TOCALO (3433) FY2026 FY Earnings Report

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Executive Summary

Driven by expanding demand for semiconductor and FPD manufacturing equipment, as well as strong growth at overseas subsidiaries, the Company posted solid results featuring higher revenue and earnings together with a significant improvement in profit margins. Revenue amounted to ¥58.49B (+7.9% year on year), Operating Income to ¥14.10B (+15.0%), Ordinary Income to ¥14.74B (+17.4%), and Net Income attributable to owners of the parent to ¥10.06B (+25.0%), with earnings growth continuing to outpace revenue growth. The primary drivers were operating leverage from improved gross margins and restrained growth in SG&A expenses, while the high profitability of overseas subsidiaries contributed to lifting consolidated profit margins.

Factors Affecting Performance

【Revenue】Revenue was ¥58.49B, representing a 7.9% year-on-year increase. By segment, overseas subsidiaries posted the strongest growth, with revenue of ¥12.27B (+31.7%), accounting for 21.0% of consolidated revenue. The core thermal spraying business (non-consolidated) generated ¥40.71B (+3.8%), accounting for 69.8% of consolidated revenue, although its growth rate moderated. Domestic subsidiaries recorded ¥2.88B in revenue (+8.5%), while Other Businesses declined to ¥2.47B (-14.3%).

【Profit and Loss】Operating Income was ¥14.10B (+15.0%), and the Operating Margin improved to 24.1% from 22.6% in the previous year, a +1.5pt improvement. The cost-of-sales ratio declined to 61.4% from 62.7% in the previous year, while SG&A expenses increased by only +6.0%, below the rate of revenue growth, contributing to margin expansion. Ordinary Income was ¥14.74B (+17.4%), including subsidy income of ¥0.419B and foreign exchange gains of ¥0.125B. Extraordinary gains and losses were nearly offset, with gains of ¥0.03B and losses of ¥0.03B, indicating that the increase in Net Income represented structural improvement rather than dependence on extraordinary items. In conclusion, the Company achieved both revenue and earnings growth.

Segment Analysis

Overseas subsidiaries generated revenue of ¥12.27B (+31.7%) and segment profit of ¥4.94B (+48.3%), with a profit margin of 40.2%, making them the core driver of consolidated growth and margin improvement. The core thermal spraying business (non-consolidated) posted revenue of ¥40.71B (+3.8%), while segment profit declined to ¥8.80B (-0.7%), resulting in a lower profit margin of 21.6%. Domestic subsidiaries recorded revenue of ¥2.88B (+8.5%) and profit of ¥0.33B (-4.3%), with a profit margin of 11.5%, indicating a slight deterioration in profitability. Other Businesses recorded revenue of ¥2.47B (-14.3%) and profit of ¥0.28B (-33.4%), resulting in both lower revenue and earnings. This structure, in which high-growth, high-profitability overseas subsidiaries offset declining earnings in the core business that accounts for approximately 70% of consolidated revenue, means that the increasing reliance on overseas operations will determine the sustainability of profitability going forward. It should be noted that segment profit is based on Ordinary Income and therefore differs in definition from consolidated Operating Income.

Key Financial Indicators

【Profitability】The Operating Margin was 24.1%, improving from 22.6% in the previous year, while the Net Profit Margin attributable to owners of the parent expanded to 17.2% from 14.8% in the previous year. ROE was 14.9%. 【Cash Quality】Operating Cash Flow (OCF) was ¥7.75B, representing only approximately 0.77x Net Income attributable to owners of the parent of ¥10.06B, indicating that cash generation somewhat lagged earnings growth. Trade receivables increased by ¥1.93B and inventories by ¥1.09B, with the expansion of working capital restraining cash conversion. 【Investment Efficiency】Capital expenditures were ¥9.76B, reaching 2.57x depreciation and amortization expense of ¥3.79B, indicating an active investment phase aimed at expanding capacity. Research and development expenses were ¥1.44B, equivalent to 2.5% of revenue. 【Financial Soundness】The Equity Ratio remained high at 81.4%. Although long-term borrowings increased by +181.5% year on year to ¥5.25B, cash and deposits of ¥14.73B significantly exceeded short-term borrowings of ¥0.51B, indicating a high degree of financial flexibility.

Cash Flow Analysis

Operating Cash Flow was ¥7.75B, down -14.6% year on year, while Investing Cash Flow was -¥9.96B, primarily reflecting capital expenditures of ¥9.76B. Financing Cash Flow was -¥1.16B due to dividend payments and debt repayments. Free Cash Flow (OCF + Investing Cash Flow) was negative at -¥2.21B, indicating that internal funds generated during the period were insufficient to fully fund the large-scale capital expenditures. Capital expenditures were 2.57x depreciation and amortization expense of ¥3.79B, demonstrating that the Company is in an investment phase aimed at increasing future capacity. In terms of working capital, the ¥1.93B increase in trade receivables, ¥1.09B increase in inventories, and ¥1.55B decrease in trade payables weighed on OCF. Cash and cash equivalents stood at ¥14.46B at period-end, down from ¥17.59B in the previous year; however, given the Equity Ratio of 81.4% and low level of interest-bearing debt, this does not represent a level that would impair near-term liquidity.

