OKUMURA (1833) FY2027 Q1 Earnings Report

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Executive Summary

Non-operating income offset the decline in revenue and deterioration in core operating margins, resulting in higher ordinary income; however, the results highlight weakening core earnings power as a key issue. Revenue declined substantially to ¥653.6B (-6.3% YoY), while operating income fell significantly to ¥26.3B (-36.5% YoY). However, supported by ¥29.8B in non-operating income, including ¥9.2B in dividend income, ordinary income increased to ¥52.6B (+32.2% YoY). Net income attributable to owners of the parent was ¥34.3B (-7.1% YoY), as an extraordinary loss of ¥4.2B from losses on the disposal of fixed assets offset ¥3.0B in gains on the sale of investment securities. The primary causes of the decline in operating income were a significant decrease in revenue from the Civil Engineering Business (-25.1%) and expanding losses in the Infrastructure Operations Business and other businesses, with progress against the full-year plan also lagging.

Factors Affecting Financial Performance

【Revenue】Revenue declined to ¥653.6B, down -6.3% YoY. By segment, the Civil Engineering Business declined to ¥329.5B (50.4% of total revenue, YoY -25.1%), exerting downward pressure on company-wide revenue, while the Engineering (Construction) Business increased to ¥289.1B (up +22.0% YoY), providing an offset. The Infrastructure Operations Business and other businesses increased sharply to ¥13.7B (up +377.6% YoY), although this reflected the launch of new business areas and the segment remains small in scale. The Real Estate Business also increased revenue to ¥15.5B (up +14.9% YoY).

【Profit and Loss】Operating income declined to ¥26.3B (down -36.5% YoY), with the operating margin deteriorating to 4.0% from the previous year. This was attributable to the Infrastructure Operations Business and other businesses expanding their operating loss to -¥14.8B, as well as the Real Estate Business recording negative gross profit because its cost of sales exceeded revenue. Ordinary income increased to ¥52.6B (up +32.2% YoY), boosted by ¥29.8B in non-operating income, including ¥9.2B in dividend income. However, this increase was highly dependent on non-operating income and does not reflect the earnings power of the core business. An extraordinary loss of ¥4.2B from losses on the disposal of fixed assets exceeded an extraordinary gain of ¥3.0B from the sale of investment securities, resulting in a decline in net income to ¥34.3B (down -7.1% YoY). In conclusion, the company recorded lower revenue and lower profit on a core operating basis, while ordinary income increased due to non-operating factors; attention should therefore be paid to the quality of core earnings.

Segment Analysis

The core Civil Engineering Business generated revenue of ¥329.5B (50.4% of total revenue) and operating income of ¥19.4B (5.9% margin). Although revenue declined substantially (-25.1%), profit remained approximately at the previous-year level, indicating relatively stable project profitability. The Engineering (Construction) Business increased revenue to ¥289.1B (up +22.0% YoY), but operating income declined to ¥14.7B (down -29.1% YoY, 5.1% margin), indicating that costs preceded revenue growth. The Real Estate Business is highly profitable, with operating income of ¥6.5B (41.6% margin), although its scale is small. The Infrastructure Operations Business and other businesses generated revenue of ¥13.7B but recorded an operating loss of -¥14.8B (-108.1% margin), with the costs of launching the newly established segment significantly weighing on company-wide profit. The Machinery Business remained small, with revenue of ¥9.8B and operating income of ¥0.4B, but improved from the previous year.

Key Financial Indicators

【Profitability】The operating margin declined to 4.0% from the previous year, while the gross margin was 13.1% (gross margin on completed construction contracts: 14.0%; development business and other businesses: -3.8%), with deteriorating profitability in the development business and other businesses weighing on the company-wide gross margin. The net profit margin was 5.3%.【Cash Flow Quality】Cash and deposits stood at ¥169.0B. While accounts receivable from completed construction contracts declined to ¥1893.2B and collections progressed, costs on uncompleted construction contracts increased by +70.7% to ¥81.2B, absorbing funds through work-in-progress projects.【Investment Efficiency】ROE remained low at 1.8%, against a backdrop of low net profit margin and total asset turnover. EPS was ¥95.66 (¥102.90 in the previous year, YoY -7.0%).【Financial Soundness】The equity ratio was 44.9%, almost unchanged from 44.7% in the previous year. Although the interest-bearing debt structure was skewed toward short-term borrowings, comprising ¥250.0B in long-term borrowings and ¥226.5B in short-term borrowings, the company recorded ¥29.8B in non-operating income against ¥2.7B in interest expenses, limiting the relative burden of interest costs.

