SEIKITOKYU KOGYO (1898) FY2027 Q1 Earnings Report

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Executive Summary

This quarter resulted in a decline in revenue, operating income, and a significant contraction in net income due to deteriorating profitability in the Construction Business and an increase in the effective tax rate. Revenue was ¥197.3B (down -3.2% YoY), Operating Income was ¥4.6B (down -22.8%), Ordinary Income was ¥4.4B (down -24.6%), and quarterly Net Income attributable to owners of the parent was ¥2.1B (down -49.5%). The decline in Operating Income and below was significantly larger than the decrease in revenue, with Net Income in particular compressed beyond the level implied by earnings progress due to the increased tax burden.

Factors Affecting Earnings

【Revenue】Revenue was ¥197.3B, down -3.2% YoY. The Construction Business, which accounts for 65.0% of revenue, declined by -5.2% and weighed on the overall result, while the Paving Materials Manufacturing and Sales Business, which accounts for 33.9% of revenue, increased by +4.1%, partially offsetting the decline. The decrease in the Construction Business was mainly attributable to lower completed construction revenue, while the Paving Materials Business appears to have benefited from improvements in selling prices and volume.

【Profit and Loss】Operating Income was ¥4.6B, down -22.8% YoY, and the Operating Margin declined to 2.3% (2.9% in the same period last year). The gross margin was nearly flat at 10.7% (10.8% in the same period last year), but the SG&A ratio increased from 7.9% to 8.4%, putting pressure on profits. By segment, Operating Income in the Construction Business declined by -15.5% (margin of 5.9%, compared with 6.7% in the same period last year), indicating deteriorating profitability, while the Paving Materials Manufacturing and Sales Business improved by +20.3% (margin of 7.7%). The profitability trends of the two businesses are therefore contrasting. Ordinary Income declined by 4.4B (-24.6%), broadly in line with the decrease in Operating Income, while Net Income was significantly compressed to 2.1B (-49.5%). The main reason for this difference was the sharp increase in the effective tax rate from 27.9% in the previous year to 51.0%; the impact of extraordinary items, including a loss on disposal of fixed assets of 0.05B, was minor. Overall, this was a decline in both revenue and earnings, reflecting the combined effects of lower revenue, deteriorating core-business profitability, and a higher tax burden.

Segment Analysis

The Construction Business reported revenue of 149.2B (down -5.2% YoY), Operating Income of 8.8B (down -15.5%), and a margin of 5.9% (6.7% in the same period last year), indicating deteriorating profitability. The Paving Materials Manufacturing and Sales Business reported revenue of 77.8B (up +4.1%), Operating Income of 6.0B (up +20.3%), and an improved margin of 7.7% (6.4% in the same period last year), partially offsetting the decline in earnings from the Construction Business. Other Businesses, including the electricity sales business, remained small, with revenue of 2.5B (down -1.2%) and Operating Income of 0.4B (down -21.4%). Adjustments for the head office and administrative divisions (corporate expenses) amounted to △10.7B, widening from △10.0B in the previous year and further weighing on the increase in the segment total.

Key Financial Indicators

【Profitability】The Operating Margin declined to 2.3% (2.9% in the same period last year), while the Net Profit Margin declined to 1.1% (2.1% in the same period last year). The effective tax rate rose to 51.0% (27.9% in the same period last year). 【Cash Flow Quality】Accounts receivable for completed construction contracts decreased to 226.8B (338.9B in the previous year, -33.1%), while advances received on construction contracts in progress increased to 23.6B (16.4B in the previous year, +44.0%). The progress in collections and accumulation of advance payments supported capital efficiency. 【Investment Efficiency】ROE was 0.5%, basic EPS was ¥5.81 (¥11.54 in the previous year, -49.7%), and BPS was ¥1,175.75 (¥1,207.01 in the previous year, -2.6%). 【Financial Soundness】The Equity Ratio was 55.0% (52.3% in the previous year, +2.7pt), and cash and deposits were 193.7B (144.4B in the previous year, +34.2%). Net cash was approximately 126.9B against long-term borrowings of 64.8B and short-term borrowings of 2.0B, indicating a strong liquidity position.

