NIPPON DENSETSU KOGYO CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The Company’s earnings reversed from the operating and ordinary loss territory recorded in the same period of the previous year, with substantial improvement in operating income, ordinary income, and net income in addition to higher revenue. Revenue was ¥349.7B (¥302.3B in the previous year, YoY+15.7%), operating income was ¥10.8B (¥-8.6B in the previous year, turning profitable), ordinary income was ¥20.1B (¥-0.7B in the previous year, turning profitable), and consolidated net income was ¥14.0B (¥5.1B in the previous year, YoY+175.4%). Net income attributable to owners of the parent was ¥14.4B (¥5.9B in the previous year, YoY+143.6%), while EPS was ¥24.73 (¥10.13 in the previous year). The primary factor behind the improvement was the substantial increase in the gross profit margin on completed construction contracts from 9.6% to 15.7%, supported by stabilized cost conditions and improved project profitability.

Factors Affecting Earnings

【Revenue】Net sales from completed construction contracts were ¥349.7B, up YoY+15.7%. As the Company discloses results as a single segment (Equipment Construction Business), there is no breakdown by business, but progress in the completion percentage of existing projects appears to have driven the revenue increase. Advances received on construction contracts in progress increased to ¥37.4B (¥27.4B in the previous year, +36.7%), indicating progress in accumulating orders for the recognition of work completed in the next period and thereafter.

【Profit and Loss】Gross profit on completed construction contracts was ¥54.9B, and the gross profit margin improved to 15.7%, up +607bt from 9.6% in the previous year. SG&A expenses were ¥44.1B (12.6% of revenue), and the fact that their growth rate was contained relative to the increase in revenue also contributed to the improvement in the operating margin to 3.1% (△2.8% in the previous year). Ordinary income was ¥20.1B, with non-operating income of ¥9.8B (including dividend income of ¥8.1B) substantially adding to operating income; consequently, the growth rate at the ordinary income stage (YoY+2,926.8%) exceeded that at the operating income stage (same +226.0%). Extraordinary gains and losses consisted of a ¥0.8B gain on the sale of investment securities and ¥0.9B in losses on the sale and disposal of fixed assets and other items, resulting in a net △¥0.1B and having a minor impact. In conclusion, the increase in revenue and profit was supported by both an improved gross profit margin and expanded non-operating income.

Segment Analysis

The Company Group operates as a single segment, the Equipment Construction Business, and does not disclose segment-level revenue or profit-and-loss information.

Key Financial Indicators

【Profitability】The operating margin was 3.1%, improving from △2.8% in the same period of the previous year, while the consolidated net profit margin was 4.0%, exceeding 1.7% in the previous year. The gross profit margin on completed construction contracts rose substantially to 15.7% (9.6% in the previous year), serving as the primary driver of the improvement in profitability.【Cash Quality】Of ordinary income of ¥20.1B, non-operating income accounted for ¥9.8B (2.8% of revenue), of which dividend income of ¥8.1B represented the majority. This is a non-recurring income source that is susceptible to market fluctuations. Comprehensive income was limited to ¥4.3B (¥4.8B attributable to owners of the parent), and the gap from net income of ¥14.4B was attributable to a △¥7.0B valuation difference on securities and a △¥2.6B adjustment related to retirement benefits, indicating that fluctuations in asset valuations had a certain impact on earnings quality.【Investment Efficiency】ROE remained low at 0.6% (actual result for the quarter), while the total asset turnover ratio was also low at 0.127; however, Q1 tends to be seasonally low because of the timing of work-progress recognition characteristic of the construction industry.【Financial Soundness】The equity ratio (net assets / total assets) was 81.1%, substantially higher than 69.1% in the same period of the previous year. The current ratio was 407.4%, and the debt-to-equity ratio was 0.23x, indicating an extremely conservative financial structure. Short-term borrowings decreased from ¥122.0B in the previous year to ¥1.0B, substantially reducing the Company’s effective dependence on interest-bearing debt.

Cash Flow Analysis

As the Company does not disclose a cash flow statement, funding trends are analyzed based on changes in the balance sheet. Cash and deposits declined slightly to ¥111.7B (¥123.6B at the end of the previous fiscal year), while accounts receivable from completed construction contracts decreased substantially to ¥885.2B (¥1,501.8B at the end of the previous fiscal year), indicating progress in collections. At the same time, short-term borrowings were substantially reduced from ¥122.0B to ¥1.0B, while electronically recorded obligations also decreased from ¥63.0B to ¥63.0B, rather than ¥90.2B, indicating a reduction in payment obligations as well. Advances received on construction contracts in progress increased to ¥37.4B (¥27.4B at the end of the previous fiscal year, +36.7%), with the strengthening of the advance-payment structure supporting cash management. No significant changes were observed in the balances of property, plant and equipment or investment securities, suggesting that the cash burden from capital expenditures and investment activities was limited. Overall, working capital compression and debt reduction progressed simultaneously, representing a funding trend that is strengthening the soundness of the financial base.

