WAKACHIKU CONSTRUCTION (1888) FY2027 Q1 Earnings Report

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Executive Summary

The most important feature of this quarter’s results was the significant improvement in profitability, in addition to higher revenue and earnings, driven by the expansion of completed construction revenue and improved project profitability in the Construction Business. Revenue was ¥271.7B (+34.2% YoY), Operating Income was ¥17.7B (+917.0% YoY), Ordinary Income was ¥18.2B (+782.5% YoY), and Net Income was ¥12.2B (+1010.9% YoY). The Operating Income margin improved substantially to 6.5% from 0.9% in the same period of the previous year, primarily due to improved profitability on completed construction projects and operating leverage resulting from the growth rate of SG&A expenses remaining below the revenue growth rate.

Factors Driving Performance Changes

【Revenue】Revenue was ¥271.7B, up +34.2% YoY. The Construction Business accounted for nearly all consolidated revenue at ¥270.1B (+34.6% YoY), driving growth. The Real Estate Business contracted to ¥1.3B (-9.9% YoY), while Other Businesses remained at ¥0.5B (-5.7% YoY). Completed construction revenue of ¥263.97B increased +34.1% YoY, with the expansion of orders and project progress in the Construction Business being the primary drivers of the revenue increase.

【Profit and Loss】Segment profit in the Construction Business was ¥24.0B (+280.5% YoY), with the margin rising substantially to 8.9% from 3.1% in the same period of the previous year. The gross profit margin improved to 14.4% from approximately 10.4% in the same period of the previous year, and gross profit on completed construction projects expanded to ¥36.7B (+91.8% YoY). SG&A expenses were ¥21.6B, increasing only +11.2% YoY and remaining below the 34.2% revenue growth rate, resulting in greater fixed-cost absorption. Non-operating income and expenses consisted of ¥1.6B in income, primarily dividend income, and ¥0.9B in expenses, including interest expenses, resulting in a limited impact on Ordinary Income. Extraordinary income and expenses were virtually absent, and Net Income of ¥12.2B relative to Ordinary Income of ¥18.2B reflects a burden from an effective tax rate of approximately 32.7%. The company achieved both revenue and earnings growth, and the increase in earnings can be viewed as high quality because it was accompanied by improved profitability in addition to higher revenue.

Segment Analysis

The Construction Business generated revenue of ¥270.1B (+34.6% YoY), Operating Income of ¥24.0B (+280.5% YoY), and an 8.9% margin (3.1% in the same period of the previous year), making it the substantive source of consolidated profit. The Real Estate Business generated revenue of ¥1.3B (-9.9% YoY) and Operating Income of ¥0.7B (-12.8% YoY). Although small in scale, it maintained a high margin of 53.5%. Other Businesses, including ship management services, generated revenue of ¥0.5B and an Operating Loss of ¥0.3B, deteriorating from a loss of ¥0.1B in the same period of the previous year. Corporate expenses (adjustments) were ¥6.7B, up from ¥5.2B in the same period of the previous year, but were more than absorbed by higher earnings in the Construction Business.

Key Financial Indicators

【Profitability】The Operating Income margin of 6.5% and Net Income margin of 4.4% both improved substantially from the same period of the previous year (0.9% and 0.5%, respectively), although the gross profit margin of 14.4% is not particularly ample as a buffer against fluctuations in construction costs.【Cash Flow Quality】Comprehensive Income of ¥8.1B was below Net Income of ¥12.2B, due to changes in valuation differences, including a -¥3.4B change in the valuation difference on other securities. Completed construction receivables of ¥605.3B represented 53.3% of total assets, making the progress of billing and collection corresponding to construction progress a key factor in cash conversion.【Investment Efficiency】ROE (annualized) was 9.1%, with the sharp improvement in the Net Income margin being the primary contributor.【Financial Soundness】The Equity Ratio was 47.5%, while interest-bearing debt was ¥129.3B (short-term ¥75.8B and long-term ¥53.5B), and the D ratio was trending lower YoY. Short-term borrowings decreased 53.0% YoY, indicating an improvement in reliance on financing, while cash and deposits declined 21.7% YoY to ¥153.8B.

