SANKO TECHNO (3435) FY2026 Q3 Earnings Report

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Executive Summary

Despite a slight decline in revenue, operating income increased due to an improvement in the cost ratio. However, net income declined due to the reversal of a one-time gain recorded in the same period of the previous year, making it necessary to assess the quality of the earnings growth. Revenue was ¥156.7B (-0.2% YoY), operating income was ¥11.4B (+9.1%), ordinary income was ¥11.9B (+12.7%), and net income was ¥8.2B (-12.8%). The primary factor behind the increase in operating income was an approximately 1.4pt improvement in the gross margin to 31.2%. The decline in net income was attributable to the reversal of extraordinary income, including a ¥1.3B gain on negative goodwill recognized in the Functional Materials Business in the same period of the previous year, and does not indicate a deterioration in the core business.

Factors Affecting Earnings

【Revenue】Revenue was ¥156.7B, essentially flat at -0.2% YoY. The Fastening Business (80% of revenue composition) recorded revenue of ¥125.5B, down -3.1% YoY, while the Functional Materials Business (20% of revenue composition) recorded revenue of ¥32.4B, up +13.5% YoY, resulting in divergent performance across the businesses.

【Profitability】Operating income increased to ¥11.4B (+9.1% YoY), and ordinary income increased to ¥11.9B (+12.7%). The primary factor was an improvement in the gross margin from 29.8% to 31.2%. Although selling, general and administrative expenses increased +3.3% YoY, outpacing revenue growth, the Company secured higher profits. Net income, however, was ¥8.2B (-12.8% YoY), primarily due to the temporary impact of the reversal of ¥2.5B in extraordinary income recorded in the same period of the previous year, including a ¥1.3B gain on negative goodwill. Core profitability has improved. In conclusion, although revenue did not increase, the results should not be characterized as higher revenue and lower profit; rather, they can effectively be summarized as lower revenue and higher profit at the operating and ordinary income levels.

Segment Analysis

The Fastening Business recorded segment profit of ¥18.2B (+7.6% YoY) and a profit margin of 14.5% (13.1% in the previous year), improving profitability despite declining revenue and supporting more than 98% of consolidated profit. The Functional Materials Business increased revenue to ¥32.4B (+13.5% YoY), but segment profit declined to ¥0.3B (-56.2% YoY), and its profit margin fell from 2.5% to 0.9%. The fact that revenue growth has not contributed to profit growth indicates that monetizing growth investments in this business will be a key challenge going forward.

Key Financial Metrics

【Profitability】The operating margin was 7.3% (6.7% in the previous year), while the net profit margin was 5.2% (6.0% in the previous year). Profitability at the operating level improved, but the net profit margin declined due to the reversal of one-time gains.【Cash Flow Quality】Inventories accounted for 25.0% of total assets and increased +3.7% YoY. On an annualized basis, both inventory days and receivable days were relatively long, and the increase in inventories amid slightly declining revenue is a point of concern from a capital efficiency perspective.【Investment Efficiency】ROE (annualized) of 5.7% exceeded ROA (annualized, estimated at approximately 4.1%), but financial leverage (total assets/net assets) was low at 1.38x, limiting the uplift from the use of debt.【Financial Soundness】The equity ratio was 72.6% (69.2% in the same period of the previous year). The current ratio was approximately 504%, based on current assets of ¥156.5B against current liabilities of ¥31.0B. Long-term borrowings declined -11.4% YoY, indicating continued deleveraging, and the financial foundation was generally robust.

Cash Flow Analysis

Although the cash flow statement is not directly disclosed, cash trends can be analyzed based on changes in the balance sheet. Cash and deposits declined to ¥37.4B from ¥40.0B in the same period of the previous year, while property, plant and equipment expanded to ¥83.7B, primarily due to an increase in buildings and structures, suggesting that funds were increasingly allocated to investment activities. Inventories increased to ¥66.4B, up +3.7% YoY, and the accumulation of inventories amid slightly declining revenue has contributed to the immobilization of funds. Long-term borrowings declined -11.4% YoY to ¥26.3B, indicating an outflow of funds on the liabilities side. However, retained earnings continued to accumulate, reaching ¥171.5B, and net assets expanded +3.0% YoY to ¥193.1B. Overall, although higher operating income and accumulation of equity are progressing, the tie-up of funds in working capital, particularly inventories, remains a point of concern regarding capital efficiency.

