NJS (2325) FY2026 Q1 Earnings Report

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Executive Summary

FY2026 Q1 results delivered double-digit revenue and profit growth at all stages: Revenue ¥106.3B (YoY +¥17.8B +20.1%), Operating Income ¥40.9B (YoY +¥8.3B +25.3%), Ordinary Income ¥41.2B (YoY +¥8.5B +25.8%), Net Income ¥29.1B (YoY +¥6.5B +28.7%). Gross profit margin improved to 53.3% (prior 51.2%, +2.1pt) and SG&A ratio declined to 14.8% (prior 15.7%, -0.9pt), expanding operating margin to 38.5% (prior 36.9%, +1.6pt). Domestic operations account for 94% of revenue and nearly all operating income, with Revenue +20.8% and Operating Income +24.3%, indicating continued growth in the core business. ROE is 9.6%, supported by an improved Net Margin of 27.4% (prior 25.6%, +1.8pt) and Total Asset Turnover of 0.267 turns. Cash and deposits are sizable at ¥203.9B (YoY +¥25.6B), and Contract Liabilities increased sharply to ¥15.9B (prior ¥5.2B, +¥10.7B), suggesting an accumulation of advance-type orders. Progress against the Full Year plan stands at 38% for Revenue and 114% for Operating Income, significantly front-loaded and leaving substantial room for upward revision.

Drivers of Performance

[Revenue] Revenue reached ¥106.3B (+20.1%), a high-growth outcome. By segment, Domestic Business was ¥99.9B (+20.8%) and Overseas Business ¥6.4B (+10.7%), keeping domestic share at 94% as the dominant core. By product, Water Supply ¥28.3B (prior ¥21.1B, +34.2%), Sewage ¥70.4B (prior ¥61.9B, +13.8%), Environment & Others ¥7.6B (prior ¥5.5B, +37.1%) — notable strength in Water Supply and Environment. Contract Liabilities surged to ¥15.9B (prior ¥5.2B, +207%), confirming accumulation of advance-type orders and short-term support for revenue recognition. Cost of goods sold ratio improved to 46.7% (prior 48.8%, -2.1pt) due to a higher mix of high-margin projects and disciplined cost control.

[Profitability] Gross profit was ¥56.7B (+21.8%), with gross margin rising to 53.3% (+2.1pt). SG&A totaled ¥15.8B (+13.1%), keeping the SG&A ratio at 14.8% (-0.9pt) and enabling operating leverage. As a result, Operating Income expanded to ¥40.9B (+25.3%), with an operating margin of 38.5% (+1.6pt). Non-operating income was ¥0.5B (interest income ¥0.2B, dividend income ¥0.1B, other ¥0.2B) and non-operating expenses were ¥0.1B (mainly foreign exchange losses ¥0.1B), leaving Ordinary Income at ¥41.2B (+25.8%). Extraordinary income/losses were negligible (gain ¥0.0B, loss ¥0.0B), bringing Profit Before Tax to ¥41.2B (+25.9%). Corporate tax and related amounted to ¥12.1B, lowering the effective tax rate to 29.3% (prior approx. 30.9%), resulting in Net Income of ¥29.1B (+28.7%) and Net Margin of 27.4% (+1.8pt). Non-controlling interests were limited at ¥0.0B, with Net Income attributable to owners of the parent at ¥29.1B. In summary, growth in the domestic core, gross margin improvement, and cost-efficiency combined to produce revenue and profit growth.

Segment Analysis

Domestic Business: Revenue ¥99.9B (+20.8%), Operating Income ¥41.2B (+24.3%), Operating Margin 41.3% (prior 40.1%, +1.2pt), maintaining high profitability while increasing earnings. Domestic revenue breakdown: Water Supply ¥26.5B (+36.7%), Sewage ¥69.9B (+13.6%), Environment & Others ¥3.5B (+94.0%), with Water Supply and Environment driving domestic growth. Overseas Business grew Revenue to ¥6.4B (+10.7%) but continued to record an operating loss of ¥0.3B (prior ▲¥0.5B). However, the loss narrowed by 40.8% YoY, indicating an improving trend. Overseas composition: Water Supply ¥1.8B, Sewage ¥0.5B, Environment & Others ¥4.1B, with Environment projects accounting for a large share. Contribution to consolidated operating income is dominated by Domestic (>100%), while Overseas margin is -4.9%, diluting consolidated margins. Domestic high profitability underpins consolidated results, with Overseas on a path of loss reduction.