Quality of Earnings

The earnings growth for the period was primarily supported by gross margin improvement and SG&A expense control in recurring business activities. Extraordinary gains and losses, consisting of gains of ¥0.03B and losses of ¥0.03B, were almost fully offset and had only a limited impact on Net Income. Non-operating income included subsidy income of ¥0.419B and foreign exchange gains of ¥0.125B, among other items. Although some items were temporary in nature, their amounts were limited and their impact on Ordinary Income was small. Meanwhile, OCF was only approximately 0.77x Net Income attributable to owners of the parent, with the expansion of working capital resulting from increases in trade receivables and inventories being the primary cause of the accruals, or divergence between accounting earnings and cash flows. Comprehensive Income was ¥11.55B, slightly exceeding consolidated Net Income of ¥10.85B, primarily due to a positive contribution of ¥0.68B from foreign currency translation adjustments. Accordingly, the divergence does not materially impair the quality of earnings.

Earnings Forecast and Guidance

For the following fiscal year ending March 2027, the Company forecasts Revenue of ¥65.00B (+11.1% year on year), Operating Income of ¥15.00B (+6.4%), and Ordinary Income of ¥15.00B (+1.7%). While continued revenue growth is expected, the planned Operating Margin is approximately 23.1%, implying a decline of approximately 1.0pt from the current-period result of 24.1%. This appears to be a somewhat conservative earnings plan that incorporates increased depreciation and amortization expenses associated with capital expenditures, as well as changes in the business mix, despite the expected revenue growth. Forecast EPS is ¥172.02, and forecast dividends are ¥86.00.

Shareholder Returns

Annual dividends were ¥85.00 per share, comprising an interim dividend of ¥37.00 and a year-end dividend of ¥48.00. The Payout Ratio was approximately 50.2% against Net Income attributable to owners of the parent of ¥10.06B. No share repurchases were conducted, and returns consisted solely of dividends; therefore, shareholder returns should be evaluated based on the Payout Ratio. Dividends paid of ¥5.05B were within OCF of ¥7.75B; however, Free Cash Flow was negative at -¥2.21B, meaning that dividends were not fully covered by FCF. The forecast dividend for the following fiscal year is ¥86.00, representing a planned ¥1 increase, and the forecast Payout Ratio against forecast EPS of ¥172.02 is approximately 50.0%. Including retained earnings of ¥61.27B, the Company has a robust financial foundation, and its capacity to pay dividends remains high.

Risk Factors

1. Declining earnings and business concentration in the core business: The thermal spraying business (non-consolidated), which accounts for 69.8% of consolidated revenue, recorded revenue growth of +3.8% but a -0.7% decline in segment profit, with its profit margin falling to 21.6%. Improvement in the profitability of the core business will determine the sustainability of Company-wide growth.

2. Working capital expansion and weak cash conversion: OCF was ¥7.75B, only approximately 0.77x Net Income attributable to owners of the parent of ¥10.06B. The primary causes were increases of +¥1.93B in trade receivables and +¥1.09B in inventories, and continued delays in cash conversion relative to earnings growth require monitoring.

3. Increasing reliance on overseas subsidiaries: Overseas subsidiaries are at the center of consolidated margin improvement, with revenue growth of +31.7%, profit growth of +48.3%, and a profit margin of 40.2%. However, fluctuations in overseas demand, foreign exchange movements, and changes in local competitive conditions are having a relatively greater impact on consolidated earnings.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company's Operating Margin and Net Profit Margin both significantly exceed the industry median, demonstrating a high level of profitability within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate also exceeds the industry median, but remains within the upper bound of the industry IQR (8.8%) and is not an exceptional level.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The Operating Margin of 24.1% and Net Profit Margin of 17.2% are significantly above the industry median, demonstrating the high value-added nature of the Company's surface treatment business.

2. While overseas subsidiaries, with revenue growth of +31.7% and a profit margin of 40.2%, are the core of consolidated growth, the core thermal spraying business (non-consolidated), which accounts for approximately 70% of consolidated revenue, recorded lower earnings. This indicates that profitability disparities within the business portfolio are widening.

3. Capital expenditures of ¥9.76B reached 2.57x depreciation and amortization expense, resulting in negative Free Cash Flow of ¥2.21B. Although the Company has the financial capacity to absorb the investment, supported by an Equity Ratio of 81.4% and low interest-bearing debt, the utilization and monetization progress of the investments, as well as working capital trends, should be monitored in future financial results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,325–¥1,401 at ±1% in the Cost of Equity, and ¥1,357–¥1,371 at ±0.1 in ω.

Notes:

• Amortization of goodwill of ¥0.4 per share has been added back to earnings (as a non-cash expense and to enhance comparability with IFRS companies).

(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 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 adviser as necessary.

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