TANABE ENGINEERING CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥24.88B
• Operating Income: ¥2.08B
• Net Income: ¥1.44B
• EPS: ¥137.37

Income Statement

Balance Sheet

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: Solid profitability with margin expansion despite slightly lower sales, underpinned by disciplined cost control and a robust balance sheet. Revenue declined 0.8% YoY to 248.8, but operating income rose 10.6% YoY to 20.78, and net income climbed 18.0% YoY to 14.41. Gross profit was 45.91, implying an 18.5% gross margin, while operating margin improved to 8.35%. Ordinary income reached 21.16, aided modestly by net non-operating income of 0.37 (0.63 in income offset by 0.26 in expenses). Net margin printed at 5.79%, consistent with the DuPont net profit margin component of 5.8%. Operating margin expanded by roughly 89 bps YoY (from ~7.46% to 8.35%), driven by better cost discipline and likely favorable project mix. The effective tax rate of 31.9% is in a normal range for JGAAP industrials and did not impede bottom-line growth. ROE calculated at 5.7% (Net Margin 5.8% × Asset Turnover 0.556 × Leverage 1.76x), matching the reported figure, indicates moderate capital efficiency. ROIC is indicated at 8.2%, around the upper end of typical targets and supportive of value creation over the cost of capital. Liquidity is very strong with a current ratio of 192% and substantial net cash (cash 93.86 versus debt 11.25), supporting resilience and investment capacity. Interest coverage is exceptionally high at 328x, underscoring low financial risk. Earnings quality cannot be fully assessed this quarter due to unreported cash flow metrics; OCF/NI and FCF are not available, which is the key limitation to the quarter’s quality assessment. The dividend payout ratio is calculated at 64.8%, a touch above the 60% benchmark, but near-term affordability appears supported by the net cash position; inferred DPS would be roughly 89 yen based on EPS. Forward-looking, the improved operating leverage and solid ROIC suggest the company can sustain mid- to high-single-digit operating margins if project execution and mix remain favorable. Key watch items are order intake, backlog visibility, and operating cash conversion, given the project-based nature of the business. Overall, the quarter reflects healthy underlying operations with a premium on maintaining discipline in bidding and execution.

Profitability Analysis

ROE decomposition: ROE 5.7% = Net Profit Margin (5.8%) × Asset Turnover (0.556) × Financial Leverage (1.76x). The biggest change driver QoQ/YoY appears to be the margin component: operating income rose 10.6% while revenue fell 0.8%, implying operating margin expansion (~89 bps YoY to 8.35%). Business drivers likely include tighter project cost management, improved pricing/mix in engineering/plant construction jobs, and SG&A operating leverage (SG&A at 25.12 equates to ~10.1% of sales). The leverage component (assets/equity ~1.76x) is conservative and likely stable; asset turnover at 0.556 is typical for project-based firms and did not drive the ROE change. Sustainability: margin gains are likely sustainable if mix and execution hold, but they remain sensitive to fixed-price contract risk and material/labor cost trends. Watch for any SG&A growth outpacing revenue in subsequent quarters; in this period, profitability improved despite flat-to-down sales, indicating positive operating leverage.

Growth Assessment

Top-line contracted slightly (-0.8% YoY) to 248.8, but profit growth was solid (OP +10.6%, NI +18.0%), pointing to quality of growth driven by margins. The ordinary margin (8.5%) and limited reliance on non-operating items (net +0.37) suggest core operating improvements rather than one-offs. Revenue sustainability will hinge on order intake and backlog in core end-markets (chemicals, energy, utilities, and industrial plants). Near-term outlook: continued cautious revenue trajectory but maintained mid-single-to-high-single-digit operating margin is plausible given the quarter’s performance. Key swing factors are project mix, execution discipline, and cost pass-through on long-term contracts.