Cash Flow Analysis

Although a statement of cash flows is not disclosed, fund movements can be assessed from changes in the balance sheet. Accounts receivable from completed construction contracts declined by approximately ¥281B, from ¥2174.4B at the end of the previous fiscal year to ¥1893.2B, indicating progress in collections. Meanwhile, costs on uncompleted construction contracts increased by approximately ¥34B, from ¥47.6B to ¥81.2B, as the accumulation of work-in-progress projects absorbed funds. Advances received on uncompleted construction contracts were ¥237.0B, nearly unchanged at -1.8% from the end of the previous fiscal year. Property, plant and equipment increased to ¥779.8B, suggesting that funding needs for investment activities remain ongoing. Short-term borrowings declined to ¥226.5B, indicating some progress toward deleveraging. Overall, progress in collections and the increase in work-in-progress projects offset one another, and the stability of cash generation will depend on working capital management going forward.

Quality of Earnings

The increase in ordinary income was heavily dependent on ¥29.8B in non-operating income, including ¥9.2B in dividend income, with the difference between ordinary income and operating income reaching ¥26.4B. Non-operating income was equivalent to 4.6% of revenue, indicating that the increase was driven by factors separate from the earnings power of the core business; consequently, the sustainability of the increase in ordinary income is considered limited. Extraordinary gains and losses amounted to a net -¥1.2B (gain on the sale of investment securities: ¥3.0B; loss on the disposal of fixed assets: ¥4.2B), with both being non-recurring items. Provision for losses on construction contracts increased by +18.1% YoY to ¥32.2B, indicating that provisions against deteriorating profitability on certain projects have been strengthened; this should be monitored as a factor that could affect future earnings.

Earnings Forecast and Guidance

Q1 progress against the full-year forecast was 21.5% for revenue (¥653.6B/¥3040.0B), 12.8% for operating income (¥26.3B/¥205.0B), 25.4% for ordinary income (¥52.6B/¥207.0B), and 22.3% for net income (¥34.3B/¥154.0B). Progress in operating income was significantly below the simple proportional benchmark of 25%, reflecting losses in the Infrastructure Operations Business and other businesses and deterioration in gross profit in the Real Estate Business. By contrast, progress in ordinary income was relatively high due to the boost from non-operating income. The full-year plan calls for operating income growth of +28.7%, making improved profitability toward the second half of the fiscal year a prerequisite for achieving the plan. No revisions were made to the earnings forecast during this quarter.

Shareholder Returns

The full-year dividend forecast is ¥300 per share (the previous-year actual dividend was disclosed as the combined interim and year-end dividend), implying a payout ratio of approximately 70.0% against forecast EPS of ¥428.91. No revision was made to the dividend forecast during the quarter. Regarding treasury shares, a disposal for restricted stock compensation was conducted on 2026-07-31, and this is reflected in the EPS forecast. There was no new disclosure regarding share buybacks; shareholder returns should therefore appropriately be evaluated on a payout-ratio basis.

Risk Factors

1. Continued losses in the Infrastructure Operations Business and other businesses: The operating loss in Q1 was -¥14.8B (-108.1% margin), with the costs of launching the newly established segment significantly weighing on the company-wide operating margin. The pace of loss reduction will directly affect achievement of the full-year results.

2. Deteriorating project profitability and increased provisions: The provision for losses on construction contracts was ¥32.2B, up +18.1% YoY. If the time lag in passing on increases in materials and labor costs continues, the risk of additional loss recognition remains.

