SALA (2734) FY2026 Q2 Earnings Report

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Executive Summary

The interim period resulted in a substantial increase in profit despite a decline in revenue, with improvements in the cost structure providing the key earnings boost. Revenue was ¥129.67B (-1.2% YoY), Operating Income was ¥7.45B (+26.7%), Ordinary Income was ¥8.52B (+48.7%), and Net Income was ¥5.76B (+39.9%). The primary reasons for the revenue decline were lower revenue in the Energy & Solutions Business and the Car Life Support Business. However, reductions in costs and selling, general and administrative expenses improved the gross margin and operating margin, resulting in higher profits. Meanwhile, Operating CF was ¥0.53B, a significant decrease from ¥6.51B in the previous year, indicating that challenges remain in converting earnings into cash.

Factors Affecting Earnings

【Revenue】Revenue was ¥129.67B, down -1.2% YoY. While the core Energy & Solutions Business, which accounted for 51.5% of revenue, declined -3.8%, and the Car Life Support Business declined -8.2%, the Engineering & Maintenance Business grew significantly by +14.8%. The Housing Business (+1.2%) and Animal Healthcare Business (+1.1%) also recorded modest revenue growth. On a company-wide basis, the impact of declining-revenue segments exceeded that of the growing segments, resulting in a slight decline in the top line.

【Profit and Loss】Cost of sales decreased 2.8% YoY, improving the gross margin to 26.2% from 25.0% in the previous year. Selling, general and administrative expenses also declined by ¥0.50B, resulting in Operating Income of ¥7.45B (+26.7%). Ordinary Income increased 48.7% to ¥8.52B, also benefiting from improved non-operating income and expenses, while Net Income increased 39.9% to ¥5.76B, expanding at a faster pace than Operating Income. Extraordinary losses, including a ¥0.29B loss on the disposal of fixed assets, exceeded extraordinary income, resulting in a net burden of ¥0.21B; however, the impact on overall profit was limited. In conclusion, the results represent a combination of lower revenue and higher profit.

Segment Analysis

The largest contributor to segment profit was the Energy & Solutions Business, which secured segment profit of ¥5.44B (+7.1%) and a profit margin of 8.2% despite revenue of ¥66.70B (-3.8%). The Engineering & Maintenance Business recorded revenue of ¥22.19B (+14.8%) and profit of ¥2.19B (+11.1%), maintaining the highest company-wide profit margin at 9.9%. The Housing Business and Property Business recorded profits of ¥0.12B and ¥0.29B, respectively, turning profitable from losses in the previous year. Meanwhile, the Car Life Support Business (profit margin -3.8%) and Animal Healthcare Business (profit margin -1.5%) remained loss-making, with the latter recording a larger loss than in the previous year. While profit growth in the two core businesses, combined with the effects of the businesses that turned profitable, supported company-wide profit growth, the continued losses in two businesses remain an area for potential earnings improvement.

Key Financial Metrics

【Profitability】The Operating Margin improved to 5.7% from 4.5% in the previous year, while the Net Profit Margin improved to 4.4% from 3.1%. The Gross Margin also increased to 26.2% from 25.0%. Even under declining revenue, restraint in costs and selling, general and administrative expenses directly contributed to improved margins.【Cash Flow Quality】Operating CF was limited to ¥0.53B, and its ratio to Net Income of ¥5.76B was approximately 0.09x, a low level. An increase in inventories of ¥2.68B and a decrease in trade payables of ¥1.91B hindered cash conversion.【Investment Efficiency】ROE (annualized) was 11.8%, while the Equity Ratio was 43.9% versus 42.9% in the previous year, indicating that both capital efficiency and the financial foundation improved year on year.【Financial Soundness】Cash and deposits of ¥29.75B were insufficient to fully cover current liabilities of ¥62.11B; however, current assets of ¥94.30B exceeded current liabilities, securing short-term payment capacity. Capital expenditures of ¥6.90B exceeded depreciation and amortization of ¥3.26B, and an investment-led condition continues.

Cash Flow Analysis

Operating CF was ¥0.53B, a significant decrease from ¥6.51B in the previous year. Increases in inventories (-¥2.68B), decreases in trade payables (-¥1.91B), and income tax payments (-¥1.99B) were sources of cash outflow. Trade receivables decreased by ¥0.62B, and collections themselves contributed to cash generation, but this was insufficient to offset the effects of increased inventories and the payment cycle. Investing CF was -¥8.58B, primarily due to capital expenditures of ¥6.90B, resulting in Free Cash Flow of -¥8.05B when combined with Operating CF. Financing CF was positive ¥5.91B, with increases in short-term borrowings and other factors covering part of investment funding and the ¥1.03B share repurchase. Despite higher profit, the Company did not generate corresponding cash during the interim period. Normalization of inventory levels and the payment cycle in the second half will be the focus for improving cash flow trends.