Key Financial Metrics

[Profitability] Operating Margin 38.5% (prior 36.9%, +1.6pt), Net Margin 27.4% (prior 25.6%, +1.8pt) — profitability has been improving over multiple periods. Gross Margin 53.3% (+2.1pt) reflects improved project mix and cost controls; SG&A Ratio 14.8% (-0.9pt) indicates improved cost efficiency. ROE is 9.6%, supported by Net Margin expansion and Total Asset Turnover of 0.267 turns. [Cash Quality] Contract Liabilities jumped to ¥15.9B (prior ¥5.2B, +207%), indicating accumulation of advance-type orders and cash being collected in advance. Cash and deposits are ¥203.9B, representing 51.2% of total assets, with funds accumulated partly ahead of Operating Cash Flow. [Investment Efficiency] Total Asset Turnover is 0.267 turns (annualized 1.07 turns); turnover is inherently limited for a service company but offset by high operating margins. Goodwill is ¥4.9B (1.2% of total assets) and Intangible Assets ¥12.3B (3.1%), both modest, implying limited M&A risk. [Financial Soundness] Equity Ratio is 76.1% (prior 81.2%), remaining high; Current Ratio 370.5% and Quick Ratio 370.5% indicate very strong liquidity. Interest-bearing debt is effectively non-existent, making interest coverage effectively unmeasurable and interest risk negligible. Net assets are ¥303.0B versus cash and deposits of ¥203.9B, supporting ample dividend capacity and room for growth investment.

Cash Flow Analysis

Disclosure of Operating Cash Flow, Investing Cash Flow, and Financing Cash Flow is not provided, but balance sheet movements allow analysis of cash trends. Cash and deposits increased to ¥203.9B (prior ¥178.3B, +¥25.6B), driven by profit generation and a large increase in Contract Liabilities. Contract Liabilities rose to ¥15.9B (prior ¥5.2B, +¥10.7B), indicating advance-type cash inflows recognized as deferred revenue. Accrued corporate taxes and similar liabilities also increased to ¥18.9B (prior ¥5.7B, +¥13.2B), implying cash outflows for taxes in future periods, though this is 9.3% relative to cash and deposits and manageable. Investment securities declined to ¥30.2B (prior ¥39.1B, -¥8.9B), with valuation declines compressing comprehensive income (Unrealized Gain/Loss on Available-for-Sale Securities ▲¥6.1B), but not directly affecting cash. Retained earnings increased to ¥285.7B (prior ¥261.9B, +¥23.8B), showing steady internal reserve accumulation. Overall, strong core profitability and expansion of advance-type Contract Liabilities are driving robust cash generation; interest-bearing debt is near zero and free cash accumulation continues.

Quality of Earnings

Non-operating income ¥0.5B (0.4% of sales) and non-operating expenses ¥0.1B (0.1% of sales) are minor, indicating profits are mainly from core operations. Non-operating income mainly comprises interest income ¥0.2B and dividend income ¥0.1B from financial assets, which are recurring and have high sustainability. Foreign exchange losses ¥0.1B are a temporary effect from Overseas operations but immaterial in size. Extraordinary items were negligible (gain ¥0.0005B, loss ¥0.0B), so no material one-off impact on Net Income. The gap between Ordinary Income ¥41.2B and Net Income ¥29.1B (a -29.4% swing) is largely driven by Corporation Taxes ¥12.1B (effective tax rate 29.3%), a normal tax burden. Comprehensive Income ¥22.5B (¥29.1B Net Income less ▲¥6.6B) shows a notable divergence, mainly due to Unrealized Loss on Securities ▲¥6.1B, Foreign Currency Translation Adjustments ▲¥0.4B, and Remeasurements of Defined Benefit Plans ▲¥0.2B, totaling ▲¥6.7B in valuation losses. These are unrealized, market-driven items that do not directly affect cash flows and do not materially impair the quality of core earnings. There is no indication of accrual bias; core earnings quality is assessed as very high.

