NITTOC CONSTRUCTION CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The quarter recorded increases in both revenue and earnings, with the key highlight being the improvement in the operating margin, primarily driven by greater efficiency in SG&A expenses. Revenue was ¥185.3B (+7.1% YoY), Operating Income was ¥7.7B (+52.2%), Ordinary Income was ¥8.4B (+47.7%), and Net Income was ¥4.8B (+32.5%). In addition to growth in completed construction revenue, the decline in the SG&A ratio to 12.7% (14.0% in the previous year) contributed to the earnings increase. However, a foreign exchange loss of ¥0.3B and an impairment loss of ¥0.6B weighed on profit before tax.

Factors Affecting Performance

【Revenue】Revenue increased 7.1% YoY to ¥185.3B. Completed construction revenue grew to ¥184.9B (+7.3%), primarily due to an increase in construction progress. The Company has a single segment, the Construction Business, and does not disclose a breakdown by business.

【Profit and Loss】The gross margin was 16.8%, virtually unchanged from 16.9% in the previous year. However, the improvement in the SG&A ratio to 12.7% (14.0% in the previous year) lifted the operating margin to 4.1% (approximately 3.0% in the previous year). In non-operating items, dividend income of ¥0.9B supported Ordinary Income, while an impairment loss of ¥0.6B was recorded as an extraordinary loss, limiting the growth in profit before tax to the 32.5% increase in Net Income. Both revenue and earnings increased.

Key Financial Indicators

【Profitability】The operating margin improved to 4.1%, while the net profit margin rose to 2.6% (2.1% in the previous year). The gross margin was 16.8%, virtually unchanged from 16.9% in the previous year, indicating that structural improvement on the cost side remains limited. 【Cash Flow Quality】Dividend income of ¥0.9B represents a stable source of revenue, while the foreign exchange loss of ¥0.3B and impairment loss of ¥0.6B placed pressure on profit before tax as non-recurring items. 【Investment Efficiency】ROE was 1.3%, and the Equity Ratio was 62.6% (60.4% in the previous year), indicating a conservative financial foundation despite low capital efficiency. EPS was ¥11.16 (¥8.68 in the previous year, +28.6%), and BPS was ¥886.43. 【Financial Soundness】Against cash and deposits of ¥186.9B, long-term borrowings stood at only ¥3.1B, indicating a substantial net cash position. Current assets of ¥411.0B significantly exceeded current liabilities of ¥176.8B, and there are no concerns regarding short-term liquidity.

Cash Flow Analysis

As the Company does not disclose a cash flow statement, cash trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥186.9B, an increase of ¥9.5B from ¥177.3B at the end of the previous fiscal year. Accounts receivable for completed construction decreased to ¥174.2B (¥207.7B in the previous year), suggesting that progress in collections contributed to cash generation. Meanwhile, advances received on construction in progress increased to ¥12.3B (¥8.4B in the previous year, +46.0%), with advance payments for contracted projects strengthening short-term liquidity. No significant burden from capital expenditures was observed. Property, plant and equipment was ¥102.8B, virtually unchanged from the previous year, suggesting that the accumulation of cash was attributable more to collections and advances received than to investment activity.

Earnings Quality

The quality of current-period earnings is centered on recurring earnings supported by improved profitability in the core business. The decline in the SG&A ratio appears to reflect the results of structural cost management and represents a sustainable improvement factor. Meanwhile, dividend income of ¥0.9B from investment securities held at ¥60.1B provides stable non-operating income and can be considered a recurring support factor. On the other hand, the foreign exchange loss of ¥0.3B and impairment loss of ¥0.6B are strongly non-recurring in nature and contributed to the reduction from profit before tax of ¥7.7B to Net Income of ¥4.8B. Comprehensive income was ¥4.6B, approximately in line with Net Income of ¥4.8B, with no significant divergence attributable to valuation differences on securities or foreign currency translation adjustments. The increase in the provision for construction loss to ¥0.8B (¥0.3B in the previous year, +179.3%) suggests a review of the profitability of specific projects and warrants monitoring when assessing future earnings quality.

Earnings Forecast and Guidance

Progress toward the full-year earnings forecast was 23.0% for Revenue against the forecast of ¥805.0B, 13.9% for Operating Income against the forecast of ¥55.0B, and 15.2% for Ordinary Income against the same forecast of ¥55.0B. The full-year forecast calls for declines in both revenue and earnings YoY (Revenue -3.9%, Operating Income -5.6%, Ordinary Income -8.9%), differing in direction from the revenue and earnings growth recorded in Q1. In the construction industry, construction progress tends to be concentrated in the second half of the fiscal year, so comparisons with a simple one-quarter progress benchmark require consideration of seasonality. No revisions have been made to the earnings forecast or dividend forecast.

