Nishimatsu Construction Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥177.32B
• Operating Income: ¥9.32B
• Net Income: ¥6.38B
• EPS: ¥163.59

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 Financial Analysis

Executive Summary

Verdict: FY2026 Q2 was solid at the P/L level with low-single-digit growth and stable margins, but cash conversion was weak and leverage remains elevated. Revenue rose 2.0% YoY to 1,773.2, with operating income up 2.0% to 93.2 and ordinary income up 5.3% to 87.7, culminating in net income of 64.6 (+7.5% YoY). Gross profit reached 216.0, yielding a gross margin of 12.2%, while SG&A was 122.7 (6.9% of revenue), supporting operating margin of 5.3%. Non-operating items were a net expense of 5.6, largely reflecting interest expense of 9.7 offset by dividend and interest income of 4.7, keeping ordinary income slightly below operating income. EPS (basic) printed at 163.59 JPY; book value per share is 4,691 JPY, implying a modest 3.5% ROE. ROIC is 3.0%, below the 5% warning threshold, indicating capital efficiency challenges for a general contractor. Margin dynamics are broadly stable: with operating income growing in line with revenue, we infer essentially flat operating margin (roughly 0–10 bps change YoY). Net margin of 3.6% improved faster than revenue (NI +7.5% YoY), suggesting modest improvement in below-the-line items and/or tax rate effects (effective tax rate 27.1%). Cash flow quality is weak: operating cash flow was -174.0 versus net income of 64.6 (OCF/NI -2.69x), implying significant working capital outflows typical of construction seasonality and project timing. Financing inflow of 240.1 indicates reliance on debt to support working capital and possibly shareholder returns. The balance sheet shows current ratio 127% (adequate but below a comfortable 150% benchmark) and D/E of 2.32x (above 2.0x—high), with short-term loans of 549.8 close to cash on hand of 516.1, highlighting funding dependence. Interest coverage is healthy at 9.6x, but debt/EBITDA of 7.8x and low ROIC constrain financial flexibility. The calculated payout ratio is 142.4% (dividend details unreported), which, combined with negative OCF, raises sustainability concerns should the company maintain elevated distributions. Forward-looking, the key watchpoints are order backlog quality, project mix and margin discipline amid labor/material cost volatility, and normalization of working capital to restore positive OCF. Delivery on ROIC improvement above 5% and deleveraging would be pivotal to strengthening the equity story. Overall, earnings trajectory is steady, but cash and leverage metrics temper the quality of the quarter.

Profitability Analysis

ROE (3.5%) decomposition: Net Profit Margin (3.6%) × Asset Turnover (0.288×) × Financial Leverage (3.32×) ≈ 3.5%. The weakest link is asset turnover at 0.288, typical for general contractors carrying large work-in-process and receivables. Net margin improved YoY relative to revenue (+7.5% NI vs +2.0% revenue), suggesting the margin component contributed most positively (likely small tax/non-operating tailwinds). Financial leverage at 3.32× is high, amplifying ROE despite low operating efficiency. Business drivers: stable operating margin (5.3%) reflects controlled SG&A (6.9% of revenue) and steady gross margin (12.2%) against a benign cost environment; non-operating drag (net -5.6) remains manageable with interest coverage at 9.6×. Sustainability: net margin resilience is reasonably sustainable if project selection and cost pass-through hold; however, leverage-driven ROE is less desirable and exposes equity to rate and refinancing risks. Watch for SG&A growth exceeding revenue (currently not the case) and any deterioration in gross margin from input cost or execution slippage.

Growth Assessment

Top line grew 2.0% YoY to 1,773.2, indicating steady execution but not outsized order conversion. Operating income growth of 2.0% keeps operating margin essentially flat at 5.3%, while ordinary income +5.3% and NI +7.5% imply incremental improvement below the operating line and at taxes. Revenue sustainability depends on order intake and backlog conversion (not disclosed); public and private capex trends and labor availability will drive 2H cadence. Profit quality is mixed: accounting earnings are stable, but OCF was sharply negative (-174.0), pointing to working capital absorption (likely increases in receivables/unbilled and/or declines in advances). With interest expense 9.7 and non-operating net -5.6, incremental rate pressure could cap ordinary income growth if leverage is not reduced. Outlook: modest revenue growth with stable operating margin seems achievable near term, but the path to improving ROIC above 5% requires better asset turnover (faster cash conversion) and disciplined capex/investments.