Forecasts & Guidance

Full Year plan: Revenue ¥280.0B (+12.7%), Operating Income ¥36.0B (+10.2%), Ordinary Income ¥37.0B (+9.3%), Net Income ¥24.5B (EPS forecast ¥257.27, Dividend forecast ¥55). Progress vs. Full Year based on Q1 results: Revenue 38.0% (standard 25% +13.0pt), Operating Income 113.6% (standard +88.6pt), Ordinary Income 111.4% (standard +86.4pt), Net Income 118.8% (standard +93.8pt) — all stages far ahead of schedule. Operating Income and Net Income have already exceeded Full Year plans at Q1, leaving significant scope for upward revision. While prior-year progress also exceeded standard, the current period is even more advanced. High-margin domestic projects and improved cost efficiency underpin this momentum; the absence of announced revisions likely reflects conservatism. Even accounting for quarterly variability in project progress, if current momentum continues, a significant outperformance of the Full Year plan is expected.

Shareholder Returns

The company plans an annual dividend of ¥55 (Payout Ratio 21.4% based on forecast EPS ¥257.27). Q1 EPS is ¥305.67, which annualizes to ¥1,222.68, but considering seasonality and project progress in the second half, the forecast EPS appears conservative. Payout Ratio 21.4% is highly sustainable given cash and deposits ¥203.9B, retained earnings ¥285.7B, and ample operating cash generation. Annual dividend payout based on shares outstanding (after treasury shares) of 9,523 thousand shares is approximately ¥520M, about 2.6% of cash and deposits and ~4.5% of annualized Net Income, indicating ample dividend capacity. No share buyback program is disclosed; current shareholder returns consist solely of dividends. Given low payout ratio and strong liquidity, there is room for dividend increases or introduction of buybacks, though the company appears to prioritize balancing with growth investments. No revision to dividend guidance has been announced; mid-term upward adjustments are not indicated at this time.

Risk Factors

1. Domestic concentration risk: Domestic operations account for 94% of Revenue and nearly 100% of Operating Income, leaving limited geographic diversification. Domestic public investment cycles and changes in water environment regulation directly impact performance. Contract Liabilities of ¥15.9B (15.0% of Revenue) indicate strong short-term order momentum, but a medium- to long-term decline in orders could slow revenue growth.

2. Continued losses in Overseas operations: Overseas Business grew revenue to ¥6.4B (+10.7%) but remains in operating loss at ¥0.3B (Operating Margin -4.9%). Although loss narrowed by 40.8% YoY, the timing to reach break-even is uncertain. Continued upfront costs could dilute consolidated margins.

3. Market valuation risk of investment securities: Investment securities ¥30.2B (10.0% of Net Assets) are subject to market value fluctuations that affect comprehensive income and Net Assets. This period recorded Unrealized Loss on Securities ▲¥6.1B (▲27%), compressing Comprehensive Income to ¥22.5B (Net Income delta ▲22.7%). Market conditions could further widen Net Asset volatility.

Industry Benchmark (Reference — Company Study)

Profitability & Returns

The company's profitability significantly exceeds the industry median and ranks among the top.

Growth & Capital Efficiency

Revenue growth is roughly in line with the industry median and maintains a standard growth pace within the IT & Communications sector.

※ Source: Company aggregation

Key Points to Note from the Results

1. Q1 Operating Income has already exceeded the Full Year plan (progress 114%), making an upward revision likely. Simultaneous improvement in Gross Margin (53.3%, +2.1pt) and SG&A Ratio (14.8%, -0.9pt) expanded Operating Margin to 38.5% (+1.6pt), indicating qualitative improvement in the revenue structure. If domestic high-margin trends and cost efficiency persist, a medium-term upward trend in margins is expected.

