NJS Co.,Ltd. FY2026 Q2 Earnings Report

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Executive Summary

Against a backdrop of expanding high-margin projects in the domestic water supply and sewerage-related business, the Company posted higher revenue and earnings, with Operating Income and Net Income growing faster than Revenue. Revenue was ¥167.9B (+17.5% YoY), Operating Income was ¥49.7B (+27.0%), Ordinary Income was ¥50.9B (+28.4%), and Net Income was ¥36.2B (+34.9%). In addition to the cost of sales increasing at a rate below Revenue growth, the increase in SG&A expenses was significantly below Revenue growth, resulting in the Operating Margin expanding to 29.6% (27.4% in the same period last year).

Factors Affecting Earnings

【Revenue】Revenue increased 17.5% YoY to ¥167.9B. Domestic operations led overall growth at ¥158.2B (+18.3%), with Sewerage (¥107.2B, +12.2%), Water Supply (¥49.2B, +27.6%), and Environment and Other (¥11.5B, +29.8%) all recording higher revenue. Overseas operations were ¥9.8B (+6.0%), accounting for only 5.8% of total Company revenue.

【Profit and Loss】Operating Income was ¥49.7B (+27.0%), Ordinary Income was ¥50.9B (+28.4%), and Net Income was ¥36.2B (+34.9%). The gross margin improved slightly to 51.2% (50.9% in the same period last year), while SG&A expenses increased 7.5%, substantially below Revenue growth, resulting in the Operating Margin expanding to 29.6%. The reason Net Income growth exceeded Ordinary Income growth was the decline in the effective tax rate from approximately 32.2% in the same period last year to 28.8%. Extraordinary gains and losses were both negligible, and their impact on earnings was limited. In conclusion, the Company achieved higher revenue and earnings, with improvements in both profitability and margins.

Segment Analysis

Domestic operations improved in both profitability and growth, with Revenue of ¥158.2B (+18.3%), segment profit of ¥50.3B (+26.7%), and a segment Operating Margin of 31.8% (29.7% in the same period last year), serving as the substantive source of consolidated profit. Overseas operations recorded Revenue of ¥9.8B (+6.0%), while the segment loss widened to ¥0.7B from a loss of ¥0.6B in the same period last year. The Operating Margin for overseas operations was negative 7.0%, with the profitability gap versus domestic operations reaching approximately 38.8pt. Sewerage accounted for the largest share of consolidated Revenue at 63.8%, indicating the Company’s high dependence on public-sector projects.

Key Financial Indicators

【Profitability】The Operating Margin of 29.6% (27.4% in the same period last year) and Net Profit Margin of 21.6% (18.8% in the same period last year) both improved year over year, supported by the improvement in the gross margin to 51.2% and greater SG&A efficiency.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥94.0B, equivalent to 2.6 times Net Income, while the accrual ratio was negative, indicating strong cash conversion of earnings. However, OCF includes a ¥14.7B increase in contract liabilities, and changes in customer advances may affect future OCF levels.【Investment Efficiency】Annualized ROE was 23.4%, decomposed into a Net Profit Margin of 21.6% × total asset turnover of 0.857x × financial leverage of 1.27x. The primary driver of the high ROE was the high Net Profit Margin.【Financial Soundness】The Equity Ratio was 79.0%, the current ratio was 433.3%, and the debt-to-equity ratio was 0.27x, indicating an extremely sound financial position. Cash and deposits were ¥263.1B, representing 67.2% of total assets.

Cash Flow Analysis

OCF increased 29.9% YoY to ¥94.0B, demonstrating strong cash generation equivalent to 2.6 times Net Income of ¥36.2B. The ¥14.7B increase in contract liabilities boosted OCF, and the significant contribution from customer advances received ahead of project progress should be considered when evaluating future OCF levels. Investing Cash Flow was negative ¥33.6B, primarily due to deposits into time deposits, while capital expenditures remained modest at ¥1.1B. As a result, Free Cash Flow was secured at a high level of ¥60.4B, while Financing Cash Flow was negative ¥5.4B, primarily due to dividend payments. Capital expenditures were only 0.47 times depreciation and amortization expense of ¥2.3B, making the allocation of ample funds toward future investment a key capital allocation issue.