Shareholder Returns

The Company plans to pay an annual dividend of ¥50.00 per share (the previous year's actual dividend of ¥22 is considered equivalent to an interim dividend, and no simple comparison is made). Based on 41,775 thousand shares outstanding, total dividends are calculated at approximately ¥2.09B, resulting in a Payout Ratio of approximately 56.5% against the full-year Net Income forecast of ¥3.70B. Given the Company's financial capacity, including cash and deposits of ¥186.9B and substantial net cash of approximately ¥184B, the current dividend level does not represent an excessive burden relative to cash holdings and earnings.

Risk Factors

1. Construction profitability risk: The provision for construction loss increased to ¥0.8B (¥0.3B in the previous year, +179.3%), suggesting that increases in labor and material costs under fixed-price contracts may be putting pressure on the profitability of specific projects.

2. Occurrence of temporary losses: The Company recorded an impairment loss of ¥0.6B and a foreign exchange loss of ¥0.3B during the period. These losses are equivalent in scale to approximately 12% of profit before tax of ¥7.7B and represent non-recurring earnings volatility factors.

3. Low capital efficiency: ROE was 1.3% and the operating margin was 4.1%. Although both are improving, their absolute levels remain low, leaving room to improve profitability relative to the asset composition, which includes investment securities of ¥60.1B.

Industry Benchmark (For Reference; Based on Our Analysis)

Profitability and Returns

Profitability is slightly below the industry median, positioning the Company below the midpoint.

Growth and Capital Efficiency

The Revenue growth rate exceeds the industry median and is positioned in the upper range of the IQR.

Source: Based on our analysis

Key Points from the Earnings Results

1. The decline in the SG&A ratio (12.7%, compared with 14.0% in the previous year) was the primary driver of the improvement in the operating margin, suggesting that structural efficiency gains may be progressing in cost management.

2. While non-recurring factors, namely the impairment loss and foreign exchange loss, weighed on profit before tax, core business profitability excluding these factors is trending upward, indicating a favorable trend in core earnings power.

3. Although the full-year forecast anticipates declines in both revenue and earnings, Q1 recorded increases in both. In addition, the provision for construction loss increased, making the trend in construction profitability through the second half a key focus in assessing earnings quality.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade period). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥896–¥946 at ±1% for the cost of equity, and ¥920–¥922 at ±0.1 for ω.

Notes:

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

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value 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 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 responsibility, after consulting with a professional adviser as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a strong operational start for Nittoc Construction, with revenue growth and substantially faster operating-profit growth. Revenue increased 7.1% year on year to ¥18.53bn. Operating income rose 52.2% to ¥765m. Ordinary income increased 47.7% to ¥837m. Profit attributable to owners increased 28.6% to ¥466m. The operating margin expanded by 122bp year on year to 4.1% from 2.9%. Gross margin was broadly stable but edged down by approximately 12bp to 16.8% from 16.9%, indicating that the operating-income improvement was driven principally by lower SG&A rather than gross-margin expansion. SG&A expenses declined 3.2% year on year to ¥2.35bn despite the increase in revenue, demonstrating favorable operating leverage. Construction revenue accounted for ¥18.49bn of total revenue, confirming that construction remains the overwhelmingly dominant earnings base. Non-operating income of ¥109m was led by ¥91m of dividend income, which supported ordinary profit but was not the principal driver of the earnings improvement. Net income grew more slowly than operating income because the effective tax rate rose to 38.2% and the company booked a ¥64m impairment loss. Annualized Q1 ROE was 5.0%, below the 8% benchmark generally associated with an attractive equity return profile. The balance sheet remains highly liquid, with a 232.5% current ratio and ¥18.69bn of cash and deposits. Financial leverage is modest at 1.60x in the DuPont framework, while debt/capital is only 0.8%. Management maintained its full-year forecast, which calls for revenue of ¥80.50bn and operating income of ¥5.50bn. Q1 progress is 23.0% for revenue but only 13.9% for operating income, suggesting that the annual earnings plan relies on a significant recovery in profitability over the remaining quarters. The construction business faces normal execution risks from fixed-price contracts, labor availability, material costs and project timing, but the Q1 cost-control result provides a constructive initial signal.