Earnings Quality

The increase in profit during the interim period was primarily attributable to improvements in the core business, centered on Operating Income growth (+26.7%). Extraordinary gains and losses resulted in a net loss of ¥0.21B and did not contribute to boosting profit. Ordinary Income grew at a faster pace than Operating Income, aided by non-operating income of ¥1.45B, including dividend income of ¥0.07B and equity-method investment income of ¥0.28B, exceeding non-operating expenses of ¥0.38B, including interest expenses of ¥0.30B. However, non-operating income amounted to only approximately 1.1% of revenue, and the primary drivers of profit were improvements in the gross margin and SG&A ratio in the core business. Meanwhile, Operating CF was only 0.09x Net Income, with changes in working capital, such as increased inventories and decreased trade payables, hindering the conversion of profit into cash. There is a divergence between profit growth on the income statement and cash generation, making it necessary to monitor the cash conversion rate from an earnings-quality perspective.

Earnings Forecast and Guidance

Progress against the full-year forecast revised in July was 49.9% for revenue, 95.6% for Operating Income, 90.7% for Ordinary Income, and 94.8% for Net Income. While revenue was near the standard 50% level, most of the forecast profit had been recognized in the first half. The profit required in the second half is relatively small, at approximately ¥0.35B for Operating Income, ¥0.88B for Ordinary Income, and ¥0.31B for Net Income. Accordingly, the scope for additional profit growth in the second half is limited in terms of achieving the full-year forecast. The Company revised both its earnings forecast and dividend forecast upward, including an increase in dividends, apparently reflecting the first-half profit growth. In the second half, energy supply-demand and price trends, project profitability, and normalization of working capital will be the key factors affecting progress.

Shareholder Returns

The Q2 (interim) dividend was ¥16.00 per share, and the full-year dividend forecast is ¥34.00, revised upward from the previous year’s actual dividend. The interim Payout Ratio against interim Net Income of ¥5.76B, rather than Net Income attributable to owners of the parent of ¥5.96B, is approximately 18%. The Company conducted share repurchases of ¥1.03B, so the Total Return Ratio including dividends will be higher than the dividend-only Payout Ratio. From a profit perspective, there are no significant concerns regarding dividend sustainability. However, Free Cash Flow during the interim period was -¥8.05B, and dividends and share repurchases were not covered by internally generated funds. Cash and deposits of ¥29.75B provide a buffer, but the recovery of Operating CF will determine the sustainability of future shareholder returns.

Risk Factors

1. Decline in cash-generation capacity: Operating CF was ¥0.53B, with its ratio to Net Income of ¥5.76B at approximately 0.09x, a low level. This was attributable to deterioration in working capital, including increased inventories and decreased trade payables. Normalization of working capital in the second half will be key to recovery.

2. Variability in profitability by business: The Car Life Support Business (profit margin -3.8%) and Animal Healthcare Business (profit margin -1.5%) remained loss-making, with the Animal Healthcare Business in particular recording a larger loss than in the previous year. These losses offset profit growth in the core businesses.

3. Deterioration in Free Cash Flow due to front-loaded investment: Capital expenditures of ¥6.90B reached 2.1x depreciation and amortization of ¥3.26B, resulting in Free Cash Flow of -¥8.05B. Investment funding was supplemented through financing activities, including short-term borrowings, and changes in the funding structure should be closely monitored.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

As comparative data against the industry median for the Company’s Operating Margin and Net Profit Margin was not provided, these metrics are presented only as absolute levels.

Growth and Capital Efficiency

Revenue growth was slightly negative, and a determination of the Company’s relative position within the industry is reserved because comparative data was not provided.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Despite declining revenue, the Operating Margin improved to 5.7% from 4.5% in the previous year through gross margin improvement and SG&A control, indicating progress in cost-structure efficiency.

2. Despite profit growth, Operating CF remained at only 0.09x Net Income, and the divergence between profit growth and cash generation is a key characteristic of the current-period results.

3. Profit progress against the full-year forecast exceeded 90%, and the earnings and dividend forecasts were revised upward in July, indicating that the first-half profit growth has been reflected in the outlook for the second half.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,377–¥1,457 at ±1% for the Cost of Equity, and ¥1,412–¥1,419 at ±0.1 for ω.

Notes:

• Goodwill amortization of ¥3.9 per share is added back to earnings (to account for a non-cash expense and comparability with IFRS companies).
• Because Net Income progress against the full-year forecast (95%) exceeds the standard level (50%), forecast EPS is adjusted upward within a maximum range of +10% (because companies with leading progress tend to exceed 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 end of the quarter are used (there is a timing gap relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson type; explicit 5-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, nor does it predict or guarantee future share prices.)

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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. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting a professional advisor as necessary.

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