial leverage is the largest contributor to the 10.1% ROE, meaning shareholder returns are materially supported by the balance-sheet structure rather than by strong operating margins. The 4.8% net margin is above the 3.4% EBIT margin because Q1 included ¥1.33bn of extraordinary gains, so it overstates recurring profitability. The DuPont five-factor interest burden of 2.137x is unusually above 1.0 because profit before tax benefited from extraordinary income; it should not be interpreted as evidence that financing costs enhance profitability. The tax burden was 0.664, equivalent to a 32.2% effective tax rate. Gross margin fell to 10.9% from 11.4%, while operating margin fell to 3.4% from 3.9%, indicating that lower revenue and SG&A deleveraging compounded gross-profit pressure. SG&A grew 4.1% year on year despite lower sales, materially underperforming the revenue trend. Completed-construction gross profit was ¥3.91bn on ¥38.79bn of completed-construction revenue, for a 10.1% construction gross margin. The low 3.4% EBIT margin is a quality-alert concern because a narrow operating buffer leaves earnings sensitive to project-cost overruns, labor and material inflation, and changes in construction volume. The 2.9% ROIC quality alert also points to weak returns on the capital deployed in operations and investments; while construction is structurally lower margin than many industries, this level remains below the 5% warning threshold. Improving civil and building project profitability, rather than asset sales, is necessary for a durable improvement in return metrics.

Growth Assessment

Top-line performance was weak in Q1, with revenue declining 8.9% year on year to ¥40.43bn. Completed-construction revenue declined 8.1% to ¥38.79bn and accounted for the large majority of consolidated sales. Civil engineering revenue declined 2.3% to ¥21.25bn, while segment profit fell 34.7% to ¥0.68bn, showing meaningful margin pressure in the core earnings segment. Building construction revenue declined 14.3% to ¥17.54bn, but segment profit increased 89.4% to ¥0.27bn, suggesting profitability improved despite lower project volume. Real estate revenue declined 28.2% to ¥1.46bn and segment profit declined 42.1% to ¥0.26bn. Ancillary operations increased revenue to ¥0.66bn from ¥0.32bn and segment profit to ¥0.50bn from ¥0.13bn, but remain small relative to construction activities. Civil engineering is the core business based on its ¥0.68bn segment-profit contribution, approximately half of aggregate segment profit before other businesses. Full-year company guidance calls for revenue of ¥185.0bn, up 2.9% year on year, operating income of ¥6.60bn, up 17.4%, ordinary income of ¥5.70bn, down 3.0%, and profit attributable to owners of ¥6.30bn. Q1 revenue progress is 21.9% of the full-year forecast, 3.1 percentage points below the standard 25% Q1 pace. Operating-income progress is 20.6%, 4.4 percentage points below the standard pace, while ordinary-income progress is 27.7% and net-income progress is 30.6%. The above-standard ordinary-income and net-income progress rates reflect Q1 non-operating dividend income and extraordinary gains, not superior underlying operating delivery. Meeting guidance requires ¥144.57bn of revenue and ¥5.24bn of operating income over Q2-Q4, equivalent to a 3.6% operating margin versus 3.4% in Q1. This makes margin recovery, particularly in civil engineering, the principal determinant of full-year delivery.

