DAIHO (1822) FY2026 Q3 Earnings Report

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Executive Summary

Despite a decline in revenue, the Company achieved a substantial increase in earnings due to improved construction project profitability. In terms of earnings quality, the sharp recovery in the Building Business was the defining feature. Revenue was ¥1024.2B (down -1.8% YoY), Operating Income was ¥37.6B (up +52.4%), Ordinary Income was ¥41.2B (up +56.4%), and Net Income attributable to owners of the parent was ¥23.7B (up +23.7%). Gross profit margin improved by 178bp to 9.5%, while Operating Income margin rose by 131bp to 3.7%. However, the progress rate against the full-year plan was 59.7% for Operating Income, below the standard 75%, indicating that earnings are expected to be heavily weighted toward Q4.

Factors Affecting Earnings

【Revenue】Revenue was ¥1024.2B, down 1.8% YoY. By segment, the Civil Engineering Business recorded ¥520.5B (down -0.8%) and the Building Business recorded ¥476.1B (down -3.4%), with both segments posting declines. The Other Businesses, at ¥27.6B (up +6.9%), provided support. By region, domestic revenue was ¥946.1B (down -1.0%) and overseas revenue was ¥78.1B (down -11.0%), with the decline in overseas construction projects relatively significant.

【Profit and Loss】Operating Income increased substantially to ¥37.6B (up +52.4%), while Ordinary Income rose to ¥41.2B (up +56.4%). Gross profit margin improved from 7.8% to 9.5%, and although SG&A expenses increased to ¥60.0B (up +6.8%), the improvement in gross profit exceeded this increase. In non-operating income, foreign exchange gains of ¥4.0B boosted Ordinary Income. Extraordinary items resulted in a net loss of ¥3.3B, including an impairment loss on investment securities of ¥4.2B. As the effective tax rate increased to 35.0% from 28.2% in the previous year, the 23.7% increase in Net Income to ¥23.7B was restrained compared with the growth in Operating Income and Ordinary Income. Overall, the Company achieved higher earnings despite lower revenue.

Segment Analysis

Segment profit in the Building Business recovered sharply from ¥0.5B to ¥20.2B, and its profit margin improved by 414bp from 0.1% to 4.2%. The Building Business accounted for 53.7% of consolidated Operating Income of ¥37.6B and was the primary driver of the earnings increase. In contrast, segment profit in the Civil Engineering Business declined to ¥14.9B (down -32.2%), while its profit margin fell by 133bp from 4.2% to 2.9%. The Other Businesses generated revenue of ¥27.6B (up +6.9%) and profit of ¥2.5B (up +13.9%), maintaining the highest profitability at an 8.9% margin despite their small scale. While improved profitability in the Building Business led the overall increase in earnings, the decline in the Civil Engineering Business indicates variability in profitability between businesses.

Key Financial Indicators

【Profitability】Operating Income margin improved to 3.7% from 2.4% in the previous year, while Net Income margin improved to 2.3%; however, both remain low compared with general construction industry benchmarks. Annualized ROE was 4.4% and ROIC was 4.1%, neither of which reached a level above the cost of capital. 【Cash Quality】Accounts receivable from completed construction contracts were ¥1034.5B, accounting for 63.2% of total assets and increasing by ¥150.6B YoY. Meanwhile, cash and deposits were ¥168.6B, down ¥48.1B YoY, indicating a structure in which the progress of cash collection materially determines liquidity. 【Investment Efficiency】Total asset turnover remained at approximately 0.83x, indicating room for improvement in asset efficiency. 【Financial Soundness】The Equity Ratio was 45.5% (47.7% in the previous year), and the current ratio was 174.0%, both healthy levels. However, short-term borrowings increased sharply from ¥8.5B to ¥163.5B, and the increased reliance on short-term liabilities requires monitoring.

Cash Flow Analysis

As this report does not contain detailed data from the statement of cash flows, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥168.6B, down ¥48.1B from ¥216.7B in the same period of the previous year, while accounts receivable from completed construction contracts increased by ¥150.6B and short-term borrowings rose substantially from ¥8.5B to ¥163.5B. This combination suggests that funding needs arose before collection of construction proceeds progressed, with short-term borrowings used to supplement funding. Long-term borrowings remained flat at ¥60.0B, indicating that financing was concentrated in the short term. Property, plant and equipment was ¥164.0B, broadly unchanged from the previous year, suggesting that cash outflows from large-scale investment activities were limited.

