PENTA-OCEAN CONSTRUCTION CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥378.97B
• Operating Income: ¥25.84B
• Net Income: ¥17.22B
• EPS: ¥61.53

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 quarter for Penta-Ocean Construction, with significant operating leverage but accompanied by very weak cash generation and elevated leverage. Revenue rose 15.5% YoY to 3,789.66, while operating income surged 71.1% YoY to 258.37, underscoring improved project margins and execution. Ordinary income increased 89.1% YoY to 251.43, and net income climbed 73.3% YoY to 171.34, translating to EPS of 61.53 JPY. Gross profit reached 391.29 for a 10.3% gross margin, and EBITDA was 303.84 with an 8.0% margin. Operating margin expanded meaningfully to 6.8% (operating income/revenue), up roughly 222 bps from about 4.6% in the prior-year period by our back-calculation. The net margin improved to 4.5%, aligning with the DuPont-derived net profit margin used in ROE calculation. Ordinary income was slightly below operating income due to net non-operating expenses (10.84 non-op income vs 17.78 non-op expenses). ROE printed at 9.4%, supported primarily by margin expansion and aided by high financial leverage (4.53x), while asset turnover was 0.458. However, earnings quality is a key concern: operating cash flow was -929.53 versus net income of 171.34, resulting in an OCF/NI ratio of -5.43x, indicating heavy working capital outflows and/or project cash timing issues. Financing cash inflow of 1,430.70 and capex of -397.25 suggest increased reliance on debt to fund both working capital and investments. The balance sheet shows total assets of 8,282.24 and equity of 1,829.16 (equity ratio ~22.1%), with short-term loans at 1,430.64 and long-term loans at 746.60. Liquidity is adequate but not robust (current ratio 121.8%), and leverage is high (D/E 3.53x) though interest coverage remains strong at 18.0x. The effective tax rate was 31.2%, in line with statutory norms. Looking ahead, improved operating margins are encouraging, but sustainability hinges on converting backlog to cash, stabilizing working capital, and managing short-term debt rollover. Near-term investor focus should be on H2 cash conversion, debt trajectory, and whether the margin uplift reflects structural improvements in bidding and execution or favorable project mix timing.

Profitability Analysis

ROE decomposition: ROE 9.4% = Net Profit Margin (4.5%) × Asset Turnover (0.458) × Financial Leverage (4.53x). The most material change appears to be net margin expansion, evidenced by operating income growth (+71.1% YoY) far outpacing revenue growth (+15.5% YoY), lifting operating margin from roughly 4.6% to about 6.8% (~+222 bps). Business drivers likely include better project mix, improved cost control on ongoing sites, and fewer low-margin legacy projects rolling through this period; non-operating impact was slightly negative, so the uplift is primarily operational. The leverage component (4.53x) continues to amplify ROE but is not the primary driver of the YoY upturn; asset turnover at 0.458 is typical for a construction contractor and likely little changed. Sustainability: Partial—margin improvements could persist if bidding discipline and execution remain strong; however, construction margins are inherently cyclical and sensitive to input costs and claim recoveries. Watch for SG&A discipline: SG&A of 132.92 grew below revenue (not explicitly disclosed YoY), and the operating margin expansion indicates positive operating leverage; any future SG&A step-up above revenue growth would pressure margins.

Growth Assessment

Top-line growth of 15.5% YoY to 3,789.66 reflects healthy project progress and order execution. Profit growth was substantially stronger: operating income +71.1% and ordinary income +89.1% YoY, signaling a better margin environment. EBITDA margin at 8.0% versus operating margin 6.8% implies modest D&A intensity (~1.2% of sales), indicating margin gains are genuinely operational rather than depreciation-driven. Non-operating items were a net drag (10.84 income vs 17.78 expenses), so the profit improvement is core. The sustainability of revenue growth depends on backlog quality and replenishment, which were not disclosed; absent backlog data, we assume steady near-term execution but highlight visibility risk. ROIC was cited at 5.5% (below 7–8% best-practice targets), suggesting room to enhance capital efficiency even with improved profitability. Outlook hinges on maintaining bid discipline amid input cost volatility and ensuring timely certification and collection to translate profit to cash.

