SRE Holdings Corporation FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended March 2026, Revenue totaled ¥328.6B (YoY +¥61.7B, +23.1%), Operating Income was ¥41.8B (YoY +¥10.7B, +34.5%), Ordinary Income was ¥38.4B (YoY +¥9.4B, +32.3%), and Net Income attributable to owners of the parent was ¥18.4B (YoY +¥1.4B, +8.5%). High-margin growth in the AI Cloud & Consulting Business and a significant revenue increase in the Life & Property Solutions Business drove top-line and operating-profit growth. Operating margin improved to 12.7% from 11.6% a year earlier (+1.1pt), while Net Income was suppressed by impairment losses of ¥5.8B and higher interest expenses (¥3.3B, YoY +¥1.7B), resulting in a Net Profit Margin of 5.6%, down 0.8pt from 6.4% in the prior year.

Drivers of Performance

Revenue of ¥328.6B (YoY +23.1%) was led by the Life & Property Solutions business (hereafter L&P) at ¥262.7B (+28.0%). L&P accounted for 80.0% of revenue mix due to active expansion of real estate projects. The AI Cloud & Consulting business (hereafter AI Cloud) was ¥65.1B (+4.0%), a low-growth segment, but inter-segment revenue expanded to ¥21.8B (prior year ¥15.9B), supporting consolidated sales. Gross margin declined to 34.7% from 35.7% a year earlier (-1.0pt), reflecting the higher revenue mix from L&P and rising procurement costs.

Operating Income of ¥41.8B (+34.5%) was led by AI Cloud segment profit of ¥34.7B (+41.0%, margin 40.0%). Selling, general and administrative expenses were contained at ¥72.3B (SG&A ratio 22.0%), growing below revenue expansion and enabling operating leverage. Ordinary Income of ¥38.4B (+32.3%) showed somewhat lower growth versus Operating Income due to higher non-operating expenses of ¥3.9B (interest expense ¥3.3B). Extraordinary items resulted in a net loss of ¥5.1B, mainly from impairment losses of ¥5.8B and valuation losses on investment securities of ¥1.3B, leaving Profit Before Tax at ¥33.4B (+12.3%). The effective tax rate remained elevated at 41.9%; after income taxes of ¥14.0B and non-controlling interests of ¥1.0B, Net Income attributable to owners of the parent amounted to ¥18.4B (+8.5%). In conclusion, while operating profit and revenue increased, extraordinary losses and higher interest burden caused final profit growth to lag considerably behind operating-level gains.

Segment Analysis

The AI Cloud & Consulting Business recorded Revenue of ¥65.1B (YoY +4.0%), Segment Profit of ¥34.7B (+41.0%), and maintained a high margin of 40.0%. The L&P Business recorded Revenue of ¥262.7B (+28.0%), Segment Profit of ¥12.0B (+15.1%), and a low margin of 4.6%. AI Cloud is the primary contributor to Operating Income (segment profit contribution 83.0%), whereas L&P’s volume expansion has not translated into margin improvement. Other businesses reported Revenue of ¥0.8B and a Segment Loss of ¥4.2B, remaining in the red.

Key Financial Metrics

• Profitability: Operating Margin 12.7% (prior year 11.6%, +1.1pt), Net Profit Margin 5.6% (prior year 6.4%, -0.8pt), Gross Margin 34.7% (prior year 35.7%, -1.0pt).
• Cash Quality: Operating Cash Flow / Net Income = -4.64x, indicating delayed cash conversion of profits; accrual ratio 21.1% remains high, raising questions on earnings quality. Operating CF / EBITDA = -1.83x.
• Investment Efficiency: ROE 11.3% is composed of Net Profit Margin 5.6% × Total Asset Turnover 0.668 × Financial Leverage 3.02, with leverage expansion the main contributor. Total Asset Turnover is under pressure due to higher inventory.
• Financial Soundness: Equity Ratio 33.1% (prior year 44.8%, -11.7pt), D/E 2.02x (prior year 0.60x, +1.42x) reflecting a large increase in financial leverage. Interest-bearing debt stands at ¥260.6B (short-term ¥185.1B, long-term ¥75.5B), skewed to short-term, with Current Ratio 180%, Quick Ratio 71%, and Cash / Short-term Debt 0.45x indicating tight liquidity. Interest Coverage Ratio 12.7x is currently adequate, but Interest Burden Coefficient is trending up at 0.80.

Cash Flow Analysis

Operating Cash Flow was a large negative ¥-85.4B (prior year ¥+4.4B, deterioration of ¥-89.8B), primarily due to an increase in inventories of ¥-109.5B. Operating CF before working capital changes was ¥-71.3B, indicating weakened core cash generation. Investing CF was ¥-6.0B (capital expenditures ¥-1.8B, intangible asset investment ¥-4.5B), restrained. Free Cash Flow was deeply negative at ¥-91.4B, meaning dividends and capex were not covered by internal funds. Financing CF was ¥+131.2B (long-term borrowings +¥143.9B, increase in short-term borrowings +¥68.8B, long-term repayments -¥78.9B, dividend payments -¥2.4B), filling the funding gap and indicating high reliance on external financing. Cash balance rose to ¥83.5B (YoY +¥39.7B) but due to borrowings rather than autonomous cash generation.

Earnings Quality

Recurring earnings are centered on Operating Income of ¥41.8B, with non-operating income of ¥0.5B negligible. Of non-operating expenses of ¥3.9B, interest expense of ¥3.3B is the main component; the rise in interest burden appears structural, tied to inventory investment and debt expansion. Extraordinary items netted to -¥5.1B (extraordinary losses ¥5.9B: impairment ¥5.8B, valuation loss on investment securities ¥1.3B, loss on disposal of fixed assets ¥0.1B; extraordinary gains ¥0.8B from sale of investment securities), causing roughly 28% of Net Income to be impacted by one-off items. The decline from Ordinary Income ¥38.4B to Profit Before Tax ¥33.4B is entirely due to extraordinary losses, and the impairment charge signals considerations regarding asset health. On an accrual basis, Operating CF lags Net Income substantially, and the buildup of inventories (+¥109.5B; inventory turnover days 431 days) is the main driver of delayed cash conversion and deterioration in quality. Comprehensive Income was ¥19.4B, close to Net Income of ¥18.4B; the impact of other comprehensive income on available-for-sale securities of -¥0.04B is minor.

Forecasts & Guidance

Full-year plan targets Revenue ¥418.0B (YoY +27.2%), Operating Income ¥52.3B (+25.1%), Ordinary Income ¥45.0B (+17.2%), and EPS ¥167.58. Achievement rate to the full-year plan based on current results is Revenue 78.6%, Operating Income 79.9%, Ordinary Income 85.3%, more than 10% below standard progress (100%). The shortfall is presumed driven by delayed sales execution in the L&P business and higher interest burden. Achieving the full-year plan requires inventory reduction and normalization of inventory turnover, continued profit growth in AI Cloud, and containment of financial expenses.

Shareholder Returns

The year-end dividend is ¥18, for an annual dividend of ¥18 and a Payout Ratio of 14.2%, a conservative level. Total dividends amount to ¥2.4B while Free Cash Flow is ¥-91.4B, meaning dividend funding is effectively dependent on external financing. Share buybacks are effectively zero (CF -¥0.0B), and Total Return Ratio remains dividend-centric at 14.2%. Despite cash balance of ¥83.5B and retained earnings of ¥73.9B, given continued negative Operating CF and short-term debt concentration of ¥185.1B, scope for dividend increases appears limited.

Risk Factors

1. Inventory Turnover Risk: Inventories at ¥253.0B (51.4% of total assets) are at a high level, with prolonged inventory turnover days of 431. This is the primary factor dragging Operating CF down by ¥-85.4B. Should sales delays or market deterioration necessitate discounts or valuation write-downs, both earnings and cash flow would suffer a double hit. Given L&P’s low margin (4.6%), room for price concessions is limited.

2. Refinancing Risk: Of ¥260.6B in interest-bearing debt, short-term borrowings are ¥185.1B (71%), indicating short-term concentration. With Cash / Short-term Debt ratio 0.45x and Quick Ratio 71% and weak autonomous cash generation (Operating CF -¥85.4B), delays in inventory liquidation or a deterioration in financial markets could impede refinancing. High leverage (D/E 2.02x, Debt/EBITDA 5.6x) reduces resilience.

3. Risk of Rising Interest Burden: Interest expense rose sharply to ¥3.3B (YoY +¥1.7B, +104.0%), and the Interest Burden Coefficient is trending up at 0.80. As long as interest-bearing debt remains at ¥260.6B, an environment of rising interest rates would accelerate profit compression. While the Interest Coverage Ratio of 12.7x is currently adequate, it could fall rapidly with slower operating income growth or higher rates.

Industry Benchmark (Reference, Company Calculations)

Profitability & Returns

Operating Margin is 2.1pt above the industry median and at a healthy level, but Net Profit Margin is 4.8pt below the median due to extraordinary losses and rising interest burden.

Growth & Capital Efficiency

Revenue growth rate exceeds the industry median by 10.3pt, maintaining high growth.

※ Source: Company aggregation

Earnings Highlights to Watch

1. While operating-level profitability improved (Operating Margin +1.1pt, Operating Income +34.5%) and AI Cloud advanced to high profitability (margin 40.0%), the sharp rise in inventories (+¥115.0B, +83.3%) and Operating CF of -¥85.4B leading to deterioration in cash-flow quality are the top priorities. The pace of normalization in inventory turnover days from 431 will determine the success of restoring financial soundness and managing refinancing risk.

2. Financial leverage has shifted to high levels (D/E 2.02x, Debt/EBITDA 5.6x), and dependence on short-term borrowings of ¥185.1B (71% of interest-bearing debt) has increased, exposing maturity-mismatch risk. Under tight liquidity (Quick Ratio 71%, Cash / Short-term Debt 0.45x), progress on L&P sales and normalization of Operating CF are preconditions for maintaining stable funding.

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This report is an earnings analysis document automatically generated by AI analyzing XBRL financial statement data. It does not constitute a recommendation to invest 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.