SEIKITOKYU KOGYO CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥42.98B
• Operating Income: ¥2.22B
• Net Income: ¥1.50B
• EPS: ¥41.06

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

Q2 FY2026 was a solid profitability inflection despite softer top-line, with operating profit up sharply on improved margins and strong cash conversion. Revenue declined 3.8% YoY to 429.8, but operating income rose 47.3% to 22.2, lifting ordinary income 50.8% to 22.1 and net income 60.7% to 15.0. Gross profit reached 53.7, implying a 12.5% gross margin, while the operating margin was approximately 5.2% (22.22/429.83). Non-operating items were small (income 0.50 vs expenses 0.65) and had limited impact on ordinary income. Interest expense was modest at 0.42, and interest coverage was very strong at 52.9x, underscoring low financial risk from borrowing costs. Operating cash flow surged to 116.8, resulting in an OCF/Net Income of 7.77x, a hallmark of high earnings quality for the period. SG&A was 31.5; while a full breakdown is not disclosed, cost discipline appears to have supported the margin expansion given profits rose despite lower sales. On a margin basis, operating margin expanded materially YoY (exact bps not computable due to lack of prior-period margin data), and net margin improved to 3.5%. Equity increased to 415.9 with book value per share at 1,135 JPY. Liquidity is adequate with a current ratio of 144.7% and cash of 171.3 against short-term loans of 52.0, limiting near-term refinancing risk. However, ROIC stands at 4.9%, below the 5% threshold and well under typical construction/materials cost of capital benchmarks, signaling capital efficiency remains a structural challenge. The reported payout ratio of 224.1% suggests dividends may exceed earnings, but dividend details are not disclosed; caution is warranted on sustainability without full-year visibility. With revenue soft but profits up, the near-term outlook hinges on sustaining gross margin gains and project execution while navigating input-cost and weather seasonality. Overall, Q2 reads as an operational quality beat with robust cash generation, tempered by sub-target ROIC and limited dividend disclosure.

Profitability Analysis

ROE decomposition (DuPont): ROE 3.6% = Net Profit Margin 3.5% × Asset Turnover 0.545 × Financial Leverage 1.90x. The most notable change driver versus last year appears to be Net Profit Margin, given operating income rose 47.3% on a 3.8% revenue decline, implying significant margin lift. Business rationale: improved project mix/pricing and cost execution likely expanded gross margin and contained SG&A, while low interest burden preserved ordinary income. Sustainability: part of the margin improvement could be cyclical or seasonal (weather, project timing) in civil engineering/paving; sustaining current net margin depends on stable input costs (asphalt/bitumen) and disciplined bidding. Asset turnover at 0.545 is typical for asset-heavy construction services and unlikely to move dramatically short term; leverage at 1.9x is moderate and not the primary ROE lever this quarter. Watch-outs: absent SG&A breakdown, we cannot confirm whether personnel or subcontracting costs are creeping; if SG&A growth outpaces revenue in H2, operating leverage could reverse.

Growth Assessment

Top-line contracted 3.8% YoY to 429.8, indicating a softer demand or project timing effect, yet profit growth was robust with operating income up 47.3% and net income up 60.7%. The profit expansion was driven by higher gross profit conversion (12.5% gross margin) and contained overheads, translating to a ~5.2% operating margin. Non-operating items were minor and did not distort growth quality. With an OCF/NI of 7.77x, profit growth is supported by cash, suggesting genuine operational improvement rather than accruals. Outlook: revenue sustainability will depend on public works ordering cycles and private sector capex, while profit sustainability hinges on maintaining bid discipline and input cost pass-through. Given seasonality in road paving and weather sensitivity, H2 execution and backlog conversion are key. ROIC at 4.9% indicates that while quarterly profitability improved, structural returns remain below target and require continued asset productivity gains or portfolio optimization.