Cash Flow Analysis

Although the Company did not separately disclose a cash flow statement for the quarter, changes in balance sheet items provide insight into cash movements. Cash and deposits were 193.7B, an increase of +49.3B from 144.4B in the same period last year. The primary factor was progress in collections, as accounts receivable for completed construction contracts decreased by -112.1B from 338.9B to 226.8B. In addition, advances received on construction contracts in progress increased by +7.2B from 16.4B to 23.6B, with the strengthening of the advance-payment structure also contributing to the accumulation of funds. Meanwhile, costs incurred on construction contracts in progress increased from 1.2B to 2.6B, indicating that some upfront expenditures associated with construction progress were incurred. Overall, the primary driver of the increase in cash appears to have been a change toward working capital compression.

Quality of Earnings

The quarter’s earnings were driven largely by core-business factors, with the impact of temporary factors limited. Non-operating income was 0.1B and non-operating expenses were 0.3B, both remaining below 0.2% of revenue. Extraordinary losses consisted solely of a loss on disposal of fixed assets of 0.05B, while extraordinary income was nearly zero; these items were not the primary cause of the divergence between Ordinary Income and Net Income. The significantly larger decline in Net Income (2.1B, -49.5%) compared with Ordinary Income (4.4B, -24.6%) was due to the sharp increase in the effective tax rate from 27.9% in the previous year to 51.0%. Comprehensive Income was 1.7B, below Net Income of 2.1B, with the -0.5B adjustment related to retirement benefits exceeding the +0.1B valuation difference on securities, thereby making other comprehensive income negative. Overall, the change in earnings for the period depended heavily on an element with a non-recurring nature, namely changes in the tax burden. It is important to note that tax-related factors, rather than the underlying earning power of the core business, determined the quality of final profit.

Earnings Forecast and Guidance

Progress against the full-year Company plan was 19.2% for revenue (197.3B/1,027.0B), 6.9% for Operating Income (4.6B/67.0B), 6.7% for Ordinary Income (4.4B/66.0B), and 4.5% for Net Income (2.1B/47.0B). Compared with standard quarterly progress of 25%, revenue was -5.8pt behind, while the profit indicators were -18~-21pt behind, indicating particularly significant delays on the earnings front. In the construction industry, completion and handover of projects tend to be concentrated in the second half, and seasonal effects may therefore be expected. However, achieving the full-year plan will require improved profitability and a leveling of the tax burden from Q2 onward. As of the quarter-end, no revisions had been made to the earnings forecast or dividend forecast.

Shareholder Returns

The Company forecasts an annual dividend of ¥75, with no revision to the dividend forecast as of the quarter-end. The Payout Ratio against the Company’s planned EPS of ¥128.3 is approximately 58.5%. Compared with the previous period’s dividend of ¥35, the current plan represents an increase to ¥75. Although Net Income progress remains low at 4.5%, the Equity Ratio of 55.0% and net cash of approximately 126.9B indicate a strong financial buffer, supporting the dividend funding capacity.

Risk Factors

1. Deteriorating profitability in the Construction Business: The Operating Margin of the Construction Business was 5.9%, down -0.8pt from 6.7% in the same period last year. The likely factor was a delay in passing higher costs and subcontracting expenses on to customers, making improvement over the full year a key issue.

2. Pressure on Net Income from the higher effective tax rate: The effective tax rate was 51.0%, up +23.1pt from 27.9% in the previous year. The Net Profit Margin declined to 1.1% (2.1% in the previous year), and if the elevated tax burden continues, it could affect the likelihood of achieving the full-year Net Income plan of 47.0B.

3. Delayed progress against the full-year earnings plan: The progress rate for Operating Income was 6.9% and that for Net Income was 4.5%, both significantly below standard quarterly progress of 25%. Even considering the seasonality of earnings being weighted toward the second half, recovery in profitability from Q2 onward is a prerequisite for achieving the plan.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (construction)

Profitability and Return

Growth and Capital Efficiency

※Source: Company compilation

Key Points from the Earnings Results

1. Profitability in the Construction Business (65.0% of revenue) deteriorated, while profitability in the Paving Materials Manufacturing and Sales Business (33.9% of revenue) improved, creating a clear contrast. Changes in the earnings structure between segments will determine the Company-wide margin going forward.

2. The sharp increase in the effective tax rate from 27.9% in the previous year to 51.0% was the primary factor pushing Net Income down -49.5% YoY. The larger decline in Net Income than in Operating Income and Ordinary Income (-22.8%/-24.6%) can be attributed to the impact of tax-related factors.