Cash Flow Analysis

Because individual items in the cash flow statement are not included in the disclosed data, cash trends are analyzed based on changes in the balance sheet. Cash and deposits declined to ¥153.8B from ¥196.4B in the same period of the previous year, while short-term borrowings were reduced by ¥85.4B from ¥161.2B to ¥75.8B, suggesting that a portion of available cash may have been used to repay interest-bearing debt. Current assets were ¥897.0B and current liabilities were ¥505.6B, resulting in a current ratio of 177.4% and maintaining financial flexibility. Completed construction receivables remained high at ¥605.3B, and the billing and collection cycle for construction proceeds associated with revenue growth is a factor that will influence future cash trends.

Quality of Earnings

The increase in Ordinary Income to ¥18.2B was primarily attributable to improved profitability in the core business, namely the Construction Business. Of the ¥1.6B in non-operating income, ¥1.0B consisted mainly of dividend income, and no temporary factors were included. Extraordinary income and expenses were virtually negligible, consisting only of an impairment loss of ¥0.01B. The gap between Ordinary Income and Net Income (¥18.2B → ¥12.2B) was primarily attributable to the tax burden at an effective tax rate of approximately 32.7%, rather than temporary profit or loss factors. Comprehensive Income of ¥8.1B was below Net Income of ¥12.2B, with a decrease in other comprehensive income, including a -¥3.4B valuation difference on investment securities, representing an accrual-like difference. Overall, the earnings growth was derived from the core business, and the quality of earnings can be assessed as sound.

Earnings Forecast and Guidance

The full-year company forecast is Revenue of ¥116.0B (+10.7% YoY), Operating Income of ¥71.0B (+6.8% YoY), and Ordinary Income of ¥65.0B (+1.1% YoY), with no revisions to the earnings or dividend forecasts during the quarter. Q1 progress rates were 23.4% for Revenue, 24.9% for Operating Income, 28.0% for Ordinary Income, and 27.2% for Net Income. While progress on the profit front exceeded the standard 25% level, revenue progress was slightly below that level. As quarterly performance in the construction industry tends to fluctuate depending on project progress and completion timing, it is not possible to determine an upside to the full-year forecast based solely on the high Q1 progress rate.

Shareholder Returns

The full-year dividend forecast is ¥145.0 per share. Based on the full-year EPS forecast of ¥345.71, the forecast Payout Ratio is approximately 41.9%; this represents the dividend-only Payout Ratio and does not include share repurchases. There was no revision to the dividend forecast during the quarter. The Q1 Net Income progress rate of 27.2% is at a level that supports the full-year forecast, and no factors indicating concern regarding the achievability of the dividend forecast have been identified at this time.

Risk Factors

1. Gross profit margin: Although the gross profit margin of 14.4% improved from the same period of the previous year, it is at a level where increases in material prices, labor costs, and subcontracting expenses, or fluctuations in cost estimates for individual projects, could have a significant impact on profitability.

2. Concentration of profit in the Construction Business: Segment profit of ¥24.0B in the Construction Business is the substantive source of consolidated profit, creating a structure in which fluctuations in project progress, completion timing, design changes, and construction delays can readily flow through to consolidated profit.

3. Scale of completed construction receivables: Completed construction receivables of ¥605.3B accounted for 53.3% of total assets. Delays in billing or collection of construction proceeds, or an extension of retention periods, could increase the working capital burden.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (construction)

Profitability and Returns

The company ranks above the industry median for both Operating Income margin and Net Income margin.

Growth and Capital Efficiency

The Revenue growth rate substantially exceeded the industry median and was also well above the upper bound of the industry IQR.

※Source: Company compilation

Key Points from the Financial Results

1. The magnitude of earnings growth, with Operating Income increasing +917.0% against Revenue growth of +34.2%, indicates that the expansion of completed construction revenue and improved profitability in the Construction Business progressed simultaneously. Although the gross profit margin improved to 14.4%, it remains at a limited level in terms of resilience to fluctuations in construction costs.

2. Short-term borrowings decreased 53.0% YoY, reducing reliance on financing, but completed construction receivables accounting for 53.3% of total assets is a structural characteristic indicating that future billing and collection trends will determine the pace of cash conversion.

3. Profit progress toward the full-year forecast (27.2%–28.0%) exceeded the standard 25% level, while revenue progress (23.4%) was slightly below it. Given seasonality arising from project progress and completion timing, monitoring quarterly trends will be important going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,994–¥4,224 at cost of equity ±1%; ¥4,105–¥4,108 at ω±0.1.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value will be below book value per share.
• 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 (Ohlson-type; explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on 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 release data. It does not recommend investment in any specific issue. 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 a professional as necessary.

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