HOKURIKU ELECTRICAL CONSTRUCTION CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Revenue and profit both significantly exceeded the same period of the previous year, resulting in higher revenue and higher profit. The key feature of the quarter was the impact of operating leverage driven by an improved cost ratio. Revenue was ¥14.32B (+18.6% YoY), Operating Income was ¥0.81B (+108.8%), Ordinary Income was ¥0.89B (+85.4%), and Net Income was ¥0.58B (+84.7%). The decline in the cost-of-sales ratio (81.3%, compared with 83.3% in the previous year) and improvement in the SG&A ratio (13.1%, compared with 13.5% in the previous year) progressed simultaneously, resulting in an Operating Income margin of 5.6%, an improvement of +2.4pt from 3.2% in the previous year.

Factors Affecting Results

【Revenue】Revenue in the single segment (Equipment Construction Business) was ¥14.32B, representing an 18.6% YoY increase. Costs on uncompleted construction contracts increased to ¥0.80B (¥0.57B in the previous year, +40.7%), suggesting that the accumulation of ongoing projects supported the growth in completed construction revenue.

【Profit and Loss】The cost-of-sales ratio declined to 81.3% (83.3% in the previous year), improving the gross profit margin to 18.7% (16.7% in the previous year). The SG&A ratio also declined to 13.1% (13.5% in the previous year). As cost control and fixed-cost absorption progressed simultaneously, the Operating Income margin expanded to 5.6% (3.2% in the previous year). Non-operating income and expenses resulted in a modest gain of ¥0.09B. After deducting income taxes and other taxes of ¥0.31B (an effective tax rate of approximately 35.2%) from Profit Before Tax of ¥0.89B, Net Income was ¥0.58B. Extraordinary items were minor, consisting solely of an extraordinary loss of ¥0.002B. Higher revenue and higher profit.

Key Financial Indicators

【Profitability】The Operating Income margin was 5.6% (an improvement of +2.4pt from 3.2% in the previous year), the Net Income margin was 4.0% (improved from 2.6% in the previous year), and the gross profit margin was 18.7% (16.7% in the previous year), indicating simultaneous progress in lowering the cost ratio and improving SG&A efficiency.【Cash Flow Quality】Comprehensive Income of ¥0.77B was approximately at the same level as Net Income of ¥0.58B. The main factor behind the difference was a ¥0.19B increase in the valuation difference on securities, and the divergence between profit and Comprehensive Income was small.【Investment Efficiency】ROE was 1.3% (on a quarterly basis), while the total asset turnover ratio remained low at 0.242, indicating room for improvement in capital efficiency.【Financial Soundness】The Equity Ratio rose to 77.9% (from 74.3% in the previous year), while long-term borrowings were ¥0.01B (-50.0% YoY). Interest-bearing debt was therefore nearly zero, and the company maintained ample liquidity, with current assets of ¥35.98B significantly exceeding current liabilities of ¥9.15B.

Cash Flow Analysis

Cash and deposits were ¥20.45B, remaining broadly flat at +2.2% compared with the same period of the previous year, and continued to significantly exceed current liabilities of ¥9.15B. Accounts receivable for completed construction contracts were ¥13.92B, down ¥4.59B (-24.8%) from ¥18.50B in the previous year, suggesting improved collection efficiency for sales proceeds. Meanwhile, costs on uncompleted construction contracts were ¥0.80B, up ¥0.23B (+40.7%) from ¥0.57B in the previous year, indicating increased short-term investment of funds in ongoing projects. Construction accounts payable and other liabilities were ¥5.41B, down ¥1.79B (-24.9%) from ¥7.20B in the previous year, while total current liabilities also decreased by ¥2.86B (-23.8%) to ¥9.15B from ¥12.01B in the previous year. This included a ¥1.42B decrease in income taxes payable and other liabilities (-96.1%, reflecting the payment of taxes finally assessed for the previous period). Long-term borrowings also declined to ¥0.01B, and no factors indicating funding pressure were identified.

