FUKUDA (1899) FY2026 Q2 Earnings Report

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Executive Summary

The Company achieved higher revenue, higher profit, and substantial profit growth, primarily due to revenue growth and improved profitability in the Construction Business. Revenue was ¥888.6B (+14.7% YoY), Operating Income was ¥58.2B (+61.8%), Ordinary Income was ¥60.7B (+59.8%), and Net Income was ¥43.9B (+68.8%). Profit growth significantly exceeding the revenue growth rate indicates the effect of operating leverage resulting from the expansion of construction work and a decline in the SG&A ratio.

Factors Affecting Performance

【Revenue】Revenue was ¥888.6B (+14.7% YoY). By segment, Construction generated ¥871.4B (+14.3% YoY, 98.1% of total), Real Estate generated ¥14.3B (+36.5%), and Other generated ¥3.4B (+3.3%). Within the Construction Business, Building Construction led growth with ¥491.1B (+24.8%), while Civil Engineering Construction increased only modestly to ¥321.6B (+2.7%).

【Profit and Loss】Operating Income was ¥58.2B (+61.8% YoY), and the Operating Margin improved to 6.5% from 4.6% in the same period of the previous year. The Construction segment led performance with segment profit of ¥56.6B (+63.5%, margin of 6.5%), while the Real Estate margin declined to 15.1% from the 18% range in the previous year. The Gross Profit Margin improved to 12.4% from 11.0%, while the SG&A ratio declined to 5.8% from 6.4%, confirming fixed-cost absorption driven by revenue growth. Ordinary Income of ¥60.7B (+59.8%) reflected net non-operating income, including ¥1.8B in dividend income. Extraordinary income of ¥2.7B, including gains on the sale of fixed assets, was included as a temporary factor and contributed to Net Income of ¥43.9B (+68.8%). In conclusion, both revenue and profit increased.

Segment Analysis

Construction led consolidated performance in both revenue and profit growth, with revenue of ¥871.4B (98.1% of total, +14.3% YoY) and Operating Income of ¥56.6B (+63.5%, margin of 6.5%). Real Estate revenue increased substantially to ¥14.3B (+36.5%), but Operating Income remained at ¥2.2B (+14.3%), with the margin declining to 15.1% from the 18% range in the previous year; changes in the property mix or sales conditions may have pressured profitability. Other Businesses were essentially flat, with revenue of ¥3.4B (+3.3%) and a decline in profit to ¥0.2B (-12.5%).

Key Financial Indicators

【Profitability】The Operating Margin of 6.5% (4.6% in the previous year), Gross Profit Margin of 12.4% (11.0% in the previous year), and Net Profit Margin of 4.9% (3.3% in the previous year) all improved, supported by fixed-cost absorption from revenue growth. 【Cash Quality】Operating Cash Flow (OCF) of ¥149.5B reached approximately 3.4 times Net Income of ¥43.9B, indicating strong cash generation relative to accounting profit; however, attention is required because changes in working capital, including the collection of accounts receivable for completed construction contracts and an increase in construction-related accounts payable, made a significant contribution. 【Investment Efficiency】ROE (annualized) was 9.4%, primarily due to improvements in the Operating Margin and Net Profit Margin, with low dependence on financial leverage. 【Financial Soundness】The Equity Ratio was 59.6%. Against cash and deposits of ¥425.6B, interest-bearing debt was relatively small at approximately ¥8.5B, indicating a solid financial foundation.

Cash Flow Analysis

OCF was ¥149.5B, a substantial increase of +113.3% compared with the same period of the previous year, and was well above Net Income of ¥43.9B. This increase was supported by working capital factors, including the collection of accounts receivable for completed construction contracts (+¥40.6B), an increase in construction-related accounts payable and other items (+¥39.2B), and an increase in advances received on uncompleted construction contracts. It should be noted that cash generation at the same level may not continue throughout the full year. Investing Cash Flow was limited to an outflow of ¥7.9B, mainly consisting of ¥7.4B in capital expenditures, resulting in positive Free Cash Flow of ¥141.6B. Financing Cash Flow was an outflow of ¥24.2B, mainly due to dividend payments of ¥21.7B, while OCF and Free Cash Flow were sufficient to cover dividends and capital expenditures. Cash and deposits accumulated to ¥425.6B, further strengthening financial flexibility.

