YAHAGI CONSTRUCTION (1870) FY2027 Q1 Earnings Report

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Executive Summary

Although core operating profit declined significantly due to the contraction of the Construction and Real Estate segments, gains on the sale of investment securities and gains on business transfers boosted net income. Revenue was ¥316.0B (down 23.2% YoY), operating income was ¥15.4B (down 57.8%), and ordinary income was ¥16.4B (down 55.4%). Meanwhile, net income increased 15.3% YoY to ¥29.5B, primarily due to extraordinary income of ¥26.2B (including gains on the sale of investment securities of ¥15.5B and gains on business transfers of ¥10.0B); therefore, it is not an indicator of the Company’s core earnings power.

Factors Affecting Results

【Revenue】Revenue was ¥316.0B, down 23.2% YoY. The Construction segment contracted significantly to ¥212.6B (down 26.4%), while the Real Estate segment declined to ¥11.3B (down 79.5%); the impact of the transfer of the condominium development business is reflected in the sharp decline in Real Estate. The Civil Engineering segment secured revenue growth of 30.0% YoY to ¥93.0B, partially offsetting the decline through the effect of consolidating Aquarius Invesco and Kaisho as subsidiaries.

【Profit and Loss】Operating income was ¥15.4B (down 57.8%), and the operating margin declined sharply to 4.9% from 8.9% in the same period of the previous year. Despite the decline in revenue, SG&A expenses increased 4.4% YoY to ¥28.7B, causing the SG&A ratio to rise from 6.7% to 9.1% and negative operating leverage to become evident. Ordinary income was ¥16.4B (down 55.4%). Net income increased 15.3% YoY to ¥29.5B due to extraordinary income of ¥26.2B; however, profit before tax of ¥42.4B exceeded ordinary income by ¥26.1B, indicating that extraordinary gains and losses were the primary driver of the increase. In conclusion, the Company experienced lower revenue and lower profit in its core operations, while net income including extraordinary factors increased; the former more accurately reflects the underlying performance.

Segment Analysis

The Construction segment reported revenue of ¥212.6B (down 26.4% YoY), operating income of ¥17.6B (down 35.3%), and a margin of 8.3%, reflecting both lower revenue and a decline in profitability. The Civil Engineering segment reported revenue of ¥93.0B (up 30.0%), operating income of ¥8.0B (up 29.7%), and a margin of 8.6%, securing profit growth broadly in line with its revenue growth. The Real Estate segment declined sharply to revenue of ¥11.3B (down 79.5%) and operating income of ¥2.6B (down 82.7%), although it maintained high profitability with a margin of 22.8%. The composition of Company-wide profit is shifting from being centered on Construction toward a greater contribution from Civil Engineering, with the contraction of Real Estate and expansion of Civil Engineering progressing simultaneously.

Key Financial Indicators

【Profitability】The operating margin of 4.9% and ordinary income margin of 5.2% both declined significantly from 8.9% in the same period of the previous year, while the gross margin also deteriorated to 14.0% from 15.5%. Meanwhile, the net profit margin of 9.3% reflects a level supported by extraordinary income and must be evaluated separately from core operating profitability.【Cash Flow Quality】Cash and deposits were ¥162.5B, remaining broadly in line with the previous year. Advances received on uncompleted construction contracts of ¥100.9B exceeded costs on uncompleted construction contracts of ¥34.5B, indicating that customer advances associated with construction progress supplemented working capital.【Investment Efficiency】Annualized ROE was high at 15.6%; however, because the increase in the net profit margin was driven by extraordinary income, improvement in the operating margin and ordinary income margin will be the focus in assessing sustainable capital efficiency.【Financial Soundness】The equity ratio improved to 60.2% from 51.5% in the same period of the previous year. Short-term borrowings decreased significantly to ¥75.3B from ¥235.0B, indicating a stable financial position.

Cash Flow Analysis

Although detailed disclosures for the statement of cash flows are not available, balance sheet trends indicate that cash and deposits remained broadly unchanged at ¥162.5B versus ¥162.6B in the same period of the previous year. Short-term borrowings decreased by ¥159.7B, from ¥235.0B in the previous year to ¥75.3B. As cash and deposits reached 2.16 times short-term borrowings, the Company’s ability to repay short-term funding has improved. Real estate for sale was ¥184.1B, down ¥11.97B from ¥196.0B in the previous year, indicating progress in inventory reduction; however, inventory turnover must continue to be monitored in conjunction with the contraction in Real Estate revenue. Advances received on uncompleted construction contracts were ¥100.9B, exceeding costs on uncompleted construction contracts of ¥34.5B, and the structure in which customer advances associated with construction progress supplement working capital remains in place.