2. Rapid increase in Contract Liabilities to ¥15.9B (YoY +207%) signals accumulation of advance-type orders and front-loaded revenue recognition and cash generation. Cash and deposits ¥203.9B (51.2% of total assets) and a low-leverage balance sheet secure both dividend capacity and growth investment flexibility. Overseas operations are narrowing losses and, if monetized mid-term, could enhance geographic diversification and revenue sources.

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This report is an AI-generated earnings analysis document created by analyzing XBRL financial statement data. It does not recommend investment in any specific security. Industry benchmarks are reference information compiled by the Company based on public financial statements. Investment decisions are your responsibility; please consult a professional advisor as needed.

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AI Financial Analysis

Executive Summary

NJS delivered a very strong FY2026 Q1 result, with revenue and earnings growth accompanied by further high-margin expansion. Revenue rose 20.1% YoY to ¥10.63bn. Operating income increased 25.3% to ¥4.09bn. Ordinary income grew 25.8% to ¥4.12bn. Net income attributable to owners rose 28.7% to ¥2.91bn. Gross profit increased 21.7% to ¥5.67bn. The gross margin improved by 70bp YoY to 53.3%. The operating margin expanded by 160bp YoY to 38.5%, reflecting profit growth exceeding revenue growth. The net margin rose by 170bp YoY to 27.4%. Domestic operations remained the earnings core, generating ¥9.99bn of revenue and ¥4.12bn of segment profit. Overseas operations expanded revenue while narrowing their operating loss. Water supply, sewerage, and environmental/other services all recorded double-digit revenue growth. Net income growth outpaced operating-income growth, supported by a modest improvement in the effective tax rate to 29.3% from approximately 30.9% in the prior-year quarter. Non-operating income was immaterial at 0.4% of revenue, and ordinary income remained closely aligned with operating income. The balance sheet remains exceptionally liquid, with cash and deposits of ¥20.39bn representing 51.2% of total assets. The Q1 result has already exceeded the full-year operating-income and net-income forecasts, making earnings seasonality, forecast conservatism, and the absence of a forecast revision key issues for subsequent quarters. The FY dividend forecast of ¥110 per share implies a sustainable forecast payout ratio of 42.8%.

Profitability Analysis

The reported annualized ROE is 38.4%, an excellent level relative to the 15% benchmark. The DuPont decomposition is net profit margin of 27.4%, annualized asset turnover of 1.067x, and financial leverage of 1.31x. Profitability, rather than leverage, is the principal driver of ROE: the company combines an exceptionally high margin with a low-leverage capital structure. The 160bp expansion in operating margin was the most important positive movement, as operating income rose 25.3% versus 20.1% revenue growth. Gross margin improved 70bp to 53.3%, indicating favorable project profitability and/or delivery mix before overheads. SG&A expenses rose 13.1% YoY to ¥1.58bn, materially below revenue growth; this produced positive operating leverage. The EBIT margin was 38.5%, while the 0.706 tax burden was normal and above the 0.70 reference level. The interest burden of 1.008x confirms that financing costs are immaterial to earnings. Ordinary income of ¥4.12bn was only ¥0.03bn above operating income, demonstrating that Q1 profitability was overwhelmingly derived from operations rather than non-operating gains. No material extraordinary gain supported net income. JGAAP goodwill is limited at ¥0.49bn, or 1.6% of equity, so goodwill amortization and impairment exposure are not material distortions to the earnings profile.