3. The conservative financial base, consisting of an Equity Ratio of 55.0% and net cash of approximately 126.9B, provides a near-term buffer against the delayed progress of full-year earnings (Operating Income 6.9%, Net Income 4.5%).

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly available data using a residual income model (Ohlson-type, explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,225–¥1,294 at ±1% for the Cost of Equity, and ¥1,257–¥1,261 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This figure does not predict or guarantee the future share price)

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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 security. The industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 performance was weak versus the prior-year quarter, with lower construction revenue, margin compression and a disproportionately sharp decline in net income. Consolidated revenue declined 3.2% YoY to ¥19.73bn. Operating income fell 22.8% YoY to ¥0.46bn, while ordinary income declined 24.6% to ¥0.44bn. Net income attributable to owners of parent dropped 49.6% YoY to ¥0.21bn. The operating margin contracted by approximately 60bp YoY to 2.3% from 2.9%. Gross margin eased by approximately 8bp to 10.7% from 10.8%, indicating that most of the operating-margin deterioration came from overhead absorption rather than a severe gross-profit collapse. SG&A expenses increased 3.2% YoY to ¥1.66bn despite the decline in revenue, lifting the SG&A-to-sales ratio by roughly 52bp to 8.4%. Construction remained the core business by segment profit, generating ¥0.89bn, but its revenue declined 5.2% YoY and segment profit fell 15.5%. Pavement-material manufacturing and sales delivered a relative bright spot, with segment profit rising 20.3% YoY to ¥0.60bn and segment margin improving. Corporate and other unallocated expenses increased to ¥1.07bn from ¥1.00bn, further limiting consolidated operating-profit conversion. The effective tax rate rose to 51.0% from approximately 27.7% in the prior-year quarter, amplifying the decline from pre-tax profit to net income. This elevated tax burden is a material earnings-quality issue for the quarter because the tax burden factor fell to 0.490. Financial liquidity remains strong, supported by ¥19.37bn of cash, a 175.9% current ratio and only ¥0.20bn of short-term borrowings. The balance sheet also shows modest interest-bearing debt relative to equity, with total interest-bearing debt of ¥6.68bn versus ¥43.07bn of equity. Management’s full-year plan calls for 7.8% revenue growth and 4.4% operating-income growth, implying a substantial earnings concentration in later quarters. Q1 progress was 19.2% for revenue but only 6.9% for operating income and 4.5% for net income versus the full-year plan. The investment case will therefore depend on recovery in construction execution, improved headquarters-cost absorption and normalization of the tax burden through the remainder of the fiscal year.

Profitability Analysis

Annualized DuPont ROE is 2.0%, comprising a 1.1% net profit margin, 1.008x asset turnover and 1.82x financial leverage. The principal constraint on returns is profitability rather than asset utilization or balance-sheet leverage: the 1.1% net margin is low and the annualized ROE is well below conventional cost-of-equity expectations. EBIT margin was 2.3%, below the 5% efficiency benchmark, and operating margin fell about 60bp YoY as revenue declined while SG&A increased. Gross margin declined only modestly, by about 8bp YoY, from approximately 10.8% to 10.7%; thus, the principal earnings pressure was operating leverage and higher corporate-cost absorption. SG&A rose to ¥1.66bn from ¥1.61bn, while revenue declined to ¥19.73bn from ¥20.38bn, causing SG&A growth to materially exceed revenue growth. The construction segment's profit margin, calculated against segment revenue including internal sales, improved modestly to 5.9% from 4.5%, but lower construction volume reduced segment profit to ¥0.89bn. Pavement-material manufacturing and sales improved its segment profit margin to 7.7% from 6.6%, supported by profit growth to ¥0.60bn on segment revenue growth of 4.1%. The latter segment’s margin resilience partly offset construction weakness but was insufficient to cover the increase in unallocated headquarters expenses. The tax burden factor of 0.490 was the largest additional drag below operating profit, with income-tax expense of ¥0.22bn against ¥0.44bn of profit before tax. Interest burden was healthy at 0.944 and interest coverage was strong at 19.21x, indicating that financing costs are not the source of weak profitability. The low 10.7% gross margin is a relevant construction-industry risk because relatively small shifts in project pricing, material procurement costs or subcontractor costs can have an outsized effect on operating income. Reported ROIC of 3.0% is also below the 5% benchmark, indicating that operating returns on the capital base remain subdued.