Earnings Quality

Against operating income of ¥11.4B and ordinary income of ¥11.9B, extraordinary income for the current period was ¥0.02B and extraordinary losses were ¥0.17B, indicating a limited impact on net income. Profit before tax of ¥11.8B was broadly in line with ordinary income. Non-operating income of ¥1.6B amounted to approximately 1.0% of revenue, indicating a low reliance on non-operating income such as dividend income and interest income. In contrast, in the same period of the previous year, the Company recorded ¥2.5B in extraordinary income, including a ¥1.3B gain on negative goodwill associated with the conversion of the Functional Materials Business subsidiary. Accordingly, the -12.8% YoY decline in net income was significantly affected by the reversal of this one-time gain. Therefore, the year-on-year decline in net income does not directly indicate a deterioration in core profitability and should be evaluated together with recurring indicators such as the improvement in the operating margin and gross margin.

Earnings Forecast and Guidance

The progress rates for the nine months ended Q3 against the full-year Company forecasts were 71.2% for revenue, 69.2% for operating income, 72.0% for ordinary income, and 70.4% for net income. All were below the standard progress rate of 75%, but the largest variance was limited to 5.8pt for operating income. To achieve the full-year plan, the Company needs revenue of ¥63.3B and operating income of ¥5.1B in Q4, corresponding to an operating margin of approximately 8.0% and requiring profitability above the cumulative operating margin of 7.3%. Continued improvement in the gross margin and improved profitability in the Functional Materials Business are prerequisites for achieving the plan.

Shareholder Returns

The full-year dividend forecast is ¥42.0 per share. Based on the period-average number of shares outstanding of 7,911 thousand shares, total annual dividends are estimated at approximately ¥3.3B, resulting in a payout ratio of approximately 28.6% against the full-year net income forecast of ¥11.6B, a sustainable level. The Q2 dividend was ¥0, meaning that the annual dividend is structured to be concentrated in the year-end dividend. Retained earnings were substantial at ¥171.5B, and interest-bearing debt was also low relative to equity, indicating significant balance-sheet capacity to pay dividends.

Risk Factors

1. Inventory accumulation risk: Inventories were ¥66.4B, accounting for 25.0% of total assets and increasing +3.7% YoY. The accumulation of inventories amid slightly declining revenue entails the possibility of a divergence from demand expectations and the recognition of inventory valuation losses.

2. Deterioration in the profitability of the Functional Materials Business: Revenue increased +13.5% YoY to ¥32.4B, while segment profit declined -56.2% YoY to ¥0.3B, and the profit margin fell from 2.5% to 0.9%.

3. Tie-up of funds in working capital: Based on the level of inventory and accounts receivable balances, the cash conversion cycle has lengthened. If inventories and accounts receivable are not reduced, impacts on asset efficiency and funding requirements may persist.

Industry Benchmark (For Reference; Based on Company Research)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin were slightly below the industry median, placing profitability below the middle of the industry range.

Growth and Capital Efficiency

Revenue growth was significantly below the industry median, indicating that top-line growth was at the lower end of the industry range.

※Source: Based on Company Research

Key Takeaways from the Financial Results

1. An approximately 1.4pt improvement in the gross margin YoY resulted in operating income increasing +9.1% despite slightly declining revenue. The sustainability of this cost ratio improvement will be key to achieving the full-year plan.

2. The core Fastening Business improved its segment profit margin despite declining revenue and remains the center of consolidated profit. In contrast, the Functional Materials Business experienced margin deterioration despite revenue growth, indicating that monetizing growth investments remains a key issue.

3. The year-on-year decline in net income was primarily attributable to the temporary reversal of extraordinary income, including the gain on negative goodwill recorded in the same period of the previous year. The fact that this points in a different direction from growth in operating and ordinary income is an important consideration in evaluating the quality of the results.

Theoretical Share Price (Reference Value)

Sensitivity: 2,111円–2,232円 at ±1% for the cost of equity, and 2,161円–2,176円 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value will be below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated at a somewhat high level.

（Valuation 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, and does not predict or guarantee the future share price）

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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 benchmark is reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

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