3. Gap between short-term liabilities and cash: Cash and deposits of ¥169.0B were below short-term borrowings of ¥226.5B. Although the current ratio was 142.6%, providing a certain buffer, the company is at a level requiring monitoring of its funding position.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (construction)

Profitability and Returns

The operating margin is slightly below the industry median, while the net profit margin exceeds the industry median, including the impact of non-operating factors.

Growth and Capital Efficiency

The revenue growth rate is significantly below the industry median, positioning the company among those with notable revenue declines within the industry.

※Source: Company analysis

Key Takeaways from the Financial Results

1. The operating margin deteriorated to 4.0% from the previous year, while the full-year progress rate was also low at 12.8%. The reduction of losses in the Infrastructure Operations Business and other businesses and recovery in the gross margin of the construction business will be key areas of focus for achieving the full-year results in the second half.

2. The increase in ordinary income is dependent on non-operating income, including dividend income. The ¥26.4B difference between operating income and ordinary income reflects factors separate from the earnings power of the core business, as indicated by the financial results data.

3. Accounts receivable from completed construction contracts declined while costs on uncompleted construction contracts increased simultaneously, indicating parallel progress in collections and accumulation of work-in-progress projects. Future working capital movements will determine cash efficiency.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: 5,031円–5,310円 at ±1% for the cost of equity, and 5,164円–5,169円 at ±0.1 for 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 relative to the full-year forecast).
• Because 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 report data. It is not a recommendation to invest 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 responsibility, after consulting professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 performance was mixed: core operating profitability weakened materially, while a sharp increase in non-operating income supported ordinary profit. Revenue declined 6.3% YoY to JPY65.36bn. Operating income fell 36.5% to JPY2.63bn, substantially underperforming the top-line decline. The operating margin compressed by 193bp YoY to 4.0% from 5.9%. Gross profit declined 9.8% to JPY8.56bn, and the gross margin narrowed by 50bp to 13.1% from 13.6%. SG&A expense increased 10.9% YoY to JPY5.93bn despite the lower revenue base, creating negative operating leverage. Civil engineering revenue grew 22.0% YoY, but segment profit fell 29.1%, indicating substantial margin pressure. Building construction revenue declined 25.1% YoY, although segment profit increased 1.3%, demonstrating relative resilience in project profitability. Real estate revenue rose 13.2% YoY, but its segment profit declined 7.7%. Infrastructure operations recorded a JPY1.48bn segment loss, compared with a JPY0.59bn loss a year earlier, and was the largest absolute detractor to consolidated operating profit. Ordinary income nevertheless rose 32.2% to JPY5.27bn because non-operating income more than doubled to JPY2.98bn. Dividend income of JPY0.92bn and other non-operating income of JPY0.57bn were important contributors, while interest expense rose 37.1% to JPY0.27bn. Profit attributable to owners declined 7.1% to JPY3.43bn, with a JPY0.43bn fixed-asset disposal loss partly offsetting a JPY0.30bn gain on sales of investment securities. Annualized ROE was 7.3%, below the 8% benchmark and supported by 2.23x financial leverage rather than a high operating margin. The unchanged full-year outlook requires a considerable second-half improvement, particularly in construction execution and infrastructure profitability. Q1 operating-income progress was only 12.8% of the full-year plan, 12.2 percentage points below the standard 25% Q1 pace, whereas ordinary-income progress was broadly in line at 25.4%.

