TOTETSU KOGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥65.69B
• Operating Income: ¥6.27B
• Net Income: ¥4.53B
• EPS: ¥129.93

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

FY2026 Q2 was a strong profitability inflection for Totetsu Kogyo, with double-digit profit growth outpacing modest topline expansion. Revenue rose 6.0% YoY to 656.9, while operating income surged 52.2% YoY to 62.7, driving ordinary income up 51.2% to 66.5 and net income up 38.6% to 44.7. Operating margin expanded materially to roughly 9.5%, from an estimated 6.7% a year ago, implying c. +290 bps of operating margin expansion. Gross profit reached 107.9 (gross margin 16.4%), supported by better cost execution vs. revenue growth. Non-operating income of 4.0, led by dividend income (3.1), provided a modest tailwind, while non-operating expenses remained negligible (0.18). Earnings quality was very strong: operating cash flow of 225.0 was 5.0x net income, indicating robust cash conversion and likely favorable working-capital timing in construction projects. Liquidity and solvency are conservative, with a current ratio of 354%, working capital of 816.2, and net cash position (cash 215.7 vs short-term loans 100.0), yielding interest coverage above 500x. Balance sheet strength is underpinned by large equity (1,246.0) and low leverage (D/E 0.31x). That said, capital efficiency remains a clear area for improvement: ROE is 3.6% and ROIC is 3.8%, both below typical cost-of-capital benchmarks, constrained by low asset turnover and low financial leverage. EBITDA of 76.0 (11.6% margin) and depreciation of 13.3 imply continued capacity to self-fund capex (11.8) from operating cash flow. The effective tax rate stood at 32.2%, broadly in line with statutory levels. Reported payout ratio (calculated) of 108.9% appears elevated for a mid-year period and warrants caution until full-year dividends are disclosed. With strong profits and cash flows in H1, management appears well positioned to sustain full-year guidance (not provided here) barring project delays. Forward-looking, the margin improvements suggest better project mix and cost control, but sustaining these gains will require continued discipline amid labor/material cost volatility. The exceptionally strong OCF vs. earnings may normalize in H2 if advance receipts and billing timing reverse, so cash conversion should be watched. Overall, the quarter demonstrates solid execution and cash generation, but structural improvement in ROIC/ROE remains the main medium-term challenge.

Profitability Analysis

ROE decomposition (DuPont): Net Profit Margin 6.8% × Asset Turnover 0.403 × Financial Leverage 1.31x = ROE 3.6%. The largest driver of improvement this quarter is net profit margin, as operating income grew 52.2% vs. 6.0% revenue growth, expanding operating margin to ~9.5% from ~6.7% a year ago (+~290 bps). The business reason appears to be better project execution/mix and cost management, lifting gross-to-operating conversion, while non-operating support (dividends) added a small tailwind. Asset turnover remains modest given a large asset base relative to mid-year revenue, and low leverage reflects a net cash, equity-heavy balance sheet—both factors cap ROE despite margin gains. Sustainability: part of the margin improvement may be sustainable if driven by tighter bidding and on-site productivity; however, construction margins can be lumpy due to project timing and input cost swings, so a portion is likely cyclical. No evidence that SG&A growth outpaced revenue; the SG&A ratio is 6.9% of sales, down versus last year implied by operating leverage, but precise YoY SG&A growth is unreported. Overall, margin-driven ROE improvement is the key lever, but low leverage and moderate turnover keep capital efficiency below target.

Growth Assessment

Revenue growth of 6.0% YoY indicates steady demand in core railway/infrastructure segments. Profit growth was outsized: operating income +52.2% and ordinary income +51.2% YoY, pointing to operating leverage and improved execution. Non-operating income (3.97), primarily dividend income (3.10), was a modest contributor and appears recurring from investment holdings. The operating margin uplift to ~9.5% suggests mix and cost discipline; sustaining this through H2 depends on project backlog quality and cost pass-through. EBITDA margin at 11.6% provides a cushion against input volatility. With OCF at 225.0 vs capex 11.8, internal funding capacity for growth investments remains ample. Outlook: absent evidence of order slippage, H2 should benefit from seasonality and backlog conversion, but cash flow may normalize as working capital timing reverses. Overall revenue trajectory looks sustainable near-term; profit sustainability hinges on maintaining current margin mix and avoiding cost overruns.

