Showa Sangyo Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

The first quarter saw higher revenue but lower earnings, with top-line growth offset by declining profitability. Revenue increased to ¥923.8B (¥846.5B in the same period of the previous year, +9.1% YoY), while Operating Income declined slightly to ¥34.8B (-1.5%), Ordinary Income to ¥43.8B (-0.3%), and Net Income to ¥29.2B (-1.1%). Non-operating income, including dividend income received and equity-method investment gains, provided support and largely offset the decline in the Operating Income margin of the core Food Business, which fell to 3.8% from 4.2% in the previous year.

Factors Affecting Performance

【Revenue】Revenue increased 9.1% YoY to ¥923.8B. By segment, AnimalFeed posted a substantial increase in revenue to ¥198.0B (+41.9%), driving company-wide growth. The core Food Business recorded a modest increase to ¥718.0B (+2.4%), while Other Businesses generated ¥22.9B (+11.2%). Revenue composition was Food 76.5%, AnimalFeed 21.1%, and Other Businesses 2.4%, indicating a high degree of dependence on Food.

【Profit and Loss】The gross profit margin declined 34bp to 17.8% from 18.2% in the previous year, while the SG&A expense ratio increased 7bp to 14.0%, resulting in a 40bp contraction in the Operating Income margin to 3.8% from 4.2%. By segment, Operating Income in Food declined to ¥32.7B (-3.0%, margin 4.6%) due to deteriorating profitability. AnimalFeed expanded its profit to ¥2.2B (+64.7%, margin 1.1%), but its low margin limited its contribution to company-wide earnings. Non-operating income included dividend income received of ¥4.9B and equity-method investment gains of ¥3.5B, bringing Ordinary Income to ¥43.8B (-0.3%) and largely absorbing the decline at the operating level. Net Income was ¥29.2B (-1.1%). The extraordinary loss of ¥0.6B was immaterial, and the impact of temporary factors was limited. In conclusion, the company achieved higher revenue but lower earnings.

Segment Analysis

The core Food Business posted revenue of ¥718.0B (+2.4%) but Operating Income of ¥32.7B (-3.0%), resulting in a decline in the profit margin to 4.6%. This is believed to reflect the completion of price pass-through for higher raw material and logistics costs. AnimalFeed recorded revenue of ¥198.0B (+41.9%) and Operating Income of ¥2.2B (+64.7%), with both volume and unit prices increasing, but remained a low-margin business with a margin of 1.1%. Other Businesses generated revenue of ¥22.9B (+11.2%) and Operating Income of ¥3.2B (-14.8%), with a margin of 14.1%; although small in scale, this segment is relatively highly profitable. The significant disparity in profit margins between segments, together with Food accounting for approximately 94% of company-wide Operating Income of ¥34.8B, indicates that the profitability trend in this business materially influences overall performance.

Key Financial Metrics

【Profitability】The Operating Income margin declined 40bp to 3.8% from 4.2% in the previous year, while the Net Income margin also declined slightly from the previous year to approximately 3.1%. The gross profit margin contracted 34bp to 17.8% from 18.2%, while higher raw material and logistics costs, together with an increase in the SG&A expense ratio to 14.0% (+7bp), pressured margins.【Cash Quality】Cash and deposits declined 27.5% to ¥60.5B from ¥83.5B in the previous year, while short-term borrowings of ¥150.9B and commercial paper of ¥205.0B indicate increasing dependence on short-term funding.【Investment Efficiency】ROE was 1.9%, reflecting the impact of low profitability and low asset turnover in constraining capital efficiency.【Financial Soundness】The Equity Ratio remained high at 55.6% (54.3% in the previous year), and short-term financial soundness was generally favorable, with current assets of ¥1167.2B exceeding current liabilities of ¥823.3B. However, the high level of short-term liabilities warrants attention from a refinancing perspective.

Cash Flow Analysis

As the disclosure does not include detailed cash flow statements, funding trends are analyzed based on changes in the balance sheet. Cash and deposits declined by ¥23.0B (-27.5%) to ¥60.5B from ¥83.5B in the previous year, while accounts receivable and notes receivable increased to ¥526.1B (¥516.7B in the previous year) and inventories to ¥162.3B (¥161.4B in the previous year), indicating continued accumulation of assets. Meanwhile, short-term borrowings increased to ¥150.9B (¥138.0B in the previous year), and commercial paper increased to ¥205.0B (¥185.0B in the previous year), suggesting that the accumulation of operating assets is being funded by short-term financing. This funding structure indicates that, if working capital efficiency does not improve, cash on hand may decline further and dependence on the refinancing of short-term liabilities may increase.