Profitability Analysis

Annualized DuPont ROE is 7.3%, comprising a 5.2% net profit margin, 0.622x asset turnover and 2.23x financial leverage. The principal constraint is operating profitability: the EBIT margin is 4.0%, below the 5% caution threshold, while the gross margin is also modest at 13.1%. Financial leverage contributes meaningfully to ROE, but this does not compensate fully for the low return generated on the asset base. The Q1 operating-margin contraction to 4.0% from 5.9% is consistent with negative operating leverage, as SG&A increased 10.9% while revenue declined 6.3%. Gross profit declined more slowly than operating income, showing that the largest incremental pressure was below gross profit rather than solely in project-level costs. Civil engineering generated JPY28.91bn of revenue and JPY1.47bn of segment profit, equating to a 5.1% margin versus 8.8% in the prior year. Building construction remained the core business by segment-profit contribution, generating JPY1.94bn of profit on JPY32.95bn of revenue for a 5.9% margin, up from 4.4% a year earlier. Real estate produced a high 42.6% segment margin, but its JPY0.65bn profit contribution remains modest relative to the construction businesses. Infrastructure operations remain loss-making, with a negative 108.1% segment margin on JPY1.37bn of revenue, and the widened loss is a material drag. Machinery returned to a JPY0.04bn profit from a small loss, but its contribution is immaterial. The 3.2% ROIC quality alert is consistent with the low operating margin and indicates that current returns are below a satisfactory cost-of-capital threshold. The interest-burden ratio of 1.959x exceeds 1.0x because substantial non-operating income lifts pre-tax earnings above EBIT; this should not be interpreted as evidence that financing costs are immaterial. Interest coverage of 9.88x remains sound, but interest expense increased faster than operating income declined, reinforcing the need to restore core EBIT.

Growth Assessment

Revenue performance was uneven across businesses. Civil engineering was the main growth engine, with revenue increasing JPY5.22bn YoY to JPY28.91bn. Building construction contracted by JPY11.02bn YoY to JPY32.95bn and accounted for the majority of the consolidated revenue decline. The construction business remains overwhelmingly dominant, with completed-construction revenue of JPY61.86bn, or 94.6% of consolidated revenue. Revenue composition therefore remains sensitive to the timing of large building-project completion and recognition. Costs on uncompleted construction contracts increased 70.7% YoY to JPY8.12bn, which supports a larger pipeline of work in execution but raises execution, cost-control and conversion risk. Advances received on uncompleted construction contracts were JPY23.70bn, materially exceeding costs on uncompleted construction, providing a favorable project-funding position. The high-WIP-ratio alert reflects that work in process represents the full reported inventory balance; in construction, this is structurally associated with contract execution rather than a conventional manufactured-goods inventory model, but it still requires close monitoring of project profitability and completion timing. The company forecasts FY2027 revenue of JPY304.0bn, down 1.0% YoY, implying that the outlook does not rely on a major top-line recovery. Q1 revenue represents 21.5% of the full-year forecast, 3.5 percentage points below the standard 25% pace. The full-year operating-income target of JPY20.5bn implies a 6.7% operating margin, compared with the Q1 4.0% result. Achieving the plan therefore depends on a 269bp margin recovery through the remainder of the year. The FY ordinary-income forecast of JPY20.7bn is 25.4% achieved in Q1, but recurring operating profit is less advanced at 12.8%. The planned expansion of business domains through real estate, renewable-energy infrastructure operations and machinery can diversify earnings over time, but the current infrastructure loss indicates that near-term execution and profitability remain more important than revenue growth.

Financial Health

Liquidity is adequate, with a current ratio of 142.6% and a quick ratio of 142.6%; both indicate that current assets exceed current liabilities. Working capital is JPY70.03bn. Construction receivables of JPY189.32bn account for 45.0% of total assets and 80.7% of current assets, making collection discipline and customer credit quality central to liquidity management. Cash and deposits were JPY16.90bn, equivalent to 0.75x short-term borrowings of JPY22.65bn. Interest-bearing debt totaled JPY47.65bn, comprising JPY22.65bn of short-term loans and JPY25.00bn of long-term loans. The 47.5% short-term debt ratio triggers the refinancing-risk alert because nearly half of borrowings require near-term rollover or repayment. This maturity profile is partly mitigated by the positive working-capital balance, substantial receivables and JPY23.70bn of advances received on uncompleted construction contracts. Debt-to-equity was 1.23x, above the conservative 1.0x reference point but below the 2.0x aggressive-financing threshold. Debt-to-capital was 20.2%, well below the 40% investment-grade reference level. Total equity was JPY188.78bn and the capital adequacy ratio was 45.6%, up from 44.7% a year earlier. Investment securities were substantial at JPY72.84bn, or 17.3% of total assets, and valuation differences on securities totaled JPY39.13bn; this creates sensitivity of comprehensive income and equity to market-price fluctuations. Comprehensive income was only JPY1.56bn, below net income because other comprehensive income was negative JPY1.91bn, principally reflecting market-value and hedge-related movements. Intangible assets were only 0.3% of assets, indicating no material M&A-related intangible-asset concentration.