Financial Health

Liquidity: Current ratio 1.27× (adequate but below 1.5× comfort), quick ratio 1.27× per disclosed items; working capital 717.3 supports near-term obligations. Solvency: D/E is 2.32× (Warning: >2.0×), indicating high leverage; total liabilities 4,301.3 vs equity 1,852.3. Interest coverage 9.6× is solid, but debt/EBITDA of ~7.8× suggests constrained headroom if earnings soften. Maturity profile and funding mix: short-term loans 549.8 are roughly on par with cash 516.1, implying notable reliance on short-term funding for operations; long-term loans are 365.1. Maturity mismatch risk is moderate: current assets 3,341.1 exceed current liabilities 2,623.9, but negative OCF elevates rollover risk if working capital normalization is delayed. Off-balance sheet: no disclosures provided; typical construction guarantees and performance bonds may exist but are not reported here.

Cash Flow Quality

OCF/Net Income is -2.69× (Warning: <0.8), indicating poor earnings-to-cash conversion this half, likely driven by working capital outflows tied to project timing and billing cycles. With investing CF unreported, free cash flow cannot be calculated; however, negative OCF combined with positive financing CF (+240.1) signals reliance on external funding to bridge cash needs and possibly shareholder returns. Sustainability: recurring negative OCF would be problematic for dividends and debt reduction; normalization in 2H is key in this sector but must be evidenced. Working capital indicators to monitor: changes in accounts receivable, unbilled receivables/WIP, and advances from customers (not disclosed here), as well as payables terms.

Dividend Sustainability

The calculated payout ratio is 142.4%, which is above the <60% sustainability benchmark and suggests elevated distribution relative to earnings; DPS and total dividend paid were not disclosed. Given OCF of -174.0 this period, dividends (if maintained at this payout level) are not covered by internally generated cash and appear to be effectively financed by balance sheet/financing inflows. Without visibility on full-year FCF and capex, coverage cannot be confirmed; prudence would require either a lower payout or a clear rebound in OCF in 2H to sustain current distributions. Policy outlook depends on full-year profit/OCF delivery and leverage management.

Risk Assessment

Business Risks:

• Project execution risk leading to cost overruns and margin slippage (gross margin 12.2%).
• Input cost and labor inflation risk in construction impacting fixed-price contracts.
• Order intake/backlog risk amid competitive bidding and private capex cycles (data not disclosed).
• Schedule and billing timing risk causing volatile working capital and OCF.
• Safety and regulatory compliance incidents specific to construction sites.

Financial Risks:

• High leverage: D/E 2.32× (explicit warning) and debt/EBITDA ~7.8×.
• Refinancing and interest rate risk given 549.8 short-term loans and interest expense of 9.7.
• Cash flow risk: OCF/NI -2.69× indicates weak cash conversion this period.
• Potential dividend strain with a calculated payout ratio of 142.4% amid negative OCF.
• Concentration risk in non-operating income sources (dividends/interest) if core margins tighten.

Key Concerns:

• Sustained negative OCF would pressure liquidity and increase reliance on debt.
• ROIC at 3.0% (<5%) highlights capital efficiency challenges relative to cost of capital.
• Current ratio 1.27× is adequate but offers limited cushion if collections are delayed.
• Visibility is limited due to unreported breakdowns (SG&A details, backlog, AR/AP, investing CF).

Investment Implications

Key Takeaways:

• Steady P/L with revenue +2.0% and operating income +2.0% implies stable operating margin (~5.3%).
• Net income outpaced revenue (+7.5%), with effective tax rate at 27.1% and manageable non-operating drag.
• Cash conversion is weak (OCF -174.0; OCF/NI -2.69×), raising quality-of-earnings concerns.
• Leverage is high (D/E 2.32×; ST loans ~550 vs cash ~516), though interest coverage is currently solid (9.6×).
• ROIC 3.0% underscores need for better asset turnover and project returns.
• Dividend sustainability is questionable at a 142.4% payout given negative OCF.

Metrics to Watch:

• Order backlog and book-to-bill ratio (not disclosed).
• Working capital components (AR, unbilled WIP, advances) and OCF trajectory in 2H.
• Gross and operating margins by segment/project mix.
• Debt mix and maturities, interest expense sensitivity to rate changes.
• ROIC progression toward >5% and ultimately 7–8%.
• Capex and investment discipline given low ROIC.

Relative Positioning: Within Japanese general contractors, the company shows respectable operating stability but weaker cash conversion and higher leverage than conservative peers, resulting in subpar ROIC and a more constrained balance sheet despite acceptable interest coverage.

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