Earnings Quality

Extraordinary loss was only ¥0.002B, and the impact of temporary factors on profit and loss was minor. Non-operating income was ¥0.09B (0.6% of Revenue), including dividend income of ¥0.02B, but it was not large enough to distort the assessment of the core business. The difference between Ordinary Income of ¥0.89B and Net Income of ¥0.58B was primarily attributable to income taxes and other taxes of ¥0.31B (an effective tax rate of approximately 35.2%), while divergence arising from financial expenses and extraordinary items was small. Comprehensive Income of ¥0.77B exceeded Net Income of ¥0.58B, primarily due to a ¥0.19B increase in the valuation difference on securities. However, the divergence between the two was limited, and current-period profit can be viewed as high quality, reflecting improved profitability in the core business.

Earnings Forecast and Guidance

Progress toward the full-year plan was 20.5% for Revenue (¥14.32B/¥70.00B), 13.4% for Operating Income (¥0.81B/¥6.00B), 14.4% for Ordinary Income (¥0.89B/¥6.20B), and 14.1% for Net Income (¥0.58B/¥4.10B). Although all were below the evenly paced quarterly rate of 25%, there were no revisions to the earnings forecast or dividend forecast. Given the seasonality specific to the construction industry, in which inspections and handovers are concentrated in the second half of the fiscal year, progress is considered to be within the scope of the plan. Whether the pace of progress accelerates from the next quarter onward will be a key point in assessing achievement of the full-year plan.

Shareholder Returns

The company’s forecast dividend per share is ¥24, representing a planned ¥2 increase from the previous-period actual dividend of ¥22. The Payout Ratio against forecast EPS of ¥149.07 is approximately 16.1%, and no revision has been made. Given the company’s nearly debt-free financial foundation, with cash and deposits of ¥20.45B and long-term borrowings of ¥0.01B, sufficient financial capacity for dividend payments has been secured.

Risk Factors

1. Cost fluctuation risk: Although the gross profit margin improved to 18.7%, it remains below 20%. If material prices or labor costs rise again, profit margins may come under pressure.

2. Working capital fluctuation risk: Costs on uncompleted construction contracts increased to ¥0.80B (+40.7% YoY), and fluctuations in working capital accompanying project progress may affect short-term funding requirements. Accounts receivable for completed construction contracts also remain substantial at ¥13.92B, making continued monitoring of collection conditions important.

3. Risk of seasonally uneven progress: Progress toward the full-year plan was 20.5% for Revenue and 13.4% for Operating Income, both below the evenly paced rate of 25%. The plan therefore relies heavily on inspections concentrated in the second half of the fiscal year.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin exceed the industry median, placing the company’s profitability in the middle-to-upper range of the industry.

Growth and Capital Efficiency

The Revenue growth rate significantly exceeds the industry median, demonstrating a high growth rate within the industry.

※Source: Compiled by the Company

Key Points in the Financial Results

1. The Operating Income margin improved from 3.2% in the previous year to 5.6%, an improvement of +2.4pt. The simultaneous improvement in both the gross profit margin and SG&A ratio suggests that project profitability enhancement and cost efficiency improvements may be progressing structurally.

2. The Equity Ratio rose from 74.3% to 77.9%, while interest-bearing debt declined to ¥0.01B. Although financial soundness has been further strengthened, ROE remains at 1.3%, making capital efficiency an ongoing area of focus.

3. Progress toward the full-year plan was 20.5% for Revenue and 13.4% for Operating Income, below the evenly paced rate. However, no revisions have been made to the earnings forecast or dividend forecast, and whether the plan can be achieved on the assumption of second-half concentration will be the focus going forward.