Earnings Quality

The primary driver of the increase in Net Income was improved profitability in the core business; however, Net Income included ¥2.7B in extraordinary income, including gains on the sale of fixed assets, and it should be noted that part of the increase in Net Income was attributable to temporary factors. Non-operating income was ¥3.0B, mainly consisting of ¥1.8B in dividend income, exceeding non-operating expenses of ¥0.5B and resulting in Ordinary Income exceeding Operating Income. OCF of ¥149.5B reached approximately 3.4 times Net Income, indicating limited accruals and strong cash backing for earnings; however, the underlying amount includes significant timing effects related to working capital, such as the collection of accounts receivable for completed construction contracts and increases in construction-related accounts payable and advances received. Comprehensive Income was ¥49.9B, slightly exceeding Net Income of ¥43.9B, with a positive impact of ¥5.7B from valuation differences on securities. The divergence between Net Income and Comprehensive Income was not significant.

Earnings Forecasts and Guidance

The full-year Company forecast is Revenue of ¥1,905.0B (+13.4% YoY), Operating Income of ¥93.0B (+19.7%), and Ordinary Income of ¥96.0B (+18.1%). Progress against the full-year forecast was 46.6% for Revenue, 62.6% for Operating Income, and 63.3% for Ordinary Income. Compared with the typical first-half progress benchmark of 50%, Revenue was slightly below the benchmark, while profit progress was substantially ahead. This indicates that profitability improvements in the first half progressed beyond expectations; however, in the construction industry, second-half profitability tends to fluctuate depending on construction progress and completion timing. Whether the high first-half progress can be maintained throughout the full year will depend on project-level cost management. In addition, revisions to the earnings forecast and dividend forecast were made during the quarter.

Shareholder Returns

The full-year dividend forecast is ¥140 per share (after taking into account the 1-for-2 stock split effective July 1, 2026; equivalent to ¥280 before the split). The Payout Ratio against full-year forecast EPS of ¥390.24 is approximately 35.9%, a level considered sustainable. Cash dividends paid during the first half totaled ¥21.7B and were sufficiently covered by first-half OCF of ¥149.5B and Free Cash Flow of ¥141.6B. Share repurchases were negligible (approximately ¥0.0B), making dividends the primary form of shareholder returns. The Total Return Ratio, including share repurchases, was only approximately 15% relative to first-half Free Cash Flow.

Risk Factors

1. Low gross margin: Although the Gross Profit Margin improved to 12.4% from 11.0% in the previous year, it remains below the general quality benchmark of 20%. If material prices, labor costs, or outsourcing costs increase, or if cost overruns occur on fixed-price projects, the improvement in the 6.5% Operating Margin could be readily compressed.

2. Profitability volatility due to concentration in Building Construction: Revenue from Building Construction, the primary driver of revenue growth, increased substantially by +24.8% YoY. Delays in the construction schedules of large projects, design changes, or additional costs could reverse the improvement in earnings.

3. Working capital and collection risk: Accounts receivable for completed construction contracts was substantial at ¥595.1B, and delays in payment timing or acceptance inspections by clients could cause OCF volatility. In addition, while the Real Estate segment’s revenue increased by +37.4%, its margin declined from the previous year, and the property mix and sales conditions may constrain future profit growth.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Returns

The Company’s Operating Margin and Net Profit Margin both substantially exceed the industry median, placing its profitability at a high level within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate exceeds the industry median but does not reach the upper end of the industry IQR (18.3%); while at a high level, it is not an outlier.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Operating Income increased substantially by +61.8% against Revenue growth of +14.7%, with operating leverage from the expansion of Building Construction and the decline in the SG&A ratio serving as the central drivers of performance improvement.

2. First-half progress against the full-year forecast was 46.6% for Revenue, compared with 62.6% for Operating Income and 68.4% for Net Income, indicating that profit performance was ahead. As of the first half, the Company had secured substantial progress toward its profit forecasts. However, it is necessary to consider that Net Income includes the temporary factor of ¥2.7B in extraordinary income.

3. Although the Gross Profit Margin of 12.4% is improving, its absolute level remains low. Together with collection trends for accounts receivable for completed construction contracts of ¥595.1B, fluctuations in project profitability are a structurally important focus for second-half performance.

Theoretical Share Price (Reference Value)

Sensitivity: ¥5,192–¥5,493 for ±1% in the Cost of Equity, and ¥5,328–¥5,347 for ±0.1 in ω.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Valuation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market share price or a recommendation of any specific investment action, nor does it 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 summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional adviser as necessary.

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