Kumagai Gumi Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

The most important point this quarter was the increase in operating income, driven by improved profitability in the Building Business despite lower revenue. Revenue declined to ¥1000.2B (-5.1% YoY), while operating income rose to ¥28.7B (+42.2%), ordinary income to ¥27.2B (+40.3%), and net income to ¥14.3B (+23.4%). The primary driver was the improvement in the gross margin on gross profit from completed construction contracts, from 7.6% in the same period of the previous year to 9.4%, with improved margins in the Building Business driving company-wide earnings.

Factors Affecting Results

【Revenue】Revenue declined 5.1% YoY to ¥1000.2B. By segment, the Building Business was the largest contributor to the decline, with revenue of ¥482.3B (-8.4% YoY), while subsidiaries also posted lower revenue of ¥265.8B (-3.2% YoY). Meanwhile, the Civil Engineering Business maintained revenue broadly in line with the previous year at ¥277.2B (+0.4% YoY).

【Profit and Loss】Gross profit from completed construction contracts increased to ¥94.3B from ¥80.5B in the previous year, while the gross margin improved by +179bp to 9.4% from 7.6%. Although SG&A expenses increased 8.9% YoY to ¥65.7B, the improvement in gross profit absorbed the increase, resulting in operating income of ¥28.7B (+42.2% YoY). Ordinary income increased 40.3% YoY to ¥27.2B as the increase in operating income flowed through, while non-operating expenses increased on a net basis, mainly due to higher interest expense of ¥2.6B. Net income was ¥14.3B (+23.4% YoY), although the effective tax rate of 47.1% constrained growth in bottom-line profit. Despite lower revenue, substantial profit growth was achieved through margin improvement, leading to the conclusion that results reflected lower revenue but higher profit.

Segment Analysis

The Building Business recorded a substantial increase in profit, with revenue of ¥482.3B (-8.4% YoY) and operating income of ¥16.9B (+378.7% YoY), while its operating margin improved to 3.5% from approximately 0.7% in the previous year. Of total company-wide operating income of ¥2.9B, the Building Business accounted for approximately 59%, apparently benefiting from the correction of pricing conditions and improved cost management. The Civil Engineering Business remained broadly flat in revenue at ¥277.2B (+0.4% YoY), but operating income declined 42.4% YoY to ¥5.3B, with its margin falling to 1.9%, suggesting an adverse project mix and cost overruns. Subsidiaries reported revenue of ¥265.8B (-3.2% YoY) and operating income of ¥6.9B (-9.5% YoY), with margins deteriorating slightly to 2.6%. Improvement in the Building Business and deterioration in the Civil Engineering Business comprise the main factors behind the increase in company-wide profit.

Key Financial Indicators

【Profitability】The operating margin improved by +96bp to 2.9% from 1.9% in the previous year, while the net profit margin improved by +33bp to 1.4% from 1.1%. The primary driver was the improvement in the gross margin on completed construction contracts to 9.4% from 7.6% in the previous year.【Cash Flow Quality】Accounts receivable from completed construction contracts decreased to ¥2199.9B from ¥2405.7B in the previous year, while advances received on construction contracts in progress increased 51.4% to ¥274.9B from ¥181.5B. Progress in billing and collection and increased receipt of advances improved the quality of working capital.【Investment Efficiency】ROE improved slightly to 0.8% from approximately 0.6% in the previous year. However, both total asset turnover (0.234) and leverage (2.32x) are trending downward, indicating that the improvement in ROE depends primarily on an improvement in the net profit margin.【Financial Soundness】The equity ratio improved to 43.1% from 41.8% in the previous year. Given cash and deposits of ¥636.1B, total interest-bearing debt remains at a conservative level, and liquidity and creditworthiness remain favorable.

Cash Flow Analysis

Operating Cash Flow (OCF) has not been disclosed, but analysis of funding trends based on the balance sheet indicates an improving trend. Accounts receivable from completed construction contracts decreased to ¥2199.9B from ¥2405.7B in the previous year, indicating improved billing and collection efficiency, while advances received on construction contracts in progress increased by ¥93.4B to ¥274.9B from ¥181.5B in the previous year, suggesting earlier progress billing and improved contract terms. Costs on construction contracts in progress also decreased to ¥69.4B from ¥76.9B at the end of the previous year, indicating progress in optimizing funding in line with construction progress. These developments are working to enhance the company’s ability to fund interest payments and dividends through internal funds. However, because the construction industry has seasonality characterized by a concentration of activity toward the fiscal year-end, trends in accounts receivable and advances received from the next quarter onward will be key to assessing the sustainability of cash conversion.