Theoretical Stock Price (Reference Value)

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

Sensitivity: ¥1,642–¥1,741 at Cost of Equity ±1%, and ¥1,690–¥1,691 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a time lag relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-06 / This value does not predict or guarantee the future stock price)

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings release data. It does not recommend investment in any specific security. 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 professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a strong start, with revenue growth and substantial operating-profit leverage in the group’s single reportable equipment-construction business. Revenue increased 18.6% year on year to ¥14.32bn. Operating income more than doubled, rising 108.8% to ¥806m. Ordinary income grew 85.4% to ¥895m, while net income increased 84.3% to ¥578m. Gross profit rose 32.8% to ¥2.68bn, materially outpacing revenue growth. The gross margin improved to 18.7% from 16.7% a year earlier, an expansion of approximately 198bp. Operating margin expanded to 5.6% from 3.2%, an approximately 243bp improvement. Net margin increased to 4.0% from 2.6%, an approximately 145bp improvement. SG&A expenses grew 14.8% to ¥1.87bn, below revenue growth, supporting operating leverage. The earnings improvement was therefore primarily driven by stronger gross-profit generation and favorable fixed-cost absorption rather than non-operating items. Non-operating income was only ¥92m, equivalent to 0.6% of revenue, with dividend income of ¥24m, indicating that ordinary-income growth remained predominantly operating-led. Profit before tax of ¥892m was close to ordinary income, while the ¥20m extraordinary loss on fixed-asset disposal was immaterial. The effective tax rate was 35.2%, resulting in a tax burden of 0.648 and moderating conversion from pre-tax to net income. The balance sheet remains highly liquid, with cash and deposits of ¥20.45bn exceeding total liabilities of ¥13.09bn and virtually no interest-bearing debt. Full-year guidance calls for ¥70.0bn of revenue, ¥6.0bn of operating income, and ¥4.1bn of net income; Q1 revenue progress is modestly below normal seasonality, but profit progress is more than 10 percentage points below the standard 25% Q1 run rate. This leaves the investment case dependent on the conversion of construction activity and backlog into higher-margin completion revenue during the remaining quarters.

Profitability Analysis

The reported annualized DuPont ROE is 5.0%, decomposed into a 4.0% net profit margin, 0.967x asset turnover, and 1.28x financial leverage. The principal source of the year-on-year improvement is margin expansion rather than balance-sheet leverage, as financial leverage remains low and total equity was broadly stable at ¥46.13bn. Gross margin improved by approximately 198bp to 18.7%, indicating improved project profitability, execution, pricing, mix, or a combination of these factors. The 18.7% gross margin nevertheless triggers the low-gross-margin quality alert because it remains below the 20% reference threshold; construction earnings can be sensitive to relatively small changes in labor, materials, subcontracting, and project-loss provisions. Operating margin expanded by approximately 243bp to 5.6%, moving above the 5% concern threshold but remaining below the 8%-plus range generally associated with stronger profitability. SG&A increased 14.8%, below the 18.6% revenue increase, demonstrating favorable operating leverage. Net margin rose to 4.0%, but remains below the 5% benchmark for a stronger earnings profile. EBIT margin was 5.6%, and interest burden was favorable at 1.107 because non-operating income exceeded the negligible ¥1m interest expense. Interest coverage of 806.0x confirms that financing costs are not a constraint on profitability. The tax burden of 0.648 was below the 0.70 normal reference level, reflecting a relatively high 35.2% effective tax rate. Recurring operating performance appears to be the dominant contributor to the Q1 earnings increase, as non-operating income was limited and extraordinary losses were immaterial. Sustainability will depend on maintaining project gross margins as revenue scales through the seasonally more significant later quarters.

Growth Assessment

Revenue growth of 18.6% to ¥14.32bn represents a robust Q1 demand and execution outcome for the equipment-construction operation. Operating income growth of 108.8% substantially exceeded revenue growth, showing strong incremental profit conversion. Gross profit increased 32.8% to ¥2.68bn, which was the central driver of the earnings acceleration. Construction receivables declined 24.8% year on year to ¥13.92bn, while costs on uncompleted construction contracts increased 40.7% to ¥795m. This combination is consistent with active project execution and a shift in project-stage balances, although the durability of growth depends on timely completion and collection. Full-year company guidance anticipates 14.7% revenue growth to ¥70.0bn and 17.2% operating-income growth to ¥6.0bn. Q1 revenue progress is 20.5% of the full-year target, 4.5 percentage points below the standard 25% Q1 benchmark. Q1 operating-income progress is 13.4%, 11.6 percentage points below the standard benchmark, and Q1 net-income progress is 14.1% of the ¥4.1bn forecast. The operating-income shortfall versus a straight-line run rate is not necessarily adverse for a construction contractor because completion timing can be weighted toward later quarters, but it raises the importance of margin delivery in the remainder of the year. The absence of a forecast revision indicates that management has retained its original full-year assumptions. As the company has only one reportable segment, group growth is concentrated in equipment construction rather than diversified across separate earnings engines.