Growth Assessment

Revenue declined 3.2% YoY in Q1, led by a 5.2% decline in external construction revenue to ¥14.92bn. In contrast, pavement-material manufacturing and sales external revenue rose 3.9% YoY to ¥4.79bn, demonstrating relative resilience in this business. Construction segment profit nevertheless fell 15.5% YoY to ¥0.89bn, showing that lower project volume was not fully offset by segment-margin improvement. Pavement-material segment profit increased 20.3% YoY to ¥0.60bn, making it the principal positive contributor within the operating portfolio. Consolidated operating income declined more rapidly than revenue because the benefit from pavement-material profitability was outweighed by reduced construction contribution and higher headquarters costs. The full-year forecast targets revenue of ¥102.70bn, operating income of ¥6.70bn, ordinary income of ¥6.60bn and net income of ¥4.70bn. Q1 revenue progress is 19.2%, 5.8 percentage points below the standard 25% first-quarter pace. Operating-income progress is 6.9%, 18.1 percentage points below the standard pace, while net-income progress is 4.5%, 20.5 percentage points below it. The forecast therefore requires a pronounced improvement in profitability after Q1, rather than merely a recovery in revenue. For a construction contractor, quarterly revenue and profit recognition can be uneven as projects progress and are completed; however, the current starting point elevates the importance of project execution and cost control in subsequent quarters. The company has not revised its full-year earnings or dividend forecast.

Financial Health

Liquidity is sound. Current assets of ¥46.39bn exceeded current liabilities of ¥26.38bn, producing working capital of ¥20.01bn and a current ratio of 175.9%. The quick ratio was also 175.9%, reflecting a highly liquid current-asset composition rather than reliance on inventory liquidation. Cash and deposits increased 34.2% YoY to ¥19.37bn and represented 24.7% of total assets. Short-term loans were only ¥0.20bn, and cash covered short-term borrowings by 95.89x. Interest-bearing debt totaled ¥6.68bn, consisting primarily of ¥6.48bn in long-term loans, so maturity mismatch risk appears limited given the cash balance and current ratio. Debt to capital was 13.4%, which is conservative. The reported debt-to-equity ratio was 0.82x, below the 2.0x level that would indicate aggressive leverage; on an interest-bearing-debt basis, borrowings were also modest relative to equity. Interest coverage of 19.21x provides substantial headroom for current interest obligations. Equity declined 2.6% YoY to ¥43.07bn, while the equity ratio improved to 55.0% from 52.3%, principally because total assets and liabilities contracted more rapidly than equity. Property, plant and equipment accounted for 33.0% of assets, including ¥14.76bn of land and ¥13.57bn of buildings, giving the company a meaningful fixed-asset base. Defined-benefit liabilities of ¥2.30bn and construction-related provisions, including ¥0.37bn for loss on construction contracts, remain relevant obligations to monitor in project-risk assessment.

Notable B/S Changes

Cash and deposits: +¥4.93bn (+34.2%) YoY to ¥19.37bn - materially strengthens liquidity and provides substantial coverage of short-term borrowings. Construction receivables: -¥11.21bn (-33.1%) YoY to ¥22.68bn - lower receivables reduced current assets but may reflect collection progress and/or project billing timing. Current liabilities: -¥5.10bn (-16.2%) YoY to ¥26.38bn - the liability reduction, together with higher cash, improved the current ratio to 175.9%. Advances received on uncompleted construction contracts: +¥0.72bn (+44.0%) YoY to ¥2.36bn - increased customer advances support project funding and reduce working-capital requirements. Electronic payables: -¥1.51bn (-28.6%) YoY to ¥3.78bn - lower supplier-financing obligations contributed to the decline in current liabilities. Provision for bonuses: -¥0.84bn (-48.0%) YoY to ¥0.91bn - reduces current liabilities and should be monitored as a seasonal compensation-accrual movement. Income taxes payable: -¥0.83bn (-92.9%) YoY to ¥0.06bn - reflects substantially lower accrued tax obligations than the prior-year period.

Cash Flow Quality

Dividend Sustainability

The full-year dividend forecast is ¥75 per share, unchanged from the company forecast. Against forecast EPS of ¥128.30, the implied dividend payout ratio is approximately 58.5%. This is within the 60% sustainability benchmark, although it leaves limited room for a prolonged shortfall versus the full-year earnings plan. Q1 EPS was ¥5.81, so the first-quarter earnings run rate alone is materially below the full-year EPS target and underscores the need for a significant second-half earnings recovery. The company’s liquidity position provides balance-sheet support, with ¥19.37bn of cash and deposits and low short-term debt. Retained earnings of ¥390.29bn also provide a substantial accumulated capital buffer. Dividend sustainability will be most sensitive to the delivery of the ¥4.70bn full-year net-income forecast and to whether the elevated Q1 tax burden normalizes.

