TOYO CONSTRUCTION CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥94.59B
• Operating Income: ¥3.57B
• Net Income: ¥2.72B
• EPS: ¥26.50

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

Verdict: A solid revenue-led quarter with margin stability, but cash flow quality deteriorated sharply and capital efficiency remains weak. Revenue grew 28.5% YoY to 945.9, driving operating income up 28.7% YoY to 35.7 and ordinary income up 22.1% YoY to 29.7. Net income rose 34.8% YoY to 24.9, lifting net margin to 2.6%. Gross profit reached 102.6 with a gross margin of 10.8%, while EBITDA was 43.7 (margin 4.6%). Operating margin stands at 3.8% (35.7/945.9), roughly in line with revenue growth; given operating income growth slightly outpaced revenue, we infer a very modest operating margin expansion (approximately +1–5 bps YoY). Ordinary margin is about 3.1%, dampened by non-operating expenses (7.3) exceeding non-operating income (1.3). Interest expense was controlled at 2.17, and interest coverage is strong at 16.4x. However, operating cash flow was deeply negative at -114.4, diverging materially from net income (OCF/NI -4.6x), likely reflecting working capital build typical in construction project cycles. Financing inflow of 86.9 suggests reliance on debt to bridge cash needs, while capex was sizable at 65. This cash burn implies negative proxy FCF (OCF – capex) of roughly -179.4 for the half. Balance sheet liquidity is adequate (current ratio 150.9%), and D/E of 1.27x is moderate for the sector. ROE is low at 3.2%, with ROIC at 2.8%, both below common cost-of-capital benchmarks, pointing to capital efficiency challenges. Effective tax rate was 19.3%, supportive to net earnings. With construction backlogs typically supporting 2H execution, revenue momentum appears intact, but cash conversion and ROIC are the key watch-outs. Forward-looking, management needs to improve working capital discipline and project margin management to translate growth into sustainable cash and returns. Given limited disclosure on order backlog and detailed SG&A, we assume growth is driven by solid on-site progress, but project mix and timing effects remain critical variables. Overall, the quarter is operationally constructive but financially mixed due to weak cash flow and low returns.

Profitability Analysis

Step 1 (ROE decomposition): ROE 3.2% = Net Profit Margin (2.6%) × Asset Turnover (0.545x) × Financial Leverage (2.27x). Step 2 (driver): The dominant constraints on ROE are low net margin and modest asset turnover; leverage is moderate and not the driver of improvement. Step 3 (business reasons): Net margin is characteristic of general/marine construction where cost pass-through and project mix keep operating margins in the low single digits; increased non-operating expenses (7.3) also compressed ordinary margin. Asset turnover at 0.545 reflects large work-in-process and receivables tied to contracted projects. Step 4 (sustainability): Current margin profile is sustainable near-term given sector norms, but upside relies on mix shift toward higher-margin projects and tighter cost control; asset turnover can improve if billing/collection cycles normalize. Step 5 (flags): SG&A of 66.9 is not comparable YoY due to missing prior period breakdown, but given revenue +28.5% and operating income +28.7%, operating leverage appears neutral to slightly positive; nonetheless, ROIC at 2.8% (<5% warning) signals insufficient economic returns.

Growth Assessment

Revenue growth of +28.5% YoY is strong and consistent with higher project volumes and/or faster site progress. Operating income growth of +28.7% YoY indicates stable conversion, suggesting no major margin slippage despite input inflation risks. Net income +34.8% YoY benefited from stable tax and manageable interest. Sustainability hinges on order backlog quality and execution; absent backlog disclosure, we assume momentum into 2H but with typical construction seasonality. Non-operating expenses outpaced non-operating income, so ordinary profit growth lagged operating profit growth—monitor for any recurring items (e.g., FX, JV/affiliates, guarantee-related expenses). EBITDA margin of 4.6% remains thin, leaving limited buffer against cost overruns. Given the OCF shortfall, growth is not yet self-funding; any slowdown in collections could constrain execution pace. Outlook: cautious optimism on top-line with a need for tighter working capital and project mix upgrades to protect margins.

