Sanyo Engineering & Construction Inc. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥28.20B
• Operating Income: ¥1.18B
• Net Income: ¥1.22B
• EPS: ¥77.90

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: A solid FY2026 Q2 with strong profit recovery and healthy cash conversion, though capital efficiency remains weak. Revenue rose 1.8% YoY to 282.0, while operating income surged 76.7% YoY to 11.78, lifting operating margin to 4.18%. Ordinary income climbed 60.7% YoY to 15.34, and net income jumped 197.9% YoY to 11.96, driving net margin to 4.24%. Gross profit reached 37.37 (gross margin 13.3%) and SG&A was controlled at 25.59 (SG&A ratio about 9.1%), indicating improved operating leverage. Operating margin expanded by an estimated ~177 bps YoY (from ~2.41% to 4.18%), and net margin expanded by roughly ~279 bps (from ~1.45% to 4.24%). Non-operating items were a meaningful tailwind: net non-operating income of 3.56 (5.91 income minus 2.35 expenses) equaled ~30% of operating income and lifted ordinary income margin to 5.44%. Cash generation outpaced accounting earnings, with operating cash flow (19.58) at 1.64x net income, signaling good earnings quality. Liquidity is comfortable (current ratio 167%), backed by cash of 102.15 and working capital of 130.26. Leverage is modest (D/E 0.68x; interest coverage 24.5x), and we estimate an equity ratio around 60%, indicating a strong balance sheet. However, capital efficiency lags: ROE is 3.9% and ROIC is 3.4% (below the 5% warning threshold), highlighting underutilized assets. The quarter benefited partly from non-operating gains (dividends 0.49, interest income 0.08, and other items), whose recurrence is less certain. Despite a calculated payout ratio of 53.5% that appears manageable against current OCF, dividend sustainability still depends on maintaining the improved operating margin. With only modest top-line growth, future earnings progression will require continued margin discipline and possibly mix improvement. Near-term focus should be on sustaining the higher operating margin, reducing reliance on non-operating contributions, and improving ROIC. Overall, the trajectory is positive on profitability and cash flow, but structural improvements in asset turnover and project returns are needed to raise capital efficiency.

Profitability Analysis

DuPont decomposition indicates ROE of 3.9% = Net Profit Margin (4.2%) × Asset Turnover (0.541) × Financial Leverage (1.68x). The biggest driver of YoY ROE improvement is expansion of net profit margin, supported by a sharp rise in operating income (+76.7% YoY) on modest revenue growth (+1.8% YoY). Operating margin improved to 4.18% (estimated +177 bps YoY), aided by better gross-to-SG&A spread (gross margin 13.3% vs. SG&A ratio ~9.1%), indicating favorable operating leverage. Asset turnover at 0.541 remains low, limiting ROE despite margin gains—likely reflecting a sizable cash balance (102.15) and investment securities (31.36) relative to sales, and the balance-sheet-intensive nature of the business. Financial leverage is moderate at 1.68x and stable, contributing less to ROE change. Non-operating income net (3.56) boosted ordinary income margin to 5.44% and contributed materially to net profit; this element is less controllable and may be volatile. Sustainability: margin gains appear largely operational (SG&A discipline and possibly mix/pricing), but the non-operating lift is less sustainable. Watch for any reversal in non-operating items and for SG&A growth outpacing revenue; for now, SG&A appears contained relative to sales.

Growth Assessment

Top-line growth was modest at +1.8% YoY (282.0), with the bulk of profit growth driven by margin expansion rather than revenue acceleration. Operating income rose 76.7% YoY to 11.78, ordinary income rose 60.7% to 15.34, and net income rose 197.9% to 11.96, highlighting strong operating leverage and a significant non-operating contribution. Gross margin printed at 13.3%, while SG&A was 9.1% of sales; maintaining this spread is central to sustaining earnings. Non-operating income (5.91) and low interest expense (0.48) provided incremental support; the reproducibility of these items is uncertain. The effective tax rate of 29.5% appears normalizing and is not a headwind. Near-term, growth will depend on order intake and execution quality (backlog not disclosed), maintaining gross margin, and continued SG&A control. Mix improvements and project selection could further lift operating margin, but low asset turnover caps growth in ROE absent balance sheet optimization.

