Watahan & Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

Although growth in the Construction Business offset the decline in revenue from the Retail Business, securing higher revenue, earnings declined due to lower margins in retail and increased interest expenses. Revenue was ¥32.52B, essentially unchanged from the previous year at +0.3% YoY, while Operating Income was ¥0.63B (-7.5% YoY), Ordinary Income was ¥0.71B (-13.1% YoY), and Net Income attributable to owners of the parent was ¥0.47B (-26.8% YoY), with all earnings indicators declining by nearly double-digit percentages. The gross profit margin was flat at 20.6%, but the rise in the SG&A ratio, increased interest expenses, and a higher effective tax rate were confirmed to have progressively weighed on earnings.

Factors Affecting Performance

【Revenue】Revenue was ¥32.52B, essentially flat at +0.3% YoY. By segment, the Construction Business grew significantly to ¥11.53B (35.5% of total, +15.1% YoY), while the core Retail Business declined to ¥19.24B (59.2% of total, -3.5% YoY). The Trading Business posted a modest increase to ¥1.58B (4.9% of total, +1.1% YoY). Growth in the Construction Business offset the decline in the Retail Business, keeping consolidated revenue essentially in line with the previous year.

【Profit and Loss】Operating Income was ¥0.63B (-7.5% YoY), with the operating margin declining to 1.9% from 2.1% in the previous year. Although the gross profit margin was essentially flat at 20.6%, the SG&A ratio rose to 18.7% (18.5% in the previous year), putting pressure on profitability. By segment, Retail posted a substantial decline in segment profit to ¥0.45B (-26.3% YoY; 2.3% margin), while Construction recovered sharply to ¥0.36B (+319.8% YoY; 3.1% margin), supporting consolidated earnings. Ordinary Income was ¥0.71B (-13.1% YoY), also affected by higher interest expenses (¥0.07B versus ¥0.04B in the previous year). Net Income attributable to owners of the parent declined by 26.8% YoY to ¥0.47B, with the decline exceeding that of Ordinary Income due in part to the higher effective tax rate (32.2% versus 20.2% in the previous year). Revenue was essentially flat while earnings deteriorated, resulting in a higher-revenue, lower-earnings quarter.

Segment Analysis

Retail accounted for more than half of total segment profit at ¥0.45B, but Construction expanded sharply to ¥0.36B, leading to a more diversified earnings mix. The Retail Business recorded revenue of ¥19.24B (59.2% of total, -3.5% YoY) and Operating Income of ¥0.45B (-26.3% YoY; 2.3% margin), with deteriorating profitability in the existing business being the primary cause of the consolidated earnings decline. The Construction Business posted revenue of ¥11.53B (35.5% of total, +15.1% YoY) and Operating Income of ¥0.36B (+319.8% YoY; 3.1% margin), a substantial earnings increase suggesting an improved project mix or better cost control. The Trading Business recorded revenue of ¥1.58B (4.9% of total, +1.1% YoY) and Operating Income of ¥0.06B (-54.4% YoY; 3.6% margin), representing a decline in earnings. Other recorded revenue of ¥0.28B (-72.3% YoY) and Operating Income of ¥0.03B (-68.4% YoY); although its share of total revenue is small, it had a relatively high margin of 10.9%. Corporate expenses were ¥0.26B (¥0.24B in the previous year), deducted from reported segment profit of ¥0.86B, resulting in Operating Income of ¥0.63B.

Key Financial Indicators

【Profitability】The operating margin declined to 1.9% from 2.1% in the previous year, while the net profit margin, based on income attributable to owners of the parent, declined to 1.5% from 2.0%. In contrast, the gross profit margin was essentially flat at 20.6%, compared with 20.6% in the previous year. The primary cause of the deterioration in profitability was the increase in the SG&A ratio to 18.7% from 18.5%.【Cash Quality】Cash and deposits declined 21.3% to ¥4.23B from ¥5.37B in the previous year, while inventories increased to ¥16.80B (¥15.88B in the previous year, +5.8%), indicating a downward trend in working capital efficiency.【Investment Efficiency】ROE was 2.0%, basic EPS attributable to owners of the parent was ¥25.27 (¥33.34 in the previous year, -24.2% YoY), and BPS was ¥1,303.32, essentially flat from ¥1,303.74 in the previous year.【Financial Soundness】The equity ratio was 29.9%, essentially flat from 29.6% in the previous year. While net assets of ¥24.59B were maintained against total assets of ¥82.25B, the Company held long-term borrowings of ¥15.44B and short-term borrowings of ¥14.84B, indicating a high level of dependence on interest-bearing debt.

Cash Flow Analysis

As the statement of cash flows was not disclosed, cash movements are analyzed based on changes in the balance sheet. Cash and deposits declined by ¥1.14B (-21.3%) to ¥4.23B from ¥5.37B in the previous year. Meanwhile, inventories increased to ¥16.80B (¥15.88B in the previous year, +5.8%), and construction work in progress also accumulated to ¥1.02B (¥0.76B in the previous year, +34.2%), suggesting that the expansion of working capital may have placed pressure on cash resources. In contrast, short-term borrowings increased to ¥14.84B (¥13.69B in the previous year, +8.4%), indicating that the accumulation of working capital was financed through short-term funding. Long-term borrowings declined slightly to ¥15.44B (¥15.69B in the previous year, -1.6%), with no significant change in the composition of interest-bearing debt. The decline in cash balances and increased dependence on short-term borrowings suggest a slight reduction in financial flexibility.

Quality of Earnings

The impact of extraordinary gains and losses on earnings for the current period was extremely limited, with recurring operating income and expenses forming the core of results. Extraordinary income of ¥0.004B and extraordinary losses of ¥0.001B were both immaterial, and Ordinary Income of ¥0.71B was therefore almost identical to income before taxes of ¥0.71B. Non-operating income was ¥0.15B, equivalent to approximately 0.5% of revenue, and primarily consisted of stable items such as dividend income of ¥0.05B. Meanwhile, interest expenses increased by more than 60% to ¥0.07B from ¥0.04B in the previous year, with higher financial expenses weighing on Ordinary Income. The effective tax rate rose to 32.2% from 20.2% in the previous year, and the increase in the tax burden contributed to the decline in Net Income attributable to owners of the parent (-26.8%) exceeding the decline in Ordinary Income (-13.1%). The accumulation of working capital accompanying the increase in inventories is likely to create a divergence between accounting earnings and cash flow, and should be monitored from an earnings-quality perspective.

Earnings Forecast and Guidance

The Q1 progress rates against the full-year company forecasts were 23.2% for revenue (¥32.52B against ¥140.00B), 16.6% for Operating Income (¥0.63B against ¥3.80B), and 17.7% for Ordinary Income (¥0.71B against ¥4.00B). While revenue was close to the simple progress rate of 25%, the progress rates for Operating Income and Ordinary Income were below 20%, indicating that results are somewhat behind the full-year plan. No revisions to the earnings forecast or dividend forecast were announced during the quarter. The full-year plan projects a 5.6% YoY increase in Operating Income, making the recovery from the Q1 decline of 7.5% a key focus going forward.

Shareholder Returns

The full-year dividend forecast is ¥0 per share, and the previous year also ended with no dividend. As there is no dividend track record, there is no basis for calculating the Payout Ratio, and no shareholder returns through dividends are currently being made. The Company holds 1,271 thousand treasury shares out of 19,959 thousand issued shares; however, no disclosure concerning new treasury share repurchases during the current period has been identified.

Risk Factors

1. Declining profitability in the Retail segment: The Retail Business recorded revenue of ¥19.24B (-3.5% YoY) and Operating Income of ¥0.45B (-26.3% YoY), resulting in a decline in earnings exceeding the decline in revenue. Its profit margin declined to 2.3% from approximately 3.1% in the previous year. Given its large contribution to consolidated Operating Income, the profitability trends of this business are likely to have a significant impact on consolidated performance.

2. High leverage and dependence on short-term funding: Interest-bearing debt, comprising short-term borrowings of ¥14.84B and long-term borrowings of ¥15.44B, is high relative to total assets of ¥82.25B, while the equity ratio remains at 29.9%. Cash and deposits declined 21.3% from the previous year to ¥4.23B, indicating a relatively high degree of dependence on short-term funding.

3. Prolonged working capital cycle: Inventories increased to ¥16.80B (+5.8% YoY), while construction work in progress rose to ¥1.02B (+34.2% YoY), indicating a structure in which funds are likely to remain tied up in inventory and work in progress. Together with the increase in interest expenses (+64.3% YoY), working capital efficiency may affect both earnings and cash flow.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Growth and Capital Efficiency

※Source: Compiled by the Company

Key Points from the Financial Results

1. Operating Income in the Construction Business expanded sharply by 319.8% YoY, supporting consolidated earnings by offsetting the decline in the Retail Business, which has a growing contribution to consolidated revenue. The change in the segment profit mix is an important observation point for assessing the future earnings structure.

2. The SG&A ratio rose to 18.7%, reducing the operating margin to 1.9% while the gross profit margin remained flat. The increase in interest expenses and the higher effective tax rate also contributed, resulting in the declines in Ordinary Income and Net Income exceeding that in Operating Income. This point warrants attention when assessing earnings quality.

3. Q1 progress rates against the full-year plan were 16.6% for Operating Income and 17.7% for Ordinary Income, both below the revenue progress rate of 23.2%. Along with the expansion of working capital due to the accumulation of inventories and work in progress, progress toward achieving the full-year plan requires ongoing monitoring.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from 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 share price or a recommendation of any specific investment action.

Sensitivity: ¥1,267–¥1,345 at ±1% for the cost of equity, and ¥1,305–¥1,305 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing gap relative to the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not 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 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 discretion and responsibility, after consulting with professionals as necessary.

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