Notable B/S Changes

Costs on uncompleted construction contracts: +JPY3.36bn (+70.7%) YoY to JPY8.12bn - larger project work-in-progress supports future revenue conversion but increases execution and cost-overrun exposure. Construction receivables: -JPY28.42bn (-13.9%) YoY to JPY189.32bn - favorable collection and/or project-completion movement, though receivables remain a high 45.0% of total assets. Property, plant and equipment: +JPY5.50bn (+7.6%) YoY to JPY77.98bn - increased fixed-asset commitment, including land, should be monitored for return-on-capital generation. Land: +JPY3.19bn (+8.5%) YoY to JPY40.60bn - increased real-estate asset exposure may support development activity but raises sensitivity to property-market conditions. Provision for loss on construction contracts: +JPY0.49bn (+18.1%) YoY to JPY3.22bn - indicates a higher expected-loss buffer on construction projects and requires monitoring against future margin outcomes. Total assets: -JPY20.35bn (-4.6%) YoY to JPY420.54bn, largely alongside lower construction receivables - balance-sheet contraction is favorable for capital intensity if collections are sustained.

Cash Flow Quality

Core cash-conversion assessment should focus on the relationship between construction receivables, uncompleted-contract costs and advances received. Construction receivables declined JPY28.42bn YoY to JPY189.32bn, a favorable movement for working-capital release and collection efficiency. Conversely, costs on uncompleted construction contracts rose JPY3.36bn YoY to JPY8.12bn, reflecting increased capital committed to projects under execution. Advances received on uncompleted contracts were JPY23.70bn and exceeded uncompleted-contract costs by JPY15.58bn, which is supportive of project-level funding. The provision for loss on construction contracts increased 18.1% YoY to JPY3.22bn. This provision is a direct indicator of expected losses on identified contracts and warrants monitoring alongside civil-engineering margin deterioration. Reported earnings include JPY0.92bn of dividend income, JPY0.30bn of gain on sales of investment securities and a JPY0.43bn fixed-asset disposal loss. As a result, ordinary income is stronger than operating income, while pre-tax income includes offsetting non-recurring securities-sale and asset-disposal items. The JPY1.91bn negative other comprehensive income, despite JPY3.43bn of profit attributable to owners, shows that market-value changes reduced comprehensive wealth creation during the quarter.

Dividend Sustainability

The FY2027 dividend forecast is JPY300 per share. Based on forecast EPS of JPY428.91, the dividend payout ratio is 69.9%. This is above the 60% sustainability reference range, implying a relatively shareholder-oriented distribution policy. Forecast earnings cover the planned dividend, with EPS exceeding DPS by JPY128.91 per share. Retained earnings of JPY107.58bn provide a substantial accumulated earnings base. However, the dividend burden should be assessed against delivery of the FY earnings plan because Q1 profit attributable to owners reached 22.3% of the full-year forecast, below the standard 25% pace. The absence of a dividend revision alongside the unchanged earnings forecast indicates that management currently considers the JPY300 DPS maintainable. Preservation of the payout level depends principally on improving operating earnings, containing contract-loss provisions and avoiding a further widening in infrastructure-operation losses.

Risk Assessment

Business risks include Construction-margin risk: the consolidated operating margin fell 193bp YoY to 4.0%, while civil-engineering segment margin declined 363bp to 5.1%. Labor, material and subcontractor cost inflation, especially on fixed-price projects, could further pressure margins., Project execution risk: costs on uncompleted construction contracts increased 70.7% YoY to JPY8.12bn and the provision for loss on construction contracts rose to JPY3.22bn. Cost overruns, delays, design changes or claims on large projects could reduce future profit recognition., Building-construction volume risk: building revenue declined 25.1% YoY to JPY32.95bn. Given its position as the largest segment by segment profit, weaker project completion timing or order intake would materially affect consolidated earnings., Infrastructure-operation risk: the segment posted a JPY1.48bn loss, worsening from a JPY0.59bn loss. Renewable-energy generation conditions, operating costs, asset utilization and commercialization timing are key risks to this diversification initiative., Real-estate earnings volatility: real-estate revenue increased, but segment profit declined. Property sales and valuations can be lumpy and sensitive to transaction timing and market conditions., Construction-industry cyclicality: public infrastructure budgets, private-sector capital expenditure, skilled-labor availability, weather disruptions, natural disasters and building-safety regulation can affect project timing, costs and profitability..