Financial Health

Liquidity is adequate but not ample relative to the short-term debt burden. The current ratio and quick ratio were both 124.1%, and working capital was ¥30.19bn, so current assets exceeded current liabilities. However, the current ratio remains below the 1.5x level generally viewed as robust, leaving less protection against working-capital volatility common in construction contracting. Interest-bearing debt was ¥73.07bn, consisting of ¥52.42bn of short-term loans and ¥20.65bn of long-term loans. D/E was 2.08x, above the 2.0x warning level, and explicitly indicates aggressive debt financing relative to equity. Debt represented 48.9% of total capital, a moderate-to-elevated level that increases sensitivity to interest rates and earnings volatility. The 71.7% short-term debt ratio is a refinancing-risk alert because a large portion of borrowings requires near-term rollover. Cash and deposits of ¥21.40bn covered only 0.41x of short-term loans, triggering the liquidity-stress alert and leaving the company dependent on operating cash receipts, banking relationships, and refinancing capacity. Interest coverage was 4.31x, below the 5x strong-credit benchmark but above the 3x concern threshold; it provides a limited cushion if operating profit weakens further. Total equity declined ¥2.50bn year on year to ¥76.25bn, while total assets declined ¥20.76bn, partly preserving the capital adequacy ratio at 32.3% versus 30.6% a year earlier. Investment securities remained substantial at ¥39.85bn, or 16.9% of assets, and provide potential financial flexibility but also expose equity and comprehensive income to market-price movements. Comprehensive income was negative ¥0.11bn despite positive net income, primarily reflecting a ¥2.07bn negative valuation difference on securities. Net defined-benefit liability was ¥5.79bn and should be monitored as a long-term funding obligation.

Notable B/S Changes

Total assets: -¥20.76bn (-8.1%) year on year to ¥235.15bn, reflecting a smaller balance sheet and reduced working-capital balances. Current assets: -¥16.83bn (-9.8%) year on year to ¥155.29bn, principally relevant to construction collection and contract-settlement activity. Construction receivables: -¥10.25bn (-9.1%) year on year to ¥102.73bn, a potentially favorable collection trend, subject to confirmation in operating cash flow. Total liabilities: -¥18.27bn (-10.3%) year on year to ¥158.89bn, consistent with lower current liabilities and borrowings. Current liabilities: -¥16.22bn (-11.5%) year on year to ¥125.10bn, improving the current ratio despite lower current assets. Investment securities: -¥3.05bn (-7.1%) year on year to ¥39.85bn; the portfolio remains 16.9% of total assets and materially affects comprehensive income through valuation changes. Accumulated other comprehensive income: -¥2.25bn (-11.5%) year on year to ¥17.33bn, principally reflecting securities valuation volatility. Provision for loss on construction contracts: -¥4.08bn (-19.2%) year on year to ¥17.12bn; still a material reserve that warrants monitoring against future project margins.

Cash Flow Quality

Cash-flow quality cannot be directly assessed because operating, investing, and financing cash-flow figures are not available. Consequently, OCF-to-net-income, free cash flow, cash conversion, and dividend coverage by free cash flow cannot be calculated. The composition of accounting earnings nevertheless raises a clear quality concern: ¥1.33bn of extraordinary income represented a substantial portion of ¥1.93bn profit attributable to owners. The gains arose from sales of assets and investment securities and are non-recurring by nature. Dividend income of ¥0.48bn also supported ordinary income, although it is more recurring than disposal gains if supported by a stable investment portfolio. Construction receivables declined ¥10.25bn year on year to ¥102.73bn, which could support operating cash generation if collections converted into cash. At the same time, accounts payable for construction and other contracts declined ¥4.20bn and advances received on uncompleted construction contracts declined ¥1.30bn, partially offsetting the favorable receivables movement in working-capital cash terms. The company carried ¥17.12bn of provision for loss on construction contracts, down from ¥21.20bn a year earlier; this remains a material project-risk reserve and should be assessed alongside future margin performance. The high-one-time-items alert has a direct investment-thesis impact: Q1 net-income growth should not be extrapolated into recurring earnings or debt-service capacity.