Profitability Analysis

Annualized Q1 DuPont ROE is 5.0%, comprising a 2.5% net profit margin, 1.245x asset turnover and 1.60x financial leverage. The principal positive change in the quarter was profitability at the operating level: operating income increased 52.2%, materially ahead of the 7.1% revenue increase. Operating margin improved to 4.1% from 2.9%, a 122bp expansion. Gross margin, however, declined marginally to 16.8% from 16.9%, so improved project-level pricing or execution was not the main contributor to the operating-margin gain. Instead, SG&A fell to ¥2.35bn from ¥2.42bn, a 3.2% decrease, while revenue expanded, producing meaningful operating leverage. This cost discipline is favorable, but its sustainability should be tested against the full-year plan, which implies lower full-year operating income year on year despite the strong Q1 result. The 4.1% EBIT margin triggers the LOW_OPERATING_EFFICIENCY alert because it is below the 5% benchmark; this means relatively small adverse movements in project costs or contract execution can have a disproportionate effect on profit. The 16.8% gross margin triggers the LOW_GROSS_MARGIN alert and indicates limited project-level margin headroom. In construction, such a gross-margin profile is exposed to subcontractor, labor and materials inflation, especially on fixed-price work. Interest coverage of 382.5x is exceptionally strong, confirming that financing costs do not constrain profitability. The tax burden was 0.604, close to but above the high-tax-burden warning threshold of 0.60, while the interest burden of 1.009 reflects net non-operating income rather than debt pressure. The ¥64m impairment loss reduced profit before tax relative to ordinary income and contributed to net-income growth lagging the operating-income increase.

Growth Assessment

Revenue growth of 7.1% to ¥18.53bn reflects a solid Q1 volume start in the construction business. Completed construction revenue was ¥18.49bn, representing virtually all consolidated sales. Gross profit on completed construction contracts increased to ¥3.10bn from ¥2.92bn, but the gross-profit margin edged lower, indicating that revenue growth was not accompanied by material project-margin expansion. The sharper rise in operating income was therefore more dependent on SG&A efficiency than on gross-profit conversion. Full-year guidance calls for revenue of ¥80.50bn, down 3.9% year on year, and operating income of ¥5.50bn, down 5.6%. Q1 revenue progress against the full-year forecast is 23.0%, slightly below the standard 25% Q1 run rate but within a normal seasonal range for construction. Q1 operating-income progress is 13.9%, 11.1 percentage points below the standard 25% run rate and therefore materially back-end loaded. Profit attributable to owners has reached 12.6% of the ¥3.70bn full-year forecast, also indicating that later-quarter earnings are expected to carry most of the annual result. The unchanged forecast suggests management does not yet view the Q1 profit outperformance as sufficient to revise the full-year plan. Costs on uncompleted construction contracts increased 42.0% year on year to ¥355m, while advances received on uncompleted construction contracts increased 46.0% to ¥1.23bn, consistent with ongoing project activity. Provision for loss on construction contracts increased to ¥81m from ¥29m, which should be monitored as a signal of project-specific cost or execution pressure.

Financial Health

Liquidity is strong. Current assets of ¥41.10bn exceeded current liabilities of ¥17.68bn, resulting in working capital of ¥23.42bn. The current ratio was 232.5% and the quick ratio was 232.3%, both comfortably above healthy benchmarks. Cash and deposits increased 5.4% year on year to ¥18.69bn and represented 31.4% of total assets. Construction receivables were ¥17.42bn, while electronically recorded monetary claims were ¥2.93bn; together these balances underscore the importance of collection timing in a project-based business. Total equity was ¥37.29bn, equal to 62.6% of total assets, providing a substantial capital buffer. Reported debt-to-equity was 0.60x, below the 1.0x conservative benchmark, and debt/capital was only 0.8%. Long-term loans were ¥308m, and interest expense was only ¥2m, consistent with minimal financing stress. There is no current-ratio warning and no D/E warning under the stated thresholds. Current assets are more than sufficient to cover current liabilities, mitigating maturity-mismatch risk. Noncurrent liabilities included a ¥4.10bn net defined-benefit liability, which is the largest identified long-dated obligation and remains relevant to long-term balance-sheet commitments. Investment securities of ¥6.01bn represented 10.1% of total assets, creating some exposure to market-value movements, although the capital base is sufficient to absorb moderate valuation volatility.

Notable B/S Changes

Provision for loss on construction contracts: +¥0.52bn (+179%) to ¥0.81bn - indicates increased provisioning for potentially unprofitable construction work and warrants monitoring for further project-margin pressure. Costs on uncompleted construction contracts: +¥1.05bn (+42%) to ¥3.55bn - reflects increased work in progress and project execution activity. Advances received on uncompleted construction contracts: +¥3.86bn (+46%) to ¥12.26bn - provides favorable customer-funded project financing and supports working capital. Construction receivables: -¥33.52bn (-16%) to ¥174.19bn - lower receivables reduce funding tied up in completed construction billing. Electronically recorded obligations: -¥10.11bn (-15%) to ¥57.50bn - lower supplier obligations accompanied the reduction in receivables and should be monitored alongside construction working-capital seasonality. Provision for bonuses: -¥9.03bn (-58%) to ¥6.61bn - a material seasonal or accrual-related reduction in current liabilities that contributed to the stronger liquidity position.

Cash Flow Quality

Cash-flow quality cannot be quantified from the available figures. The balance-sheet movement nevertheless shows cash and deposits rising to ¥18.69bn from ¥17.73bn year on year. Construction receivables declined by ¥3.35bn year on year to ¥17.42bn, while electronically recorded monetary claims declined by ¥724m to ¥2.93bn. Electronically recorded obligations declined by ¥1.01bn to ¥5.75bn and construction payables declined by ¥963m to ¥5.96bn. The simultaneous reduction in receivables and payables is consistent with a lower working-capital footprint at the reporting date, although the relative movements should be assessed across subsequent quarters because construction billing and payments are seasonal. Advances received on uncompleted construction contracts increased by ¥386m to ¥1.23bn, which provides project funding support. Costs on uncompleted construction contracts increased by ¥105m to ¥355m, broadly consistent with work in progress. The increase in the provision for loss on construction contracts to ¥81m should be monitored because losses on projects can absorb cash even if current-period accounting margins remain positive.

Dividend Sustainability

The full-year dividend forecast is ¥50.00 per share. Based on forecast EPS of ¥88.58, the implied dividend payout ratio is 56.4%. This is below the 60% sustainability benchmark and appears supportable by forecast earnings. The payout assessment is based on the full-year forecast rather than Q1 EPS because the Q1 income statement is cumulative for only one quarter. Retained earnings were ¥26.97bn, providing a substantial accumulated earnings base. The strong liquidity position, including ¥18.69bn of cash and deposits, further supports financial flexibility. Management has not revised the dividend forecast. Sustainability will depend primarily on delivering the forecast ¥3.70bn of profit attributable to owners and maintaining disciplined project-loss provisioning.

Risk Assessment

Business risks include Construction project execution risk: the ¥81m provision for loss on construction contracts, up from ¥29m year on year, indicates exposure to cost overruns or unfavorable project economics., Margin risk: the 16.8% gross margin is below the 20% quality benchmark and the 4.1% EBIT margin is below 5%, leaving limited protection against labor, subcontractor and materials-cost inflation., Construction industry labor risk: shortages of skilled workers and subcontractor capacity in Japan can delay projects and raise labor costs, particularly on fixed-price contracts., Materials-price and procurement risk: steel, cement, fuel and other inputs can pressure profitability if escalation clauses do not fully offset cost inflation., Revenue timing risk: construction revenue and profit recognition can shift materially with project completion, weather, approvals, customer decisions and progress-billing schedules..

Financial risks include Investment-security valuation risk: investment securities total ¥6.01bn, or 10.1% of assets, exposing equity and comprehensive income to market movements., Defined-benefit obligation risk: the ¥4.10bn net defined-benefit liability is a significant long-term obligation that may be affected by discount-rate and asset-return assumptions., Receivables and collection risk: construction receivables of ¥17.42bn remain material, making customer credit quality and collection discipline important..

Key concerns include LOW_OPERATING_EFFICIENCY alert: the 4.1% EBIT margin is below 5%; while Q1 improved by 122bp year on year, profitability remains sensitive to relatively modest cost overruns., LOW_GROSS_MARGIN alert: the 16.8% gross margin is below 20% and declined slightly year on year; Q1 operating-profit growth relied mainly on SG&A reduction rather than stronger project-level margins., Guidance execution risk: Q1 operating income represents only 13.9% of full-year guidance, 11.1 percentage points below a standard 25% Q1 pace, requiring materially stronger later-quarter earnings., The full-year outlook calls for year-on-year declines in revenue and operating income, so the sustainability of Q1's earnings momentum remains to be demonstrated..

Investment Implications

Key takeaways include Q1 revenue grew 7.1%, while operating income grew 52.2%, driven by SG&A discipline and a 122bp operating-margin improvement., The operating margin remains low at 4.1%, and gross margin remains low at 16.8%, which limits resilience to construction-cost inflation or project losses., Liquidity and solvency are strong, with a 232.5% current ratio, ¥23.42bn of working capital, 62.6% equity/assets and 382.5x interest coverage., The ¥50.00 forecast dividend implies a 56.4% forecast payout ratio and is aligned with the stated sustainability benchmark., Unchanged full-year guidance remains back-end loaded, especially for profit, making subsequent-quarter margin delivery central..

Metrics to watch include Completed construction gross margin and operating margin, Provision for loss on construction contracts, Progress toward the ¥80.50bn revenue and ¥5.50bn operating-income forecasts, Construction receivables, electronic receivables and collection trends, Advances received and costs on uncompleted construction contracts, Defined-benefit liability and investment-security valuation movements.

Regarding relative positioning, Nittoc Construction presents a financially conservative construction-company profile, characterized by substantial liquidity, low debt burden and strong interest coverage. Its relative weakness is earnings efficiency: both its 4.1% EBIT margin and 5.0% annualized ROE remain below the stated quality benchmarks, so sustained margin improvement rather than balance-sheet repair is the key performance requirement.