Growth Assessment

Revenue growth was broad-based across the company’s public-infrastructure consulting activities. Sewerage was the largest revenue category and therefore the core business, with revenue rising 13.8% YoY to ¥7.04bn, equal to 66.3% of consolidated Q1 revenue. Water-supply revenue increased 34.2% to ¥2.83bn. Environmental and other revenue grew 36.9% to ¥0.76bn. Domestic revenue rose 20.8% to ¥9.99bn and accounted for 94.0% of consolidated sales. Domestic segment profit increased 24.3% to ¥4.12bn, with its segment margin improving to 41.3% from 40.1%. Overseas revenue increased 10.6% to ¥0.64bn. The overseas operating loss narrowed to ¥0.31bn from ¥0.53bn, improving the segment margin to negative 4.9% from negative 9.1%. The operating-profit progress rate is 113.6% against the FY forecast of ¥3.60bn, versus a standard Q1 progress rate of 25%. Revenue progress is 38.0% against the full-year forecast of ¥28.0bn, 13.0 percentage points above the standard rate. Ordinary-income progress is 111.5%, and net-income progress is 118.8%, both substantially above normal Q1 progress. This profile indicates that the existing full-year guidance embeds a pronounced earnings decline after Q1 or is conservative; execution and project timing through the remaining quarters will determine which interpretation is appropriate.

Financial Health

Liquidity is very strong. The current ratio is 370.5% and the quick ratio is also 370.5%, substantially above healthy reference levels. Current assets of ¥32.38bn exceed current liabilities of ¥8.74bn by ¥23.64bn. Cash and deposits of ¥20.39bn alone cover 233% of current liabilities. Total liabilities are ¥9.53bn, equivalent to 23.9% of total assets, while total equity is ¥30.30bn. The debt-to-equity ratio is a conservative 0.31x and is well below the 2.0x risk threshold. Financial leverage of 1.31x further indicates that the high return profile is not dependent on aggressive balance-sheet gearing. Current liabilities include ¥1.59bn of contract liabilities and ¥1.90bn of income taxes payable, alongside ¥1.00bn of bonus provisions. These operating liabilities are well covered by liquid assets, limiting maturity-mismatch risk. The net defined-benefit liability is ¥0.56bn, or only 1.9% of equity. Goodwill is just 1.2% of assets and intangible assets are 3.1% of assets, indicating limited reliance on acquisition-related asset values.

Notable B/S Changes

Cash and deposits: +¥25.62bn? No, +¥2.56bn (+14.4%) YoY to ¥20.39bn - strengthens already substantial liquidity. Contract liabilities: +¥10.72bn? No, +¥1.07bn (+206.7%) YoY to ¥1.59bn - reflects a meaningful rise in customer advances and requires monitoring of project fulfillment. Income taxes payable: +¥13.23bn? No, +¥1.32bn (+230.7%) YoY to ¥1.90bn - follows stronger profitability and represents a near-term cash outflow. Total liabilities: +¥30.15bn? No, +¥3.01bn (+46.2%) YoY to ¥9.53bn - driven principally by operating liabilities rather than an indication of excessive leverage. Investment securities: -¥8.86bn? No, -¥0.89bn (-22.7%) YoY to ¥3.02bn - lower market value contributed to weaker comprehensive income. Accumulated other comprehensive income: -¥6.67bn? No, -¥0.67bn (-28.0%) YoY to ¥1.71bn - mainly reflects a decline in the valuation difference on securities. Costs on uncompleted services: -¥2.08bn? No, -¥0.21bn (-19.9%) YoY to ¥0.84bn - consistent with project delivery and revenue recognition.

Cash Flow Quality

The earnings profile is operationally strong, with operating income of ¥4.09bn closely translating into ordinary income of ¥4.12bn and no material extraordinary items. Working-capital-related balance-sheet movements warrant monitoring because contract liabilities increased to ¥1.59bn from ¥0.52bn a year earlier, while income taxes payable increased to ¥1.90bn from ¥0.57bn. Higher contract liabilities can support near-term cash collection and reflect advances linked to contracted work, but their conversion into project delivery and revenue should be tracked. Costs on uncompleted services declined 19.9% YoY to ¥0.84bn, consistent with delivery of projects and recognized revenue. Provision for bonuses increased 18.6% to ¥1.00bn, broadly consistent with the expansion in the employee-based consulting business. Provision for loss on orders declined to ¥0.04bn from ¥0.08bn, which is favorable for prospective project-margin risk. The modest ¥0.67bn gap between net income of ¥2.91bn and comprehensive income of ¥2.25bn was primarily associated with negative other comprehensive income, including a ¥0.61bn decline in securities valuation differences, rather than an operating earnings issue.

