Sata Construction (1826) FY2026 Q3 Earnings Report

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Executive Summary

The Company recorded increases in both revenue and earnings during the current period, with the most significant point being that growth in operating income and net income substantially outpaced revenue growth. Revenue was ¥24.72B (+3.0% YoY), operating income was ¥0.93B (+36.5%), ordinary income was ¥0.94B (+36.2%), and net income was ¥0.61B (+33.3%). The primary driver of earnings growth was gross profit expansion exceeding the increase in SG&A expenses, with improved profitability in the construction-related segment and higher revenue in the engineering-related business making particular contributions.

Factors Affecting Performance

【Revenue】Revenue was ¥24.72B, representing a 3.0% YoY increase. By segment, EngineeringRelated grew substantially to ¥7.66B (+19.6%), while ConstructionRelated declined slightly to ¥16.73B (-2.9%) and SideLine contracted to ¥0.33B (-10.6%). Revenue from government-related customers increased overall, suggesting stability in the order base.

【Profit and Loss】Operating income increased to ¥0.93B (+36.5%), ordinary income to ¥0.94B (+36.2%), and net income to ¥0.61B (+33.3%). The operating margin improved to 3.8% (equivalent to approximately 2.8% in the prior year), with the low gross margin of 9.6% offset by the relatively restrained growth in SG&A expenses (+11.7%; although higher than revenue growth of +3.0%, the increase was absorbed). An impairment loss on investment securities of ¥0.01B was recognized as a one-time factor under extraordinary gains and losses, but its scale was small and its impact on earnings was limited. The gap between ordinary income and net income was attributable to income taxes and other taxes of ¥0.32B, implying an effective tax rate of approximately 34%. In conclusion, the Company achieved increases in both revenue and earnings.

Segment Analysis

Segment profit is presented on a gross profit basis. ConstructionRelated (civil engineering-related) recorded revenue of ¥16.73B (-2.9%), profit of ¥1.58B (+28.7%), and a profit margin of 9.5%, indicating improved profitability. EngineeringRelated (construction-related) recorded revenue of ¥7.66B (+19.6%), profit of ¥0.81B (+12.0%), and a profit margin of 10.6%; although growth was strong, the profit margin showed a slight downward trend. SideLine (ancillary business) recorded revenue of ¥0.33B (-10.6%) and profit of -¥0.01B (-128.2%), turning to a loss. Although its impact on the overall results was small, profitability requires monitoring. Revenue from government-related customers increased in both civil engineering and construction, contributing to the stabilization of the order base.

Key Financial Indicators

【Profitability】The operating margin was 3.8%, the net profit margin was 2.5%, and the gross margin was 9.6%; all improved from the prior year, although the absolute level of the gross margin remains thin.【Cash Flow Quality】Cash and deposits were ¥6.60B, a substantial decrease from the prior year-end (equivalent to ¥14.10B in the prior-year comparative financial data). As operating cash flow has not been disclosed, the extent to which earnings have been converted into cash cannot be confirmed.【Investment Efficiency】Annualized ROE was 7.4% and EPS was ¥43.97 (+46.8%), indicating improved capital efficiency. The total asset turnover ratio was approximately 1.16x, showing no significant change in asset efficiency.【Financial Soundness】The equity ratio declined slightly to 51.8% (56.5% in the prior year), but remains at a sound level above 50%. Meanwhile, short-term borrowings within current liabilities increased, and the shortening of the liability maturity structure is a point to note from the perspective of financial soundness.

Cash Flow Analysis

As the cash flow statement has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥6.60B, a substantial decrease from the level in the same period of the prior year. Possible uses of funds include dividend payments, purchases of investment securities (increased from ¥0.42B to ¥0.72B), and repayments of long-term borrowings (¥0.33B to ¥0.15B). Meanwhile, short-term borrowings surged from ¥0.30B to ¥2.41B, partially offsetting the decline in cash by shortening the funding structure. Advances received on uncompleted construction projects were ¥1.38B, a substantial decrease from ¥3.69B at the prior year-end, and the progress of incorporating advances in line with construction progress may also have affected cash movements. Overall, because the Company’s cash-generation capacity from operating activities cannot be directly confirmed, future disclosure of operating cash flow would be useful in understanding the actual funding situation.