Earnings Quality

The increase in profit for the current period was driven not by recurring earnings power but by temporary factors, namely gains on the sale of investment securities of ¥15.5B and gains on business transfers of ¥10.0B. Profit before tax of ¥42.4B exceeded ordinary income of ¥16.4B by ¥26.1B, with this difference corresponding almost entirely to extraordinary income. Non-operating income was ¥1.8B, including dividend income of ¥1.2B, while non-operating expenses were ¥0.8B, including interest expenses of ¥0.8B; both were limited in scale, and the difference between ordinary income and operating income was only ¥1.0B. The decline in the gross margin to 14.0% (down 1.5pt YoY) and the rise in the SG&A ratio to 9.1% (up 2.4pt YoY) indicate a deterioration in core earnings power. The net profit margin of 9.3% must therefore be evaluated with the understanding that it would decline significantly excluding extraordinary income. Comprehensive income was ¥23.3B, slightly below net income of ¥29.5B, primarily due to valuation difference on securities of -¥5.9B.

Earnings Forecast and Guidance

The full-year plan calls for revenue of ¥1,500.0B (down 11.5% YoY), operating income of ¥95.0B (down 30.9%), and ordinary income of ¥93.8B (down 31.5%). Q1 progress rates were 21.1% for revenue, 16.2% for operating income, and 17.5% for ordinary income, all below the 25% benchmark for even quarterly progress, indicating relatively weak progress in core earnings. Meanwhile, Q1 progress toward the full-year plan of ¥93.0B in net income attributable to owners of the parent was 31.8%, above the standard benchmark; however, this reflects the front-loaded recognition of extraordinary income and does not directly indicate upside potential for full-year profit. Improvement in the profitability of the Construction business and earnings contributions from Civil Engineering subsidiaries in the second half will be key to achieving the plan.

Shareholder Returns

The full-year dividend forecast is ¥110 per share, while forecast full-year EPS is ¥215.37, resulting in a payout ratio of approximately 51.1%. This represents a significant increase from the previous year’s dividend of ¥45. Based on the average number of shares outstanding during the period, estimated total dividends of approximately ¥47.5B against the full-year net income plan of ¥93.0B correspond to approximately 51% of planned net income. Retained earnings were substantial at ¥639.6B, and together with an equity ratio of 60.2%, the Company maintains a capital base supporting dividend payments.

Risk Factors

1. Delay in the recovery of Construction segment profitability: Revenue declined 25.6% YoY and segment profit declined 35.3%. If recovery in construction completions and profitability in the Construction business, the Company’s primary source of earnings, is delayed, achievement of the full-year operating income plan of ¥95.0B could be affected.

2. Impairment risk associated with increased goodwill: Goodwill increased to ¥34.9B (up 2,038% YoY) following the consolidation of the Civil Engineering subsidiaries, Aquarius Invesco and Kaisho, and the purchase price allocation remains provisional. If integration benefits fall below expectations, goodwill impairment risk could arise.

3. Business restructuring risk in Real Estate: Real Estate segment revenue declined 79.5% YoY, while segment profit declined 82.7%. Challenges include the inventory turnover of ¥184.1B in real estate for sale and rebuilding the earnings base following the transfer of the condominium development business.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Returns

The operating margin is slightly above the industry median, but the superiority of the net profit margin is largely attributable to the one-time impact of extraordinary income.

Growth and Capital Efficiency

The revenue growth rate is significantly below the industry median, and the extent of the decline in revenue is notable within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. Annualized ROE of 15.6% appears favorable, but it depends on a net profit margin of 9.3% that includes gains on the sale of investment securities and gains on business transfers. It must be evaluated together with the deterioration in core profitability, reflected in an operating margin of 4.9% and an ordinary income margin of 5.2%.

2. The business portfolio is undergoing simultaneous profit growth in the Civil Engineering segment and profit declines in Construction and Real Estate. The shift in profit composition toward Civil Engineering is noteworthy as a structural change.

3. Financial soundness is improving, supported by an equity ratio of 60.2% and a significant decrease in short-term borrowings. Although resilience to earnings volatility remains intact, progress in core earnings against the full-year plan—16.2% for operating income and 17.5% for ordinary income—requires improvement in the second half.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,900–¥2,008 at ±1% for the cost of equity, and ¥1,949–¥1,960 at ±0.1 for ω.

Notes:

• Net assets as of 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 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and 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 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 responsibility, after consulting with a professional as necessary.

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