NITTOC CONSTRUCTION CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥37.66B
• Operating Income: ¥1.79B
• Net Income: ¥1.19B
• EPS: ¥28.32

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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: Strong top-line and operating rebound in FY2026 Q2 with material margin expansion, but cash conversion lagged and free cash flow was likely negative, tempering quality. Revenue rose 25.4% YoY to 376.64, driven by improved project execution and volume recovery. Gross profit reached 66.73, implying a 17.7% gross margin, while operating income surged 295.8% YoY to 17.94. Ordinary income climbed 287.0% YoY to 18.66, supported by modest non-operating income of 1.12 (notably 0.86 in dividend income). Net income rose 402.4% YoY to 11.82, lifting net margin to 3.1%. Operating margin expanded sharply to approximately 4.8% from about 1.5% a year ago, a roughly 325 bps improvement. Net margin also expanded by about 236 bps YoY (from ~0.8% to ~3.1%). EBITDA came in at 22.96, giving a 6.1% EBITDA margin, reflecting better operating leverage as revenue scaled. Balance sheet strength remains a differentiator: current ratio at 225% and equity ratio implied around 60.6% (349.85/576.94), with negligible interest burden (interest expense 0.07; coverage 256x). However, earnings quality is mixed: OCF was 8.26 versus net income of 11.82 (OCF/NI 0.70x), and implied FCF (OCF minus capex) was approximately -2.01, indicating cash strain despite higher profits. The non-operating line was supportive but small relative to operating improvements, suggesting the core business drove the turnaround. ROE calculated at 3.4% still looks modest, constrained by a conservative capital structure and mid-single-digit net margins. ROIC at 6.2% trails the common 7–8% hurdle for value creation above the cost of capital, though the trajectory is improving with the profit rebound. Dividend sustainability is a watch item: the calculated payout ratio of 169.6% is high and inconsistent with negative implied FCF. Forward-looking, maintaining the improved operating margin while converting earnings to cash via tighter working capital will be key to sustaining dividends and funding capex. Overall, execution improved meaningfully, but cash conversion and ROIC need to catch up to solidify the recovery.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 3.1% × 0.653 × 1.65 ≈ 3.4%. The largest driver of YoY improvement was the net profit margin, which expanded by roughly 236 bps (to 3.1%), with operating margin expanding c. 325 bps (to ~4.8%) as operating income grew nearly 4x on a 25% revenue increase. Asset turnover at 0.653 reflects better utilization versus a subdued prior year, but the bigger lift came from operating leverage as SG&A ratio was contained at ~13% of sales. Financial leverage remains conservative at 1.65x (Assets/Equity), so ROE upside is predominantly earnings-driven rather than leverage-driven. Business reasons: higher project volumes and improved cost control (evidenced by the gap between revenue growth and the disproportionate rise in operating income) likely reduced fixed-cost dilution and improved site productivity. Sustainability: partial; volume and mix tailwinds can persist if order intake remains robust, but construction margins are cyclical and sensitive to input costs and project mix. One-time effects appear limited on the face of disclosures; non-operating gains were modest (non-operating income 1.12, primarily dividends 0.86), suggesting core-led improvement. Watch-outs: without SG&A YoY disclosure, we cannot confirm if SG&A growth exceeded revenue; however, the current SG&A/sales ratio of ~12.95% looks manageable. Keep monitoring if revenue growth slows while personnel and subcontracting costs normalize upward, which would compress margins.

Growth Assessment

Revenue growth of 25.4% YoY to 376.64 indicates strong demand recovery in core civil engineering/ground improvement activities. Operating income growth of 295.8% far outpaced sales, implying operating leverage and better project margins. Net income grew 402.4% to 11.82, aided modestly by non-operating income but primarily by operating gains. Margin expansion appears broad-based (gross and operating), consistent with improved execution and pricing/mix. Sustainability hinges on backlog quality and bid discipline; any slowdown in public works/private development or input cost inflation could narrow margins. Non-operating contributions are small (dividends 0.86), pointing to recurring operations as the main profit engine. Outlook: if current margin discipline holds, mid-single-digit operating margins look achievable; however, cash conversion must improve to support growth investments. ROIC at 6.2% is improving but remains below common 7–8% targets; sustained higher margins or asset efficiency gains are needed to close the gap.