Financial Health

Liquidity is very strong: current ratio 353.7% and quick ratio 353.7% comfortably exceed benchmarks; no warning on Current Ratio (<1.0) or D/E (>2.0). Solvency is conservative with D/E 0.31x and interest coverage >500x. Maturity profile risk is low: short-term loans of 100.0 are well covered by cash and deposits of 215.7 and substantial current assets (1,137.9). Noncurrent liabilities are modest at 60.8. No off-balance sheet obligations are disclosed here; contingent liabilities, guarantees, or JV commitments are unreported and may exist. Equity of 1,246.0 provides a large buffer; equity ratio is not reported but is clearly high given the low liability base.

Cash Flow Quality

OCF/Net Income is 5.03x, indicating high-quality earnings and likely favorable billing/advance receipts or receivables collection in H1. Estimated FCF (OCF - Capex) is approximately 213.2, comfortably positive and ample to cover dividends and debt service; official FCF is unreported. Capex (11.8) runs below depreciation (13.3), suggesting maintenance-level investment and limited capital intensity. No signs of aggressive working capital manipulation are evident from provided data; however, given construction billing cycles, the exceptionally strong OCF may partly reflect timing that could reverse in H2. Financing CF of -130.0 indicates debt repayment and/or shareholder returns; share repurchases were negligible. Overall cash conversion is strong, but sustainability should be evaluated over the full year.

Dividend Sustainability

The calculated payout ratio of 108.9% appears elevated for a mid-year snapshot and may reflect timing differences between interim dividends and half-year earnings; detailed DPS and total dividends paid are unreported. Given estimated FCF of ~213.2 in H1 and a net cash position, near-term capacity to fund dividends looks adequate. For sustainability, a payout aligned with a full-year payout ratio below ~60% would be prudent; current data are insufficient to confirm full-year levels. Policy signals are not provided; with ROIC at 3.8%, reinvestment at higher-return projects could improve capital efficiency, but room exists to balance returns and investment. Monitor: final DPS announcement, full-year payout ratio vs. FCF, and any special dividends.

Risk Assessment

Business Risks:

• Project timing risk causing revenue and cash flow volatility between quarters/halves
• Input cost inflation (labor, materials) impacting margins if not fully passed through
• Execution risk on large or technically complex railway projects impacting profitability
• Client concentration in railway operators/public sector increasing dependency risk
• Potential delays from permitting, safety, or weather disrupting construction schedules

Financial Risks:

• ROIC at 3.8% (<5%) indicates weak capital efficiency relative to likely cost of capital
• Earnings reliance on working-capital favorable timing (OCF >> NI) may normalize
• Dividend coverage uncertainty with a calculated payout ratio >100% mid-year
• Interest rate volatility could affect financing costs on short-term borrowings (100.0)

Key Concerns:

• Sustainability of margin expansion into H2 amid cost pressures
• Potential reversal of working capital benefits reducing OCF
• Limited asset turnover and low leverage constraining ROE despite profit growth
• Data gaps (DPS breakdown, backlog, SG&A details) obscure forward visibility

Investment Implications

Key Takeaways:

• Strong H1 execution with operating margin expansion of roughly +290 bps YoY
• Cash generation far exceeds earnings, supporting balance sheet strength
• Capital efficiency (ROE 3.6%, ROIC 3.8%) remains below desirable thresholds
• Leverage is low and liquidity robust, reducing downside financial risk
• Non-operating dividend income is a small but recurring profit contributor

Metrics to Watch:

• Backlog quality and win rates for H2 and FY2027
• Operating margin trajectory and cost pass-through effectiveness
• OCF normalization vs. H1 (changes in advances, receivables, payables)
• Full-year DPS and payout ratio vs. FCF
• ROIC improvement initiatives and asset turnover trends

Relative Positioning: Within Japan’s railway/infrastructure construction peers, Totetsu Kogyo exhibits superior balance sheet conservatism and very strong cash conversion this half, with margins improving meaningfully; however, its capital efficiency (ROE/ROIC) lags best-in-class contractors, suggesting upside hinges on sustained margin discipline and better asset utilization.

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
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