Financial Health

Financial health is strong. The current ratio is 393.2% and the quick ratio is also 393.2%, well above conventional liquidity thresholds. Current assets of ¥35.98bn exceed current liabilities of ¥9.15bn by ¥26.83bn, providing substantial working-capital protection. Cash and deposits total ¥20.45bn, equal to 34.5% of total assets and more than twice current liabilities. Total liabilities are ¥13.09bn against total equity of ¥46.13bn, leaving liabilities at only 22.1% of total assets. Reported debt-to-equity is 0.28x, while disclosed interest-bearing debt is only ¥12m, indicating minimal reliance on debt funding. Long-term loans declined 50.0% year on year from ¥24m to ¥12m, reinforcing the conservative funding profile. There is no maturity mismatch evident: short-term obligations are fully covered by cash alone, before considering construction receivables of ¥13.92bn. Interest coverage of 806.0x further confirms ample debt-service capacity. The net defined-benefit liability of ¥2.99bn is the most material non-debt long-term obligation and should be monitored relative to the operating earnings base. Asset retirement obligations are limited at ¥128m. Goodwill is ¥749m, only 1.6% of equity and 1.3% of assets, so acquisition-accounting exposure is low. Intangible assets account for 2.5% of total assets, also indicating limited balance-sheet dependence on acquired intangible value.

Notable B/S Changes

Construction receivables: -¥4.59bn (-24.8%) to ¥13.92bn - lower billed-work receivables support working-capital efficiency and reduce collection exposure. Costs on uncompleted construction contracts: +¥0.23bn (+40.7%) to ¥0.80bn - higher work in progress increases the importance of project-cost control and timely revenue conversion. Current liabilities: -¥2.86bn (-23.8%) to ¥9.15bn - lower short-term obligations further strengthen already ample liquidity. Long-term loans: -¥0.01bn (-50.0%) to ¥0.01bn - debt remains immaterial, reinforcing the conservative capital structure.

Cash Flow Quality

The balance-sheet cash position is robust, with cash and deposits increasing 2.2% year on year to ¥20.45bn. Construction receivables declined by ¥4.59bn year on year to ¥13.92bn, which supports collection discipline and reduces the amount of capital tied up in billed construction work. Costs on uncompleted construction contracts rose by ¥230m to ¥795m, reflecting a higher level of work in progress and creating a project-execution focus for subsequent quarters. Accounts payable for construction contracts and other items declined by ¥1.79bn to ¥5.41bn, so the lower receivable balance should not be viewed solely as a result of extending supplier financing. The company’s cash balance exceeds total liabilities by ¥7.37bn, providing substantial resilience against timing differences in progress billings, collections, and subcontractor payments. Earnings quality from the income statement is favorable in the sense that operating income drove the majority of ordinary income, while dividend income was only ¥24m and extraordinary losses were only ¥20m. The principal working-capital metric to monitor is the relationship between construction receivables, costs on uncompleted contracts, and completed-contract revenue as project volumes rise.

Dividend Sustainability

The full-year dividend forecast is ¥48.0 per share, unchanged from the disclosed plan. Against forecast EPS of ¥149.07, the implied dividend payout ratio is approximately 32.2%. This is comfortably below the 60% sustainability benchmark and leaves significant earnings retention capacity. The forecast dividend requirement is also supported by the company’s ¥20.45bn cash balance and negligible interest-bearing debt. Retained earnings amount to ¥40.52bn, providing a substantial equity buffer. The Q1 basic EPS of ¥21.03 represents 14.1% of the full-year EPS forecast, so dividend sustainability remains reliant on earnings concentration in later quarters consistent with the full-year plan. There is no disclosed dividend revision, suggesting management remains confident in maintaining the annual ¥48.0 per-share distribution. With no current-period share repurchase information provided, the assessment is limited to the dividend payout ratio rather than a total return ratio.