Financial Health

Liquidity is strong: current assets 403.00 vs current liabilities 178.79 yield a current ratio of 225.4% and quick ratio of 225.2%, well above benchmarks. No warning on current ratio (<1.0) or D/E (>2.0); D/E is 0.65x, conservative for the sector. Equity ratio is implied at ~60.6% (349.85/576.94), indicating a solid capital base. Interest-bearing debt detail is limited, but long-term loans are just 4.35; interest expense is minimal (0.07), and interest coverage is very strong at 256x. Maturity mismatch risk appears low given large cash and deposits (165.35) relative to current liabilities, and ample working capital of 224.21. Off-balance-sheet obligations were not disclosed; no information on guarantees or long-term commitments was provided.

Cash Flow Quality

OCF/Net Income is 0.70x, below the 0.8 threshold, suggesting weaker cash conversion, likely from working capital outflows tied to growth. With capex of 10.27 and OCF of 8.26, implied free cash flow is approximately -2.01, indicating internal cash generation did not cover investment needs in the period. Financing CF of -11.86 suggests cash was returned to stakeholders and/or debt was repaid; dividend details are unreported, but the calculated payout ratio indicates cash distributions likely exceeded earnings capacity. No signs of overt working capital manipulation are evident from disclosed line items, but the OCF shortfall amid profit surge warrants monitoring of receivables and unbilled construction balances (not disclosed). Sustainability: absent stronger OCF, continued capex and dividends could pressure cash balances over time despite the currently large cash position.

Dividend Sustainability

The calculated payout ratio of 169.6% is high and not covered by earnings, and implied FCF was negative (~-2.01), indicating weak coverage from internal cash flow this period. While the balance sheet is liquid, sustaining a payout above earnings and FCF would erode cash over time. Policy signals are not disclosed for this quarter; if management targets stable dividends, near-term sustainability depends on improving OCF via collections and project cash advances. With ROE at 3.4% and ROIC at 6.2%, elevated payouts could also constrain reinvestment needed to lift returns. Near-term conclusion: dividends look defensible only if cash conversion normalizes and FCF turns positive; otherwise, payout risk rises.

Risk Assessment

Business Risks:

• Project execution and cost overrun risk in civil engineering works
• Cyclical demand risk in public works and private development
• Input cost inflation (materials, subcontracting) compressing margins
• Labor availability and wage pressure affecting site productivity
• Order backlog visibility and bid discipline risk (data not disclosed)

Financial Risks:

• Earnings quality: OCF/NI at 0.70x indicates weak cash conversion
• Negative implied FCF (~-2.01) despite higher profits
• Dividend coverage risk given a 169.6% calculated payout
• Potential working capital build tied to growth (receivables/unbilled not disclosed)

Key Concerns:

• ROIC at 6.2% below typical 7–8% hurdle; value creation not yet robust
• Margin gains may be sensitive to mix and input costs, risking reversal
• Limited disclosure on SG&A components and order backlog constrains visibility

Investment Implications

Key Takeaways:

• Strong revenue rebound (+25.4% YoY) with outsized operating profit growth (+295.8%) and ~325 bps operating margin expansion
• Core operations drove earnings; non-operating contribution modest (1.12, mostly dividends)
• Cash conversion lagged (OCF/NI 0.70x) and implied FCF negative (~-2.01)
• Balance sheet is robust (current ratio 225%, equity ratio ~61%) with minimal interest burden
• ROE 3.4% and ROIC 6.2% indicate improving but still moderate returns; further efficiency gains needed
• Dividend sustainability questionable if cash conversion does not improve, given a high calculated payout ratio

Metrics to Watch:

• Order backlog and book-to-bill (not disclosed)
• OCF/Net Income and working capital days (DSO/DPO; receivables/unbilled balances)
• Gross and operating margin trajectory vs input cost trends
• Capex and maintenance vs growth split
• ROIC progress toward 7–8% target
• Dividend policy disclosures and cash payout vs FCF

Relative Positioning: Within Japanese mid-cap construction/civil engineering peers, the company currently exhibits stronger liquidity and very low financial risk, with a notable rebound in profitability. However, returns (ROE/ROIC) remain mid-tier and cash conversion trails better-in-class peers who consistently generate positive FCF through the cycle.

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