Financial Health

Liquidity is strong: current ratio 192.4% and quick ratio 192.4%, with current assets of 337.37 versus current liabilities of 175.34. No warning triggers (current ratio well above 1.0; D/E at 0.76x on a liabilities-to-equity basis is conservative, and interest-bearing debt is low at 11.25). Net cash position is robust (cash 93.86 minus interest-bearing debt 11.25 ≈ 82.61), materially reducing solvency risk. Maturity mismatch risk is low: short-term loans of 3.0 are well-covered by cash and current assets. Equity ratio (equity/assets) is approximately 57% (255.03/447.81), indicating a strong capital base. No off-balance sheet obligations are disclosed in the provided data; absence of disclosure does not preclude their existence (e.g., performance guarantees common in EPC contracts).

Cash Flow Quality

Operating cash flow and free cash flow are unreported, so OCF/Net Income and FCF coverage cannot be assessed this quarter. Given the project-based nature of the business, working capital can swing with billing milestones; without accounts receivable and unbilled positions disclosed, we cannot evaluate DSO or contract asset dynamics. No signs of earnings quality concerns are observable from P&L alone: net non-operating items are modest, and interest expense is minimal. However, until OCF/NI is confirmed (>1.0 preferred), cash realization of earnings remains the key uncertainty. Dividend and capex affordability from FCF cannot be concluded due to missing cash flow and capex data.

Dividend Sustainability

The calculated payout ratio is 64.8%, marginally above the typical <60% benchmark, implying a moderately high distribution intensity. With EPS of 137.37 yen, the implied DPS is approximately 89 yen if the payout ratio holds (DPS unreported; this is an inference). Near-term sustainability is supported by a strong net cash position and low interest burden, but ultimate sustainability depends on consistent OCF generation and working capital discipline. Absent FCF data, coverage of dividends by free cash flow cannot be verified. Policy outlook likely emphasizes stable/gradually rising dividends contingent on earnings and cash conversion; monitoring payout versus FCF will be crucial.

Risk Assessment

Business Risks:

• Project execution risk on fixed-price EPC/plant engineering contracts affecting margins
• Order backlog and intake volatility impacting revenue visibility
• Material and subcontractor cost inflation potentially compressing gross margin
• Labor availability and wage pressure in specialized engineering trades
• Customer capex cycles in chemicals/energy/industrial segments

Financial Risks:

• Working capital swings from contract assets/liabilities impacting OCF
• Moderately elevated payout ratio versus unknown FCF could constrain reinvestment in a downturn
• Tax rate variability around 30-33% affecting net margin
• Potential contingent liabilities or guarantees typical in EPC not disclosed here

Key Concerns:

• Lack of cash flow disclosure this quarter obscures earnings quality assessment
• Limited detail on SG&A components reduces transparency on cost drivers
• No breakdown of revenue by segment or project type to assess mix sustainability

Investment Implications

Key Takeaways:

• Margin-led profit growth with operating margin up ~89 bps YoY to 8.35% despite -0.8% revenue
• ROE at 5.7% and ROIC at 8.2% indicate adequate capital efficiency with room for improvement
• Balance sheet strength (net cash ~82.6) materially lowers financial risk and supports optionality
• Non-operating items are small; core operations drove the beat
• Dividend payout slightly above benchmark; sustainability hinges on OCF/FCF

Metrics to Watch:

• Operating cash flow and OCF/NI ratio (target ≥1.0)
• Order intake and backlog coverage (book-to-bill)
• Gross margin and contract mix (lump-sum vs cost-plus)
• Working capital metrics (DSO, contract assets/liabilities turnover)
• ROIC sustainability at or above ~8%
• SG&A as % of sales and operating leverage trajectory
• Effective tax rate stability

Relative Positioning: Within Japan’s plant engineering/industrial construction peers, the company exhibits stronger-than-average balance sheet resilience (net cash, high equity ratio) and improving operating efficiency, with mid-to-high single-digit operating margins and moderate ROE; continued proof of cash conversion and backlog health would solidify its standing.

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