Risk Assessment

Business risks include Construction execution risk: construction external revenue declined 5.2% YoY to ¥14.92bn and segment profit declined 15.5% to ¥0.89bn; recovery in project volume and profitability is necessary to meet the full-year plan., Low-margin project risk: consolidated gross margin was 10.7% and EBIT margin was 2.3%, leaving earnings sensitive to fixed-price contract cost overruns, subcontractor pricing and changes in asphalt, aggregate, fuel and other material costs., Labor and subcontractor availability risk: Japan's construction sector faces skilled-labor constraints, and higher labor or subcontracting costs could pressure margins where contractual price pass-through is delayed., Public-works and infrastructure spending-cycle risk: a meaningful portion of road and paving demand is exposed to public infrastructure budgets, tender conditions and project timing., Weather and natural-disaster risk: adverse weather can delay paving and civil-engineering work, defer revenue recognition and reduce equipment utilization..

Financial risks include High tax burden: the Q1 effective tax rate was 51.0%, with a tax burden factor of 0.490. This reduced net income to ¥0.21bn despite ¥0.44bn of pre-tax profit, making earnings more volatile if the elevated rate persists., Forecast execution risk: Q1 operating-income progress was only 6.9% against a standard 25% first-quarter pace, requiring a substantial improvement in subsequent quarters to achieve the ¥6.70bn full-year operating-income forecast., Return-on-capital risk: annualized ROE was 2.0% and reported ROIC was 3.0%, both reflecting low current capital productivity., Corporate-cost absorption risk: unallocated headquarters costs increased 4.7% YoY to ¥1.07bn despite lower revenue, weakening consolidated operating leverage..

Key concerns include HIGH_TAX_BURDEN: The 51.0% effective tax rate materially exceeded the normal corporate tax range and was the main reason net income declined faster than operating and ordinary income. Its persistence would impair EPS and dividend-coverage headroom., LOW_OPERATING_EFFICIENCY: EBIT margin of 2.3% is below the 5% benchmark. The low margin makes consolidated earnings highly sensitive to modest changes in revenue, construction cost inflation and head-office expenses., CAPITAL_EFFICIENCY: ROIC of 3.0% is below the 5% benchmark, indicating that current operating earnings are not generating a strong return on the capital employed., LOW_GROSS_MARGIN: The 10.7% gross margin underscores limited project-cost headroom. Construction loss provisions increased to ¥0.37bn from ¥0.20bn, which warrants monitoring as an indicator of potentially difficult projects., Working-capital timing remains important: construction receivables declined ¥11.21bn YoY to ¥22.68bn, while advances received on uncompleted construction contracts increased ¥0.72bn to ¥2.36bn. These movements support liquidity but require continued monitoring alongside project progress and billing collections..

Investment Implications

Key takeaways include Q1 earnings weakened materially, with revenue down 3.2%, operating income down 22.8% and net income down 49.6% YoY., The operating-margin decline to 2.3% was driven primarily by higher SG&A intensity and increased unallocated corporate costs rather than a major gross-margin deterioration., Pavement-material manufacturing and sales improved segment profit by 20.3% YoY, partially offsetting weaker construction activity., Liquidity and debt-service capacity are strong, supported by a 175.9% current ratio, ¥19.37bn of cash and 19.21x interest coverage., The unchanged full-year plan requires material back-end loading, particularly for operating profit and net income..

Metrics to watch include Construction segment revenue and segment profit trend, Consolidated operating margin and SG&A-to-sales ratio, Pavement-material segment margin and volume development, Construction loss provision and warranty provision movements, Effective tax rate and the tax burden factor, Progress against the ¥102.70bn revenue and ¥6.70bn operating-income forecasts, Construction receivables, advances received and cash balance.

Regarding relative positioning, The company combines a conservative liquidity and debt profile with weak current profitability. Relative to construction-industry peers, the balance sheet provides resilience against cyclical volatility, but annualized ROE of 2.0%, ROIC of 3.0% and a 2.3% EBIT margin indicate that improved project profitability and overhead absorption are needed to strengthen return-based positioning.