Risk Assessment

Business risks include Construction-margin risk: the 18.7% gross margin is below the 20% reference threshold despite improving approximately 198bp year on year. In equipment construction, labor scarcity, subcontractor capacity, materials inflation, and fixed-price project exposure can quickly reverse margin gains., Project execution and completion-timing risk: costs on uncompleted construction contracts increased 40.7% to ¥795m, making project cost control, timely completion, and conversion into recognized revenue important for full-year delivery., Industry cyclicality risk: demand is exposed to private-sector capital expenditure, public infrastructure budgets, regional construction activity, and customer investment timing., Labor and regulatory risk: shortages of skilled electrical-construction workers, wage inflation, safety requirements, and revisions to working-hour regulations can raise subcontracting and direct labor costs., Weather and disaster risk: severe weather, earthquakes, and site disruptions can delay construction schedules, increase remediation costs, and shift revenue recognition between quarters..

Financial risks include Receivable and billing-cycle risk: construction receivables remain material at ¥13.92bn, equivalent to 97.2% of Q1 revenue, so collection timing and customer credit quality remain relevant even after the year-on-year decline., Pension-obligation risk: the ¥2.99bn net defined-benefit liability is a meaningful long-term obligation that may be affected by discount-rate movements and asset-return assumptions., Forecast-conversion risk: Q1 operating income represents only 13.4% of full-year guidance, 11.6 percentage points below the standard 25% Q1 run rate, increasing reliance on later-quarter execution..

Key concerns include The low-gross-margin alert is material because a gross margin below 20% provides a narrower cushion against project cost overruns. The Q1 trend is improving, but the investment thesis requires confirmation that margin expansion can persist through the larger revenue quarters., Reported annualized ROE of 5.0% remains below the 8% reference threshold. The company’s conservative 1.28x financial leverage limits balance-sheet risk but also means sustained improvement in project margins and asset efficiency is required to lift returns., The single reportable equipment-construction segment concentrates earnings exposure in one operating market, limiting diversification if regional demand or construction profitability weakens..

Investment Implications

Key takeaways include Q1 revenue rose 18.6%, while operating income rose 108.8%, driven by gross-margin expansion and positive SG&A operating leverage., Liquidity and solvency are exceptionally strong: the current ratio is 393.2%, cash totals ¥20.45bn, and disclosed interest-bearing debt is only ¥12m., The ¥48.0 full-year DPS implies a moderate 32.2% payout ratio based on forecast EPS of ¥149.07., Full-year earnings delivery depends on a substantial second-half contribution because Q1 operating-income progress is 13.4% versus the 25% standard run rate., The company has limited M&A balance-sheet risk, with goodwill equal to only 1.6% of equity..

Metrics to watch include Gross margin and operating margin, particularly whether the 18.7% gross margin can move above or remain near the 20% reference level., Progress against full-year guidance of ¥70.0bn revenue, ¥6.0bn operating income, and ¥4.1bn net income., Construction receivables relative to revenue and the collection cycle., Costs on uncompleted construction contracts and any construction-loss provisions., Labor, materials, and subcontractor cost trends affecting fixed-price project profitability., Net defined-benefit liability and the continued maintenance of the net-cash balance-sheet position..

Regarding relative positioning, The company is positioned as a conservatively financed equipment-construction contractor with unusually strong liquidity and low acquisition-related balance-sheet risk. Its Q1 earnings momentum is favorable, but its annualized 5.0% ROE and 18.7% gross margin indicate that profitability remains more moderate than its balance-sheet strength. Relative performance will therefore be determined principally by the sustainability of project-margin improvement and later-quarter conversion of construction activity into completed revenue and earnings.