Quality of Earnings

Earnings this quarter were primarily generated by recurring profit from the core business, with only minor temporary factors. Extraordinary income was ¥0.15B and extraordinary losses were ¥0.25B, resulting in virtually no impact on net income. Non-operating income was small at ¥2.9B, equivalent to 0.3% of revenue, and consisted mainly of dividend income of ¥1.0B. Meanwhile, non-operating expenses totaled ¥4.4B, primarily comprising interest expense of ¥2.6B, resulting in net non-operating expenses that pressured bottom-line profit. The limited growth in net income (+23.4%) relative to operating income growth (+42.2%) was mainly attributable to the elevated effective tax rate of 47.1%. If the tax burden normalizes, the profit growth rate from the second half onward could increase. Comprehensive income was ¥6.7B, below net income of ¥14.3B, mainly due to deterioration in valuation difference on securities of -¥8.7B. Attention should be paid to the impact of valuation gains and losses on shareholders’ equity.

Earnings Forecast and Guidance

The Q1 progress ratios against the full-year plan were 9.3% for operating income, calculated as ¥28.7B/¥309.0B; 8.8% for ordinary income, calculated as ¥27.2B/¥310.0B; and 7.0% for net income, calculated as ¥14.3B/¥204.0B. All were below the simple proportional benchmark of 25%. However, in the construction industry, completion and handover tend to be concentrated in the second half of the fiscal year, and the low Q1 progress ratios are considered to be within the range of seasonality. Continued improvement in the gross margin and higher margins in the Building Business at 3.5% would support the assumption of achieving the full-year plan in the second half. Conversely, continued deterioration in the profitability of the Civil Engineering Business could exert downward pressure on the company-wide margin. No revision to the earnings forecast was announced this time.

Shareholder Returns

The company’s full-year dividend forecast is ¥50 per share, based on the pre-stock-split basis, implying a payout ratio of approximately 41.6% against forecast EPS of ¥120.04. In addition, the company conducted a 1-for-4 stock split effective October 1, 2025; after taking the split into account, the dividend at the end of Q2 will be ¥20.00 per share and the full-year dividend will be ¥47.00 per share. No revision to the dividend forecast was announced this time. Given the equity ratio of 43.1% and cash and deposits of ¥636.1B, the dividend is considered to be at a level that can be fully funded through internal funds.

Risk Factors

1. Deterioration in the profitability of the Civil Engineering Business: Operating income in the Civil Engineering Business declined 42.4% YoY to ¥5.3B, with the profit margin falling to 1.9%. An adverse project mix and cost overruns could exert downward pressure on company-wide profit.

2. Continued elevated effective tax rate: The effective tax rate remains high at 47.1%, constraining net income growth of +23.4% relative to growth in profit before tax of +40.5%. Whether the tax rate normalizes will be a variable affecting future net income growth.

3. Increase in non-operating expenses: Interest expense increased to ¥2.6B from ¥1.8B in the previous year, indicating sensitivity to changes in the interest-rate environment. Although interest coverage remains at a favorable level, this item requires monitoring.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Return

The company’s profitability is below the industry median. Although the Building Business is improving, the company as a whole remains relatively low-ranked within the industry.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median. While many peers are achieving revenue growth, the company remains on a declining revenue trend.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Improved profitability in the Building Business is driving expansion in the company-wide margin, with the operating margin improving to 2.9% from 1.9% in the previous year despite lower revenue. The gross margin on completed construction contracts also improved to 9.4% from 7.6%, making the sustainability of improved pricing conditions and cost management the key focus going forward.

2. The improvement in working capital quality is a notable feature. Advances received on construction contracts in progress increased 51.4% to ¥274.9B, while accounts receivable from completed construction contracts decreased to ¥2199.9B, suggesting an improved billing and collection cycle and an enhanced capacity to generate cash.

3. The decline in the Civil Engineering Business profit margin to 1.9%, reflected in a 42.4% YoY decline in operating income, and the high effective tax rate of 47.1% are structural factors constraining the current period’s profit growth rate. How these trends change in the coming quarters will be an important observation point in assessing earnings quality.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on 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: ¥1,131–¥1,197 at cost of equity ±1%; ¥1,161–¥1,166 at ω±0.1.

Note:

• Net assets as of the end of the quarter are used; there is a timing difference from the full-year forecast.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This figure does not predict or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with a professional as necessary.

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