Financial Health

Liquidity is sound: current ratio 167.2% and quick ratio 167.2% (cash-heavy), with working capital of 130.26. No warning on liquidity thresholds (current ratio well above 1.0). Cash and deposits of 102.15 cover ~53% of current liabilities (193.84), and total current assets of 324.10 provide ample coverage, limiting maturity mismatch risk despite short-term loans of 33.00. Solvency is solid: total equity 310.66 vs total assets 521.58 implies an equity ratio of ~59.6% (healthy), and D/E of 0.68x is conservative. Interest coverage is strong at 24.54x, indicating low refinancing stress. Noncurrent liabilities are modest at 17.07, suggesting limited long-term leverage. No off-balance sheet obligations were disclosed in the provided data. Overall balance sheet resilience is high.

Cash Flow Quality

OCF/Net Income at 1.64x indicates high-quality earnings, with cash conversion exceeding accounting profits. Operating cash flow of 19.58 more than covers reported capex of 2.25, implying positive implied FCF of ~17.33 absent other investing flows (full investing CF not disclosed). Financing CF was -3.66, suggesting net repayment or dividends, but dividends paid were not disclosed. Working capital details (AR/AP/inventories) were not reported, limiting analysis of potential working capital timing effects; however, the strong OCF vs NI ratio reduces concern about aggressive revenue recognition. Cash balance of 102.15 provides additional cushion to fund capex and dividends. No signs of cash flow strain are evident this quarter.

Dividend Sustainability

The calculated payout ratio is 53.5%, within the <60% benchmark for sustainability. With OCF of 19.58 and modest capex of 2.25, implied FCF appears sufficient to cover dividends under current conditions, though full investing CF and total dividends paid were not reported. Balance sheet strength (equity ratio ~60%, D/E 0.68x, cash 102.15) provides additional flexibility to sustain dividends through cycles. Key swing factors are the durability of operating margin gains and the recurrence of non-operating income. If non-operating gains normalize lower, coverage should still be adequate provided operating margin remains near current levels.

Risk Assessment

Business Risks:

• Execution risk on projects impacting gross margin and delivery timelines (backlog and mix not disclosed).
• Dependence on non-operating items to lift ordinary income (net 3.56 this quarter) introduces earnings volatility.
• Low asset turnover (0.541) depresses ROIC and limits scalability of returns.
• Potential input cost inflation (materials, subcontracting, labor) could compress the 13.3% gross margin.
• Customer deferrals or cancellations could pressure revenue given modest top-line growth (+1.8% YoY).

Financial Risks:

• Short-term loans of 33.00 create some refinancing exposure, though mitigated by strong liquidity.
• Interest rate risk could slowly erode interest coverage, albeit from a high base (24.54x).
• Capital efficiency risk: ROIC at 3.4% (<5% warning) suggests value-dilutive investments if not improved.

Key Concerns:

• Sustaining operating margin at ~4.2% while growing revenue from a low base.
• Earnings reliance on non-operating contributions in a quarter with strong boosts.
• Structural underperformance in ROE (3.9%) and ROIC (3.4%) despite a strong balance sheet.

Investment Implications

Key Takeaways:

• Earnings inflected strongly with operating margin expansion and solid OCF; quality appears high this quarter.
• Balance sheet is robust (equity ratio ~60%, D/E 0.68x, cash 102.15), supporting resilience and dividends.
• Capital efficiency is the main headwind (ROIC 3.4%, ROE 3.9%); improving asset turnover is a priority.
• Non-operating items were a meaningful tailwind; normalization is a risk to ordinary income.
• Maintaining SG&A discipline and protecting gross margin are crucial for sustaining improved profitability.

Metrics to Watch:

• Order backlog and book-to-bill (not disclosed) to gauge revenue visibility.
• Gross margin and SG&A ratio trends for operating leverage durability.
• Composition and recurrence of non-operating income and expenses.
• OCF/Net Income and working capital movements (AR, AP, inventories).
• ROIC progression and asset turnover improvement initiatives.
• Short-term debt levels and refinancing profile.
• Capex discipline and capital allocation to raise capital efficiency.
• Dividend policy updates and FCF coverage.

Relative Positioning: Compared with domestic peers in engineering/construction-adjacent services, the company demonstrates stronger near-term earnings momentum and cash conversion but weaker capital efficiency (low ROIC/ROE). Balance sheet strength and liquidity are above average, offering downside protection, while reliance on non-operating items and low asset turnover temper the quality of the earnings rebound.

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