Quality of Earnings

Against Operating Income of ¥49.7B, non-operating income was ¥1.3B, primarily consisting of ¥0.5B in interest income and ¥0.4B in dividend income, while non-operating expenses were modest at ¥0.1B; accordingly, their net contribution to Ordinary Income was limited. Extraordinary gains and losses were both negligible, indicating that Net Income of ¥36.2B represents recurring earnings with limited dependence on one-time gains or losses. The difference between Ordinary Income and Net Income was ¥14.7B, primarily attributable to income taxes of ¥14.6B. Net Income growth of +34.9% exceeded Ordinary Income growth of +28.4% because the effective tax rate declined from approximately 32.2% in the same period last year to 28.8%. OCF significantly exceeded Net Income, with no evidence of accrual-driven earnings inflation; however, the fact that cash generation was accompanied by an increase in contract liabilities should be evaluated together with project progress.

Earnings Forecast and Guidance

The Company has left its earnings forecast unchanged. Against the full-year Revenue plan of ¥280.0B, the Q2 cumulative progress rate was 60.0%, exceeding the standard 50%. Operating Income reached 138.0% of the full-year plan of ¥36.0B, Ordinary Income reached 137.4% of the ¥37.0B plan, and Net Income reached 147.8% of the ¥24.5B plan, meaning that earnings have already substantially exceeded the full-year plans. The decision not to revise the forecasts may reflect the project mix, timing of cost recognition, or conservative planning assumptions for the second half.

Shareholder Returns

The interim dividend was ¥55.00 per share, and total dividends based on the average number of shares outstanding during the period were approximately ¥5.2B. The payout ratio based solely on dividends was approximately 15.3%, while the payout ratio based on the full-year dividend forecast of ¥110.00 (unchanged from the previous forecast) is approximately 42.8%. Interim dividend coverage by Free Cash Flow of ¥60.4B was more than sufficient, and the financial foundation of cash and deposits of ¥263.1B and a debt-to-equity ratio of 0.27x supports continued dividend payments. No data on share repurchases was available, so the evaluation is based solely on dividends.

Risk Factors

1. Public Investment Dependence Risk: Sewerage accounts for 63.8% of Revenue, creating a business structure in which local government budget execution, the bidding environment, and the timing of project acceptance significantly affect the recognition of Revenue and profit.

2. Overseas Business Profitability Risk: Overseas operations recorded Revenue of ¥9.8B and a segment loss of ¥0.7B, with the loss widening from ¥0.6B in the same period last year. The Operating Margin gap versus domestic operations reached approximately 38.8pt.

3. Investment Securities Valuation Risk: The Company holds ¥29.5B in investment securities, and comprehensive income for the current period of ¥29.0B was below Net Income of ¥36.2B. Changes in valuation differences on securities and other items may affect net assets and comprehensive income.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The Company’s Operating Margin and Net Profit Margin significantly exceed the industry median, placing it among the industry’s high-profitability group.

Growth and Capital Efficiency

The Revenue growth rate was slightly below the industry median, positioning the Company around the middle of the industry in terms of growth speed.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The high profitability represented by an Operating Margin of 29.6% and annualized ROE of 23.4% is supported not by financial leverage but by the high Net Profit Margin of the core business, with OCF also providing cash backing at 2.6 times Net Income.

2. Despite substantially exceeding the full-year earnings plans on a Q2 cumulative basis (Operating Income progress rate: 138.0%), the Company has left its forecasts unchanged. Trends in project profitability and cost recognition in the second half will therefore be key areas of focus.

3. The structure of capital expenditures/depreciation and amortization at 0.47x, combined with high profitability domestically and losses overseas, highlights the capital allocation question of how to allocate ample cash (cash and deposits of ¥263.1B) toward growth investment and shareholder returns.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,083–¥3,260 at Cost of Equity ±1%, and ¥3,167–¥3,171 at ω ±0.1.

Notes:

• Goodwill amortization of ¥7.8 per share has been added back to earnings (due to its non-cash nature and to ensure comparability with IFRS companies).
• Because Net Income progress against the full-year forecast (148%) exceeds the standard level (50%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of plan tend to exceed their forecasts. The adjustment may be excessive for businesses with strong seasonality).
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end have been used (there is a timing difference versus the full-year forecast).

(Valuation model: Residual Income Model (Ohlson-type, explicit five-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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. 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 a professional advisor as necessary.

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