Quality of Earnings

Of ordinary income of ¥20.1B, operating income (recurring business profit) was limited to ¥10.8B, while the remaining ¥9.8B came from non-operating income, of which dividend income of ¥8.1B represented the majority. While this dividend income is a stable source of revenue from the investment securities held (¥508.7B), it depends on the dividend policies of the investee companies and market conditions, and therefore cannot be considered as recurring as operating-stage profit. Extraordinary gains and losses were small at a net △¥0.1B, limiting their impact on net income. Interest expense was immaterial at ¥0.1B, and the distortion of earnings due to financial expenses was limited. On the other hand, comprehensive income (¥4.3B) was substantially below net income (consolidated ¥14.0B, attributable to owners of the parent ¥14.4B), due to negative valuation differences on securities and adjustments related to retirement benefits. Accordingly, a certain divergence arose between profit reported in the income statement for the period and fluctuations in asset valuations.

Earnings Forecast and Guidance

Progress against the full-year forecast (Revenue ¥242.3B, operating income ¥23.9B, ordinary income ¥25.7B, EPS ¥316.42) was 14.4% for revenue, 4.5% for operating income, 7.8% for ordinary income, and 7.8% for EPS in Q1. Although these figures were below the simple one-fourth (25%) level, they are considered to be within the expected range for the initial stage of the fiscal year given the seasonality of the construction industry, in which recognition of completed construction contracts is weighted toward the second half of the fiscal year. No revisions were made to the earnings or dividend forecasts during the quarter, and management maintained its full-year plan. Whether the improvement in the gross profit margin (9.6%→15.7%) continues from the second half onward will be the key focus for achieving the full-year plan.

Shareholder Returns

The Company’s forecast annual dividend is ¥127 (¥124 actual in the previous fiscal year), representing a planned year-on-year increase of +2.4%. The payout ratio against forecast EPS of ¥316.42 is approximately 40.1%. Given the Company’s financial soundness, including an equity ratio of 81.1% and reduced effective interest-bearing debt, the dividend at this level is considered to be supported by cash and deposits as well as investment securities held. There is no disclosure regarding share repurchases.

Risk Factors

1. Collection risk for accounts receivable from completed construction contracts: Although accounts receivable from completed construction contracts declined from ¥1,501.8B at the end of the previous fiscal year to ¥885.2B, they still account for 32.1% of total assets, and working capital levels may fluctuate depending on the pace of collection.

2. Dependence on non-operating income: Of ordinary income of ¥20.1B, non-operating income accounted for ¥9.8B (including dividend income of ¥8.1B), creating a structure in which ordinary income levels are susceptible to the dividend policies and valuation fluctuations of securities held.

3. Cost fluctuation risk: Although the gross profit margin on completed construction contracts improved to 15.7%, fluctuations in material prices and skilled labor unit costs directly affect construction costs and may cause variability in project profitability.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (construction)

Profitability and Returns

The operating margin was slightly below the industry median, while the net profit margin slightly exceeded the median due to the boost from non-operating income.

Growth and Capital Efficiency

The revenue growth rate substantially exceeded the industry median, demonstrating high growth even within the industry.

※Source: Compiled by the Company

Key Points in the Earnings

1. The substantial improvement in the gross profit margin on completed construction contracts from 9.6% to 15.7% was the primary factor behind the return to operating profitability. Whether this level can be sustained in the second half of the fiscal year and thereafter is a key point in evaluating the earnings results.

2. The increase in ordinary income (YoY+2,926.8%) was substantially boosted by non-operating income, particularly dividend income of ¥8.1B, confirming a gap from business-level earnings power as represented by the 3.1% operating margin.

3. While short-term borrowings declined from ¥122.0B to ¥1.0B, bringing the Company close to an effectively debt-free position, advances received on construction contracts in progress increased to ¥37.4B (+36.7%), indicating simultaneous progress in financial soundness and the strengthening of the advance-payment structure.

Theoretical Stock Price (Reference Value)

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

Sensitivity: ¥3,679–¥3,892 at cost of equity ±1%, and ¥3,781–¥3,784 at ω±0.1.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets at the end of the quarter are used (there is a timing difference from the full-year forecast).
• As 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 based on XBRL earnings summary 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, with consultation with a professional as necessary.

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