Financial Health

Liquidity: Current ratio 144.7% (adequate but slightly below the >150% comfort benchmark), and quick ratio reported equal to current ratio given undisclosed inventory figures; cash and deposits of 171.3 cover short-term loans of 52.0 comfortably. Solvency: Debt-to-equity 0.90x (within conservative bounds <1.5x), long-term loans 15.5 are modest; interest coverage 52.9x indicates strong ability to service debt. Working capital stands at 147.9, providing headroom for project execution. No explicit warnings: Current Ratio is >1.0 and D/E <2.0. Maturity mismatch risk appears low with cash exceeding short-term borrowings, though detailed debt maturity schedules are not disclosed. No off-balance sheet obligations were reported in the provided data; contingent liabilities (e.g., guarantees on JV projects) cannot be assessed from current disclosures.

Cash Flow Quality

Earnings quality is high with OCF/Net Income at 7.77x, indicating strong cash conversion and favorable working capital dynamics in the half. While full Investing CF is unreported, capex totaled 6.89; indicative FCF (OCF minus capex only) would be approximately 109.9 absent other investing flows, supporting ample internal funding capacity. Financing CF was -15.96, suggesting net repayments or dividends, but dividend cash out is unreported. No signs of working capital manipulation are evident from the summary; however, the absence of AR/AP/inventory details limits deeper assessment of DSO/DPO/DIO movements. Sustainability: Given construction seasonality, OCF can be volatile; monitoring H2 collection and retention releases is important.

Dividend Sustainability

Dividend details are not disclosed, but the provided payout ratio of 224.1% implies dividends in the period exceeded earnings, which is not sustainable over a full cycle if repeated. That said, cash generation in Q2 was strong, and indicative FCF (pre other investing flows) likely covers ordinary dividends if they are normalized. Visibility is low: annual DPS, interim DPS, and total dividend paid are unreported, and payout may reflect timing differences between interim dividends and half-year profits. Policy outlook depends on full-year earnings and cash needs for capex and working capital; with ROIC at 4.9%, prioritizing investments that lift returns may take precedence over elevated payouts.

Risk Assessment

Business Risks:

• Input cost volatility (asphalt/bitumen linked to crude oil) affecting gross margins
• Project timing and weather-related seasonality impacting revenue recognition
• Competitive bidding pressure in public works potentially compressing margins
• Labor shortages and subcontractor availability driving cost escalation
• Backlog visibility not disclosed, creating uncertainty on H2 sales

Financial Risks:

• ROIC at 4.9% below cost of capital, pressuring long-term value creation
• Potential dividend commitments exceeding earnings if payout remains elevated
• Working capital swings typical in construction could reverse OCF in H2
• Limited disclosure on investment securities and AR/AP increases uncertainty

Key Concerns:

• Sustaining margin gains with declining revenue
• Low capital efficiency despite strong cash in the half
• Dividend sustainability unclear due to lack of DPS disclosure

Investment Implications

Key Takeaways:

• Profitability inflected: operating income +47% YoY on -4% revenue shows effective cost/mix management
• High-quality earnings: OCF/NI 7.77x with strong interest coverage at 52.9x
• Liquidity sound with cash 171 vs short-term loans 52; refinancing risk low
• Capital efficiency remains a structural gap with ROIC at 4.9%
• Dividend visibility low; reported payout ratio of 224% warrants caution pending full-year

Metrics to Watch:

• Gross and operating margin trajectory (bps) in H2
• Order backlog and book-to-bill
• Asphalt/bitumen input prices and pass-through
• Working capital ratios (DSO/DPO) and OCF sustainability
• ROIC progression and capex discipline
• Net debt to EBITDA and interest coverage
• Dividend announcements and payout policy guidance

Relative Positioning: Within Japan’s civil engineering/road paving peers, the company demonstrates superior short-term cash conversion and conservative funding costs, but lags on structural capital efficiency (ROIC <5%). Sustained margin execution and backlog visibility will determine whether it can close the ROIC gap versus best-in-class peers.

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