Dividend Sustainability

The FY2026 dividend forecast is ¥110 per share. Based on forecast EPS of ¥257.27, the dividend-only payout ratio is 42.8%, below the 60% sustainability benchmark. The payout ratio leaves meaningful retained earnings capacity for investment, working capital, and shareholder returns. Retained earnings stand at ¥285.72bn? No, retained earnings stand at ¥28.57bn, compared with total equity of ¥30.30bn. The company’s ¥20.39bn cash balance and low debt burden provide substantial balance-sheet support for the planned dividend. Q1 EPS was ¥305.67, already above FY forecast EPS, although dividend sustainability should be assessed principally against the full-year forecast rather than annualizing Q1 earnings. No dividend forecast revision has been announced. The key determinant of future dividend capacity is whether the unusually strong Q1 profit converts into durable full-year earnings rather than being offset by subsequent-quarter project timing.

Risk Assessment

Business risks include Public-infrastructure consulting demand and project acceptance timing can create material quarterly volatility; Q1 revenue and profit progress are substantially ahead of full-year guidance., Sewerage represents 66.3% of Q1 revenue, creating concentration in the largest business line and in public-sector water-infrastructure budgets., Overseas operations remain loss-making, with a ¥0.31bn Q1 segment loss despite improvement; project execution, country exposure, currency movements, and profitability normalization remain relevant risks., The engineering-consulting model depends on securing and retaining qualified technical personnel; wage inflation or staffing shortages could pressure project delivery and margins..

Financial risks include The ¥1.90bn income-tax payable balance and ¥1.00bn bonus provision create scheduled cash outflows, although they are amply covered by cash., Investment securities of ¥3.02bn expose equity to market valuation movements; the securities valuation reserve declined by ¥0.61bn YoY., Contract liabilities rose sharply to ¥1.59bn, and subsequent fulfillment performance should be monitored to confirm that advances convert into project revenue at expected margins..

Key concerns include FY operating-income progress of 113.6% and net-income progress of 118.8% versus full-year guidance make the earnings run-rate unusually difficult to extrapolate., The overseas loss has narrowed but has not yet reached profitability., Comprehensive income declined 13.4% YoY despite net-income growth, reflecting unfavorable valuation movements in other comprehensive income..

Investment Implications

Key takeaways include Q1 showed broad-based 20.1% revenue growth and faster 25.3% operating-income growth, with a 38.5% operating margin., Domestic operations are the core profit engine, while overseas losses improved but remain a drag on consolidated profitability., The balance sheet is highly liquid and conservatively financed, with a 370.5% current ratio, ¥20.39bn in cash, and 0.31x debt-to-equity., The ¥110 FY dividend forecast equates to a 42.8% forecast dividend payout ratio and is supported by earnings capacity and liquidity., The central analytical issue is the large divergence between Q1 performance and unchanged FY guidance..

Metrics to watch include Quarterly revenue and operating-income conversion relative to the ¥28.0bn and ¥3.60bn FY forecasts, Domestic segment margin and sewerage revenue growth, Overseas segment loss reduction and progress toward profitability, Contract liabilities and costs on uncompleted services as indicators of project timing and execution, Securities valuation movements and their effect on comprehensive income, Dividend policy and any revision to the ¥110 per-share FY forecast.

Regarding relative positioning, NJS exhibits profitability and capital efficiency that are strong for an infrastructure-focused engineering and consulting company: its 38.5% operating margin, 27.4% net margin, and annualized 38.4% ROE are well above the stated benchmarks, while leverage and goodwill exposure remain low. Its relative risk profile is shaped less by balance-sheet stress than by public-project timing, concentration in domestic sewerage-related work, and the path to overseas profitability.