Financial risks include Refinancing risk is elevated by the 47.5% short-term debt ratio. JPY22.65bn of short-term loans represent a meaningful near-term funding requirement, although liquidity ratios and working capital remain adequate., Receivable concentration risk is material because construction receivables total JPY189.32bn, or 45.0% of assets. Delayed certification, progress billing or customer collection could affect liquidity., Equity-market sensitivity is significant because investment securities total JPY72.84bn and valuation differences on securities total JPY39.13bn. Negative other comprehensive income of JPY1.91bn in Q1 illustrates this exposure., Interest-cost risk is rising: interest expense increased to JPY0.27bn from JPY0.19bn a year earlier. Coverage remains strong at 9.88x, but lower EBIT leaves less room for sustained rate increases..

Key concerns include LOW_OPERATING_EFFICIENCY: the 4.0% EBIT margin is below the 5% caution threshold. The root cause is a combination of lower revenue, a narrower gross margin and SG&A growth despite lower sales. For construction companies, low single-digit operating margins are not unusual, but the sharp YoY decline increases earnings sensitivity to project-cost deviations. The impact is that restoring the full-year operating-income plan requires a substantial margin recovery., CAPITAL_EFFICIENCY: ROIC of 3.2% is below the 5% warning threshold. Low operating profitability against a large asset base, including receivables, PPE and investment securities, is the primary cause. This constrains value creation and means the 7.3% annualized ROE relies partly on leverage and non-operating income rather than strong operating returns., HIGH_WIP_RATIO: work in process is 100.0% of reported inventory. The root cause is the construction business model, in which project costs accumulate during contract execution rather than in finished-goods stock. This is structurally more typical for construction than manufacturing, but the 70.7% YoY increase in uncompleted-contract costs heightens the need to monitor project completion, loss provisions and cash conversion., LOW_GROSS_MARGIN: the 13.1% gross margin is below the 20% cross-industry alert level. Construction generally carries lower margins than asset-light industries, so the absolute benchmark should be interpreted in sector context. However, the 50bp YoY decline, together with civil-engineering margin compression, indicates genuine project-level pressure and raises the risk of further provision charges..

Investment Implications

Key takeaways include Q1 core earnings weakened materially: revenue fell 6.3% and operating income fell 36.5%, with operating margin declining to 4.0%., Building construction is the core profit contributor and showed improved segment margin, partially offsetting a sharp deterioration in civil-engineering profitability., Ordinary-income growth was driven by non-operating income, particularly dividend income, rather than by the underlying construction business., The unchanged FY operating-income target requires a significant recovery in profitability after Q1., Liquidity and debt-capitalization metrics are acceptable, but the short-term debt mix and large receivable balance require active funding and collection management., The investment-securities portfolio is large relative to assets and contributes both non-operating income and comprehensive-income volatility..

Metrics to watch include Civil-engineering segment margin and provision for loss on construction contracts, Building-construction revenue conversion and order-completion timing, Infrastructure-operation segment loss trajectory, Operating-income progress versus the JPY20.5bn full-year target, Construction receivables, advances received and costs on uncompleted construction contracts, Short-term borrowing rollover, cash-to-short-term-debt ratio and interest expense, Investment-security valuations and the resulting other comprehensive income.

Regarding relative positioning, Okumura Gumi combines a sound equity base, adequate liquidity and strong interest coverage with below-target operating and capital efficiency. Its construction-led model has relatively low structural margins, but current profitability is additionally pressured by civil-engineering margin compression and widening infrastructure losses. The sizeable investment-security portfolio and dividend income provide earnings support, while also increasing exposure to market-value volatility.