Earnings Quality

Operating Income from the core business was ¥37.6B, an increase of 52.4% YoY, and earnings quality was relatively favorable because the increase was accompanied by an improvement in gross profit margin. Of the ¥7.0B in non-operating income, foreign exchange gains of ¥4.0B were the largest item; this included dividend income of ¥2.0B. While non-operating income was not significant at 0.7% of revenue, the reliance on foreign exchange gains has limited recurrence potential. Extraordinary items included extraordinary income of ¥1.4B and extraordinary losses of ¥4.8B, primarily due to an impairment loss on investment securities of ¥4.2B, resulting in a net loss of ¥3.3B. The gap between Ordinary Income of ¥41.2B and Net Income of ¥23.7B reached 42.6%, with extraordinary losses and the increase in the effective tax rate to 35.0% restraining the growth rate of Net Income. Comprehensive Income was ¥40.0B, exceeding Net Income of ¥23.7B, largely due to a ¥16.5B contribution from valuation differences on securities.

Earnings Forecasts and Guidance

The progress rate for cumulative Q3 revenue against the full-year revenue plan of ¥1386.0B was 73.9%, slightly below the standard 75%. The progress rate against the full-year Operating Income plan of ¥63.0B was 59.7%; against the Ordinary Income plan of ¥63.0B, it was 65.4%; and against the Net Income attributable to owners of the parent plan of ¥42.0B, it was 56.3%. In all cases, progress was more than 10 points below the standard rate. The slower progress in earnings compared with revenue is likely attributable to the possibility that the completion and handover of large-scale construction projects will be concentrated in Q4, as well as the impact of extraordinary losses and the tax burden. Achieving the full-year plan will require an accumulation of approximately ¥25.4B in Operating Income in Q4. During the quarter, revisions were made to the earnings forecasts and dividend forecasts.

Shareholder Returns

The full-year dividend forecast per share is ¥34.00, and the full-year EPS forecast is ¥47.57, implying a forecast Payout Ratio of 71.5%. The Company plans to increase the dividend from ¥29.40 at the end of the previous fiscal year (adjusted for the stock split) to ¥34.00. Cumulative Q3 EPS was ¥26.81, representing a progress rate of only 56.4% against the full-year forecast EPS; therefore, profit accumulation in Q4 will be important to maintain the dividend forecast. The Payout Ratio is above 60%, creating a structure in which the achievement of the earnings plan determines dividend sustainability. Treasury shares account for only 2.35% of issued shares, and no disclosure regarding share repurchases has been identified.

Risk Factors

1. Deterioration in the profitability of the Civil Engineering Business: Segment profit in the Civil Engineering Business was ¥14.9B, down 32.2% YoY, and its profit margin declined from 4.2% to 2.9%. Provision for construction losses increased to ¥19.9B from ¥17.0B in the previous year, creating a risk that project mix and cost fluctuations could weigh on consolidated earnings.

2. Sharp increase in short-term borrowings and shortening of financing maturities: Short-term borrowings increased sharply from ¥8.5B in the same period of the previous year to ¥163.5B. Accounts receivable from completed construction contracts also increased by ¥150.6B, and delays in collecting construction proceeds or changes in the financial environment could amplify funding pressures.

3. Delayed progress toward the full-year earnings plan: The Q3 progress rate against the full-year Operating Income plan of ¥63.0B was only 59.7%, below the standard 75%. The recognition of completed large-scale construction projects in Q4 and any additional costs will be the key factors in achieving the full-year plan.

Industry Benchmark (For Reference; Company Analysis)

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 not currently available.

Growth and Capital Efficiency

The Company’s revenue declined, but median data needed to determine its relative position within the industry is not currently available.

※Source: Company compilation

Key Points in the Financial Results

1. The 178bp improvement in gross profit margin and 52.4% increase in Operating Income despite lower revenue are noteworthy as a structural change demonstrating the effectiveness of project profitability management. In particular, the sharp improvement in the Building Business profit margin from 0.1% to 4.2% was the central driver of the earnings increase.

2. The widening dispersion in profitability among businesses is also noteworthy. While the Building Business generated 53.7% of consolidated Operating Income, the Civil Engineering Business posted lower earnings. The sustainability of profitability improvements across the Company therefore depends on the degree of recovery in the Civil Engineering Business.

3. The simultaneous sharp increase in short-term borrowings and accounts receivable from completed construction contracts is an important factor to monitor in assessing future cash trends, as it reflects changes in working capital requirements associated with expanding orders and construction activity.

Theoretical Share Price (Reference Value)

Sensitivity: ¥745–¥787 at ±1% for the cost of equity, and ¥763–¥767 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value will be 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 / This is a mechanically calculated value based solely on publicly disclosed data; it does not constitute 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 report data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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