Quality of Earnings

Current-period earnings were supported not only by the core business but also by recurring non-operating income, including dividend income received of ¥4.9B and equity-method investment gains of ¥3.5B. These items represented approximately 1.1% of revenue, a level that does not constitute excessive dependence. Interest expense increased to ¥1.4B from ¥0.9B in the previous year, indicating a gradual increase in interest costs. The extraordinary loss of ¥0.6B was immaterial, with no indication that temporary factors had a significant impact on current-period earnings. Comprehensive Income of ¥49.0B substantially exceeded Net Income of ¥29.2B, primarily due to an ¥18.0B increase in valuation difference on securities. Although this divergence is positive for strengthening shareholders’ equity, it is not directly linked to cash generation; therefore, Net Income and Comprehensive Income should be distinguished when assessing earnings quality.

Earnings Forecast and Guidance

Progress against the full-year plan was 26.4% for revenue (¥923.8B/¥3,500B), 29.0% for Operating Income (¥34.8B/¥120.0B), 31.3% for Ordinary Income (¥43.8B/¥140.0B), and 30.4% for Net Income (¥29.2B/¥95.0B). All exceeded the simple quarterly progress benchmark of 25%, indicating progress broadly in line with or slightly ahead of plan at the first-half stage. The full-year plan calls for higher revenue (+4.3%), higher Operating Income (+0.5%), and lower Ordinary Income (-3.2%). There were no revisions to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The company forecasts an annual dividend of ¥140 and has indicated a full-year dividend increase from the previous year’s interim dividend of ¥50. The Payout Ratio based on forecast EPS of ¥292.34 is approximately 47.9%. Given the Equity Ratio of 55.6% and the level of interest-bearing debt, the company retains financial capacity, providing a foundation for the sustainability of its dividend policy. However, if the decline in cash and deposits and the tendency to depend on short-term liabilities continue, monitoring cash headroom remains important. There has been no disclosure regarding share buybacks; accordingly, this report evaluates shareholder returns using the Payout Ratio only.

Risk Factors

1. Deterioration in the profitability of the core Food Business: Revenue increased 2.4%, but Operating Income declined 3.0%, and the profit margin fell to 4.6%. The likely cause is the completion of price pass-through for higher raw material and logistics costs. As the segment accounts for approximately 94% of company-wide Operating Income, its performance will determine overall results.

2. Dependence on short-term funding: While short-term financing has accumulated, with short-term borrowings of ¥150.9B and commercial paper of ¥205.0B, cash and deposits declined 27.5% YoY to ¥60.5B. The limited cash cushion warrants attention in terms of refinancing resilience.

3. Accumulation of working capital: Accounts receivable and notes receivable of ¥526.1B and inventories of ¥162.3B are trending upward, and the retention of funds associated with revenue growth could affect cash management.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (food_beverage)

Profitability and Return

Both the Operating Income margin and Net Income margin are below the industry median, placing the company’s profitability at a relatively weaker level within the industry.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, indicating that the pace of top-line expansion is relatively high within the industry.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. Structural issues indicated by higher revenue but lower earnings: While revenue increased +9.1%, Operating Income declined -1.5%, as a 34bp decline in the gross profit margin coincided with a 7bp increase in the SG&A expense ratio. Non-operating income, including dividend income and equity-method investment gains, kept Ordinary Income almost flat YoY, making improvement in core-business profitability the key focus going forward.

2. Imbalance in the earnings structure between segments: While the profit margin of the Food Business, which accounts for approximately 94% of company-wide Operating Income, declined to 4.6%, AnimalFeed, which drove growth, remained a low-margin business with a margin of 1.1%. This highlights the difference between the quality of revenue growth and contribution to earnings.

3. Changes in the funding structure: Cash and deposits declined 27.5% YoY, while short-term borrowings and commercial paper increased. Although financial soundness remains high, as indicated by the Equity Ratio of 55.6%, changes in dependence on short-term funding should be monitored continuously in future earnings reports.

Theoretical Share 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 5-year fade period). It is not a forecast of the market price or a recommendation of any specific investment action.

Sensitivity: ¥4,229–¥4,470 at ±1% for the cost of equity, and ¥4,333–¥4,356 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used; there is a timing difference relative to 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: 2026-07 / This value does not forecast or guarantee future share prices)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release 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 professionals as necessary.

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