Financial Health

Liquidity: Current ratio 121.8% (>1.0 but <1.5 benchmark), quick ratio 121.8% as disclosed; liquidity is adequate but not strong. Solvency: Debt-to-equity ratio is high at 3.53x (warning threshold >2.0), and debt/EBITDA is 7.17x, which is elevated for contractors. Equity ratio approximates 22.1% (1,829.16/8,282.24). Interest coverage is solid at 18.04x, mitigating near-term servicing risk. Maturity mismatch: Short-term loans of 1,430.64 exceed cash and deposits of 770.14, necessitating ongoing rollover or rapid working capital release; current assets (6,225.86) exceed current liabilities (5,113.31), but cash conversion risk is material given negative OCF. No off-balance sheet obligations were disclosed in the data provided; typical construction guarantees and performance bonds may exist but were not reported.

Cash Flow Quality

OCF/Net Income is -5.43x, a significant quality flag (<0.8). The negative OCF likely reflects working capital outflows—such as increases in unbilled receivables/WIP or slower collections—common in periods of rapid revenue growth and project ramp-ups. With capex of -397.25, implied free cash flow is negative in the period, and the company relied on financing cash inflow of 1,430.70 to fund operations and investments, plus buybacks of -50.06. There are no explicit signs of manipulation, but the scale of working capital use vs. profit suggests tight cash management and execution risk into H2. Sustainability: Until OCF normalizes, funding dividends and capex will depend on debt or asset sales.

Dividend Sustainability

The calculated payout ratio is 40.1%, which appears reasonable relative to earnings. However, with OCF deeply negative and FCF not disclosed but likely negative given capex, near-term dividend coverage from internal cash generation is weak. Financing CF was positive and could be implicitly supporting shareholder returns (including buybacks of -50.06), which is not a sustainable strategy if cash conversion does not improve. Policy outlook is uncertain due to lack of DPS disclosure; we assume a stable-to-cautious stance, contingent on H2 OCF recovery and working capital normalization.

Risk Assessment

Business Risks:

• Project execution risk: cost overruns, delays, and claims can erode margins.
• Input cost inflation risk: materials and subcontractor costs can pressure fixed-price contracts.
• Revenue recognition and certification timing risk impacting cash conversion.
• Demand cyclicality in domestic civil/engineering markets; backlog visibility not disclosed.

Financial Risks:

• High leverage: D/E 3.53x and debt/EBITDA 7.17x increase refinancing and covenant risks.
• Short-term funding reliance: short-term loans (1,430.64) exceed cash (770.14), elevating rollover risk.
• Earnings quality risk: OCF/NI at -5.43x signals weak cash conversion.
• Interest rate risk on floating-rate short-term borrowings.

Key Concerns:

• Sustainability of margin expansion absent corresponding cash flow.
• Working capital intensity as revenue scales, potentially suppressing FCF.
• ROIC at 5.5% below 7–8% best-practice target, implying capital efficiency headroom.
• Non-operating items are a net expense; further increases could dilute ordinary income.

Investment Implications

Key Takeaways:

• Strong operating leverage with operating margin expansion of ~222 bps YoY to ~6.8%.
• Net income up 73.3% YoY; ROE at 9.4% aided by higher margins and leverage.
• Cash generation is the Achilles’ heel: OCF -929.53 despite NI 171.34.
• Leverage high (D/E 3.53x; debt/EBITDA 7.17x) though interest coverage remains robust at 18x.
• Liquidity acceptable but reliant on working capital normalization and/or refinancing.

Metrics to Watch:

• OCF/Net Income and quarterly working capital movements (unbilled receivables, WIP, advances).
• Backlog size, quality, and booking-to-burn ratio (not disclosed here).
• Operating margin on new orders and gross margin trend.
• Debt/EBITDA and equity ratio trajectory; short-term debt rollover profile.
• ROIC progression toward 7–8% target range.

Relative Positioning: Versus domestic general contractors, profitability has improved meaningfully this quarter, but leverage and cash conversion are weaker than ideal; sustaining the margin gains while normalizing OCF will be pivotal to close the gap on capital efficiency benchmarks.

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