Earnings Quality

The increase in earnings during the current period was primarily attributable to improved gross profit at the operating level. Both non-operating gains and losses and extraordinary gains and losses were small, indicating that profits were based on recurring business activities. Non-operating income was ¥0.02B and non-operating expenses were ¥0.02B, substantially offsetting each other. Extraordinary losses were limited to an impairment loss on investment securities of ¥0.01B, meaning that the impact of one-time factors on earnings was limited. Comprehensive income was ¥0.63B, and the small difference from net income of ¥0.61B was attributable to valuation differences on securities of ¥0.02B. The provision for losses on construction contracts declined substantially to ¥0.05B (¥0.17B in the prior year), and the reduced concern over deterioration in construction profitability can be regarded as supporting earnings quality. However, operating cash flow has not been disclosed, and the extent to which earnings have been converted into cash cannot be confirmed; this point should be noted.

Earnings Forecasts and Guidance

The full-year earnings forecasts are revenue of ¥38.74B (+20.1%), operating income of ¥1.08B (+13.0%), and ordinary income of ¥1.08B (+11.7%). Neither the earnings forecast nor the dividend forecast was revised during the current quarter. Cumulative revenue through Q3 of ¥24.72B represents 63.8% of the full-year forecast, while operating income of ¥0.93B has reached 86.4% of the full-year forecast. Operating income progress is substantially ahead of revenue progress, and the Company appears likely to achieve its plan if margin improvement continues into the second half. However, securing the remaining 36.2% of full-year revenue during the second half will be the key to achieving the plan.

Shareholder Returns

The annual dividend forecast is ¥60.00, with no revision during the current quarter. Based on the average number of shares outstanding during the period of 13,942 thousand shares and net income of ¥0.61B, the total annual dividend is expected to exceed net income, resulting in a payout ratio above 100%. There has been no disclosure regarding share repurchases, so the Total Return Ratio cannot be assessed and the Company must be evaluated based solely on its payout ratio. Retained earnings were ¥7.93B, down from the prior year, suggesting that the dividend burden may be affecting internal reserves. The source and sustainability of dividends therefore require monitoring.

Risk Factors

1. Short-term liquidity risk: Short-term borrowings increased substantially from the prior year, while cash and deposits declined to ¥6.60B. Dependence on short-term liabilities is increasing, and the Company’s funding position requires monitoring.

2. Earnings base vulnerability: The gross margin is thin at 9.6%, and gross profit in the SideLine segment has turned negative. The business structure is susceptible to the impact of fluctuations in material and labor costs on profitability.

3. Dividend sustainability risk: Against the dividend forecast of ¥60.00, the payout ratio calculated based on the level of net income is high. In conjunction with the decline in retained earnings, the basis for the source of dividend payments requires confirmation.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (construction)

Profitability and Returns

Both the Company’s operating margin and net profit margin are improving, but comparative data against the industry median is not currently available as a reference.

Growth and Capital Efficiency

Revenue growth is moderate, and the Company’s relative position within the industry will need to be assessed after sufficient median data has accumulated.

※Source: Company compilation

Key Points from the Earnings Results

1. Both operating income and net income increased in the 30% range, while improved gross profit and the decrease in the provision for losses on construction contracts (¥0.17B→¥0.05B) indicate improved profitability. The increase in revenue from government-related customers is notable from the perspective of order-base stability.

2. Cash and deposits declined substantially while short-term borrowings surged, and the resulting shortening of the funding structure is a distinctive change in the earnings data.

3. Operating income progress against the full-year forecast was high at 86.4%, creating a substantial gap with revenue progress of 63.8%. The level of revenue secured in the second half will be a key point in assessing achievement of the full-year plan.

Theoretical Share Price (Reference Value)

Sensitivity: ¥811–¥854 for a ±1% change in the cost of equity; ¥829–¥833 for a ±0.1 change in ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets at the end of the quarter are used (there is a timing difference from the full-year forecast).
• Because 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 and is not a forecast of the market share price or a recommendation of any specific investment action, nor does it predict 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 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 discretion and responsibility, after consulting a professional as necessary.

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