Dividend Sustainability

The full-year dividend forecast is ¥115 per share after reflecting the planned two-for-one stock split; the company states that the equivalent pre-split year-end dividend forecast is ¥230 per share. Using the reported full-year EPS forecast of ¥226.12, the indicated dividend payout ratio is approximately 50.9%. This is below the 60% sustainability benchmark and appears supportable on forecast accounting earnings. The planned split-adjusted dividend forecast should be compared carefully with per-share figures because the corporate action changes the nominal DPS presentation. No share repurchase information is provided, so a total return ratio cannot be calculated. Cash dividend sustainability cannot be validated against free cash flow because cash-flow data are not available. The principal constraint is therefore balance-sheet rather than stated earnings payout: high leverage, low cash coverage of short-term loans, and the need to refinance ¥52.42bn of short-term borrowings could limit financial flexibility. The forecast payout remains dependent on delivery of full-year operating-income recovery and on avoiding additional construction project losses.

Risk Assessment

Business risks include Construction margin risk: the 3.4% EBIT margin and 10.9% gross margin provide limited protection against labor shortages, subcontractor-cost increases, and material-price inflation., Project execution risk: the ¥17.12bn provision for loss on construction contracts indicates meaningful exposure to loss-making projects, cost overruns, claims, and delays., Core civil-engineering deterioration: civil segment profit fell 34.7% despite only a 2.3% revenue decline, requiring close monitoring of project mix and cost control., Construction-cycle and public-investment risk: civil construction activity can be affected by public infrastructure budgets, tender conditions, weather disruptions, natural disasters, and regulatory or safety requirements., Investment-market risk: investment securities of ¥39.85bn are material, and a ¥2.07bn negative securities valuation movement caused comprehensive income to turn negative..

Financial risks include High leverage alert: D/E of 2.08x exceeds the 2.0x threshold, amplifying the effect of operating volatility on equity returns and credit risk., Refinancing-risk alert: 71.7% of debt is short term, exposing the company to bank funding availability and interest-rate repricing., Liquidity-stress alert: cash covers only 0.41x of short-term loans, so debt repayment capacity depends substantially on collection timing and refinancing., Interest-servicing risk: 4.31x interest coverage is adequate but below the 5x strong benchmark; further operating-profit erosion would reduce the cushion., Earnings-quality risk: large disposal gains materially lifted Q1 net income and do not provide recurring support for leverage reduction or shareholder distributions..

Key concerns include Highest priority: restoration of recurring construction profitability, especially the civil-engineering margin, is necessary to achieve the full-year operating-income target., High priority: management must maintain reliable bank refinancing and cash collections given the ¥52.42bn short-term loan balance., High priority: investors should separate Q1 reported net-income growth from recurring performance because extraordinary gains were substantial., Moderate priority: low 2.9% ROIC indicates that capital deployment is not yet generating an adequate operating return., Moderate priority: the decline in securities valuation reserve demonstrates potential volatility in comprehensive income and equity..

Investment Implications

Key takeaways include Core Q1 operating performance weakened: revenue fell 8.9%, operating income fell 20.7%, and operating margin contracted to 3.4%., Reported profit attributable to owners rose 49.9%, but this was primarily supported by ¥1.33bn of extraordinary gains on asset and securities sales., Civil engineering remains the core earnings business, but its segment profit decline materially exceeded its sales decline., Balance-sheet liquidity is positive on a current-ratio basis, but high leverage and the concentration of debt in short-term borrowings raise refinancing sensitivity., Full-year guidance requires a sequential improvement in operating margins, while Q1 net-income progress is not representative because of non-recurring gains..

Metrics to watch include Civil engineering segment margin and the trend in provision for loss on construction contracts, Q2-Q4 operating-income progress against the ¥6.60bn full-year forecast, Construction receivables, advances received, and cash collection conversion, Short-term loan refinancing, cash-to-short-term-debt coverage, and interest coverage, Investment-security valuation movements and further gains or losses from asset sales, ROIC improvement from the current 2.9% level.

Regarding relative positioning, 鉄建建設 combines a still-adequate current ratio with a more aggressive-than-conservative debt profile and low operating margins. Its annualized 10.1% ROE is respectable on the surface but is heavily supported by 3.08x financial leverage and Q1 non-recurring gains; recurring operating profitability and ROIC are comparatively less robust.