Financial Health

Liquidity: Current ratio 150.9% (healthy), quick ratio 150.9% (healthy), working capital 375.4. No warning triggers (CR > 1.0). Solvency: D/E 1.27x (moderate), interest coverage 16.4x (strong). Maturity mismatch: Short-term loans 221 vs current assets 1,113 and current liabilities 738—coverage appears adequate, but reliance on short-term funding to bridge OCF is evident. Total assets 1,736.5 vs total equity 766.2 implies leverage 2.27x at the asset level. No off-balance sheet obligations disclosed; however, construction projects can entail guarantees and JV commitments—none are reported in the provided data.

Cash Flow Quality

OCF/Net income at -4.60x flags poor earnings quality for the half, likely driven by working capital build (receivables/WIP/advance adjustments typical in construction). Proxy FCF (OCF – capex) is about -179.4, implying dividends and capex are not covered by internal cash. Financing inflow of 86.9 indicates debt-funded operations during the period. No explicit signs of working capital manipulation can be inferred from the limited disclosure, but the scale of OCF shortfall warrants monitoring of receivable days, unbilled WIP, and advances from customers. Sustainability: Without improvement in cash conversion, funding needs may persist into 2H.

Dividend Sustainability

Dividend data are not disclosed; however, an indicative payout ratio of 333.7% (calculated) suggests potential over-distribution relative to earnings if accurate. With OCF negative and proxy FCF deeply negative, dividend coverage from internal cash is weak this half. Balance sheet capacity (current ratio 1.51x, D/E 1.27x) offers temporary flexibility, but sustained cash deficits would pressure payout policy. Outlook: If payout ratio above 60% persists alongside low ROE (3.2%) and ROIC (2.8%), a recalibration toward earnings/FCF alignment may be prudent; confirmation awaits official DPS guidance.

Risk Assessment

Business Risks:

• Project execution risk (cost overruns, delays) in low-margin contracts
• Input cost inflation (materials, subcontracting) compressing margins
• Labor availability and wage pressure impacting site productivity
• Order intake/backlog volatility affecting utilization and revenue visibility
• Customer credit risk extending collection cycles and elevating WIP

Financial Risks:

• Negative OCF requiring increased short-term borrowing
• ROIC at 2.8% below cost of capital, risking value dilution
• Interest rate risk on 221 short-term loans and 163 long-term loans
• Potential covenant/leverage sensitivity if earnings weaken
• Cash flow timing risk inherent in milestone billing

Key Concerns:

• OCF/Net income of -4.60x signals weak cash conversion
• Thin operating margin (~3.8%) leaves limited buffer for shocks
• Ordinary profit weighed by higher non-operating expenses (7.3)
• Debt/EBITDA implied high for the half, indicating sensitivity to earnings
• Data gaps (no backlog, SG&A breakdown, dividends) limit visibility

Investment Implications

Key Takeaways:

• Strong top-line growth with operating profit tracking in line
• Margins stable to slightly improved, but still thin
• Cash flow weakness is the central issue this quarter
• Leverage is moderate; liquidity adequate, but funding needs rising
• Capital efficiency (ROE 3.2%, ROIC 2.8%) remains below target levels

Metrics to Watch:

• Order backlog and new order margin (pricing discipline)
• OCF/NI ratio and receivable/WIP days
• Short-term loan balance and interest cost trajectory
• Operating margin (bps) and non-operating expense run-rate
• ROIC improvement vs 7–8% management benchmarks (if provided)
• Capex trajectory vs cash generation

Relative Positioning: Within Japan’s general/marine construction space, revenue growth is competitive, but profitability and capital efficiency are at the low end of peers; liquidity is adequate and leverage moderate, yet cash conversion lags, leaving the company more dependent on financing than best-in-class contractors.

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
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis