KFC Ltd FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥12.28B
• Operating Income: ¥265M
• Net Income: ¥215M
• EPS: ¥29.26

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid top-line growth with a sharp rebound in profitability, but returns remain low and the earnings mix leans on non-operating income, keeping quality and sustainability questions open. Revenue rose 5.2% YoY to 122.84, driven by modest volume or pricing gains. Gross profit reached 30.20, translating to a gross margin of 24.6%. Operating income surged to 2.65 (+255.1% YoY), lifting operating margin to 2.2%. Ordinary income climbed to 3.19 (+130.5% YoY), aided by 0.89 of non-operating gains, including 0.58 in dividend income and 0.08 in interest income. Net income was 2.15 (+126.3% YoY), implying a net margin of 1.75%. Operating margin expanded by roughly 152 bps versus the prior-year period (estimated ~0.64% to ~2.16%). Net margin expanded by about 94 bps (estimated ~0.81% to ~1.75%). The earnings structure remains thin at the operating level: SG&A consumed 22.4% of sales (27.54), leaving only a 2.2% operating margin. Non-operating income was material at roughly 34% of operating income, suggesting some reliance on financial income to support ordinary profit. Liquidity is very strong (current ratio 262.6%, quick ratio 217.8%), and leverage is conservative (D/E 0.35x; interest coverage 35.25x). Capital efficiency, however, is weak: ROE is 1.0% and ROIC is only 0.9%, indicating underutilized balance sheet capacity and low asset turnover (0.429). The effective tax rate was 34.2%, broadly in line with statutory levels. Earnings quality cannot be confirmed due to unreported cash flow data; OCF/NI is not calculable. Dividend sustainability is a concern: the calculated payout ratio is 223.1%, which appears inconsistent with mid-single-digit margins and low ROIC absent strong free cash flow. Looking forward, sustaining margin recovery will require continued gross margin discipline and SG&A containment, as well as a reduced dependence on non-operating income.

Profitability Analysis

ROE (1.0%) = Net Profit Margin (1.8%) × Asset Turnover (0.429) × Financial Leverage (1.35x). The biggest driver of the YoY improvement is the margin component: operating income grew +255% on +5.2% revenue, pointing to operating margin expansion of roughly 152 bps. Asset turnover remains modest at 0.429, reflecting a balance sheet heavy in cash (31.24) and investment securities (46.60) relative to sales. Financial leverage is low at 1.35x, limiting ROE amplification. The business reason for margin improvement likely includes better pricing/project mix and SG&A discipline, with SG&A at 22.4% of sales. Non-operating contributions (dividend and interest income totaling 0.66 within 0.89 of non-operating income) boosted ordinary profit, evidencing support from financial assets rather than core operations. Sustainability: margin gains are partly sustainable if the company maintains mix/pricing and cost control; however, the non-operating boost depends on market yields and dividend receipts, which can fluctuate. Watch for potential concern that SG&A remains high relative to gross profit (27.54 vs 30.20), leaving little buffer; any cost or pricing pressure could quickly compress operating profit. No evidence of SG&A growth outpacing revenue in this period, but the narrow operating margin heightens sensitivity to fixed costs.

Growth Assessment

Revenue growth of +5.2% YoY to 122.84 is steady but not rapid, likely reflecting stable demand in core end markets. Operating income growth (+255.1% YoY) reflects strong operating leverage off a low base rather than structural step-change. Ordinary income (+130.5% YoY) and net income (+126.3% YoY) benefited from non-operating income of 0.89, notably dividend income (0.58) and interest income (0.08). Gross margin at 24.6% indicates improved mix or cost pass-through versus last year, inferred from the significant operating margin expansion. With asset turnover at 0.429 and ROIC at 0.9%, overall growth returns are currently low, implying that incremental growth must come with tighter capital discipline to lift ROIC toward the 5%+ warning threshold. Outlook hinges on maintaining the improved operating margin and stability in financial income; absent that, net profit growth may normalize. Key swing factors include material/input cost trends, project mix, and the yield/dividend environment for the securities portfolio (46.60).

Financial Health

Liquidity is robust: current ratio 262.6% (current assets 181.01 vs current liabilities 68.92) and quick ratio 217.8%, with cash and deposits at 31.24. No warning on current ratio (<1.0) or leverage (>2.0 D/E); D/E is conservative at 0.35x and interest coverage is strong at 35.25x. Maturity mismatch risk is low: short-term loans are 3.50 and long-term loans 2.00, comfortably covered by liquid assets and working capital of 112.09. The balance sheet is equity-heavy (total equity 211.71 vs total assets 286.27), limiting financial risk but dragging ROE/ROIC. Off-balance sheet obligations are not disclosed; no information provided on guarantees or commitments.

Cash Flow Quality

Operating cash flow is unreported, so OCF/Net Income cannot be assessed; this limits confidence in earnings quality. The non-operating income mix (0.89, including 0.58 dividend and 0.08 interest income) suggests a portion of profits is driven by financial assets rather than core operations, which can be more volatile and less controllable. Free cash flow is unreported; therefore FCF coverage of dividends and capex cannot be evaluated. Working capital indicators show substantial receivables (37.50) and inventories (30.92), but without prior-period data or OCF we cannot assess collection or inventory risk nor detect working capital-driven earnings management. Given the thin operating margin, cash conversion will be important to monitor when data becomes available.

Dividend Sustainability

The calculated payout ratio of 223.1% is well above the <60% benchmark and would be unsustainable on an earnings basis if representative of full-year policy. With OCF and FCF unreported, coverage from cash generation cannot be confirmed; reliance on the existing cash balance (31.24) and securities (46.60) could support dividends temporarily but does not resolve long-term sustainability. If the payout ratio reflects interim distributions or special factors, it may normalize; otherwise, maintaining such a payout would constrain reinvestment and keep ROE/ROIC depressed. Clarity on annual DPS guidance, interim vs full-year payout cadence, and capex needs is necessary to refine this assessment.

Risk Assessment

Business Risks:

• Margin sensitivity to input/material cost fluctuations and project mix in construction-related demand
• Execution risk given thin operating margin (2.2%), where small cost overruns can erase profits
• Demand cyclicality in core end markets potentially affecting order intake and utilization
• Dependence on non-operating income (dividends/interest) to support ordinary profit

Financial Risks:

• High calculated payout ratio (223.1%) potentially pressuring internal funds if OCF is weak
• Capital efficiency risk: ROIC at 0.9% and ROE at 1.0% indicate underutilized capital
• Market risk on investment securities (46.60) affecting dividend income and potential valuation
• Interest rate and yield fluctuation risk impacting financial income

Key Concerns:

• Sustaining operating margin at ~2.2% amid SG&A at 22.4% of sales
• Low asset turnover (0.429) limiting returns even with low leverage
• Lack of cash flow disclosure prevents verification of earnings quality and dividend coverage
• Potential volatility in non-operating income as a contributor to ordinary profit

Investment Implications

Key Takeaways:

• Top-line grew +5.2% YoY with significant operating margin expansion (~+152 bps) off a low base
• Non-operating income (0.89) meaningfully supported ordinary income, led by dividends (0.58)
• Balance sheet is strong and liquid (current ratio 262.6%, D/E 0.35x) with ample interest coverage (35.25x)
• Capital efficiency is weak (ROIC 0.9%, ROE 1.0%) due to low margins and modest asset turnover
• Dividend sustainability is questionable with a 223.1% payout ratio absent corroborating FCF

Metrics to Watch:

• Operating margin trajectory and SG&A-to-sales ratio
• Gross margin vs material costs and project mix
• OCF/Net Income and FCF once disclosed
• Non-operating income stability (dividend and interest income from securities portfolio)
• Receivables and inventory turnover
• Order backlog and book-to-bill (if disclosed)
• Capital allocation policy and DPS guidance

Relative Positioning: The company exhibits strong liquidity and low leverage versus typical small-cap industrial peers, but lags on profitability and capital efficiency, relying more on financial income than core operating strength.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis