KAWADA TECHNOLOGIES,INC. FY2027 Q1 Earnings Report

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Executive Summary

Despite a decline in revenue, the Company secured higher profit through improved profitability, indicating qualitative improvement in its business portfolio. Revenue was ¥262.7B (-4.6% YoY), Operating Income was ¥12.4B (+15.2% YoY), Ordinary Income was ¥27.2B (+55.6% YoY), and Net Income attributable to owners of the parent was ¥22.6B (+40.5% YoY). The primary factor behind the revenue decline was the slower pace of project execution in the Civil Engineering segment, while improved profitability in the Steel Structures and Solutions businesses, together with increased equity-method investment income and subsidy income, boosted Ordinary Income.

Factors Affecting Earnings

【Revenue】Revenue was ¥262.7B, down -4.6% YoY. By segment, the Steel Structures segment secured higher revenue of ¥126.5B (+3.1%), and Solutions increased revenue to ¥18.9B (+8.2%). Meanwhile, Civil Engineering recorded a substantial decline of -26.4% to ¥59.4B, while Construction also declined slightly by -2.4% to ¥42.0B. The contraction in Company-wide revenue was primarily attributable to the slowdown in the pace of project progress in Civil Engineering.

【Profit and Loss】Operating Income was ¥12.4B (+15.2%), and the Operating Margin improved to 4.7% from 3.9% in the previous year. The gross profit margin improved YoY to 17.1%, with improved profitability in Steel Structures (Operating Income of ¥24.0B, +113.2%) and the high margin of Solutions (37.5%) serving as drivers. On the other hand, Civil Engineering fell into the red with an Operating Loss of ¥12.7B, putting pressure on Company-wide earnings. The SG&A expense ratio rose slightly to 12.4%, but the improvement in gross profit more than offset this increase. Ordinary Income expanded to ¥27.2B (+55.6%), supported by equity-method investment income of ¥13.4B (¥4.1B in the previous year) and subsidy income of ¥3.3B, while Net Income was ¥22.6B (+40.5%). This represents an increase in profit despite the absence of the ¥3.75B gain on the sale of investment securities recorded in the previous year, resulting in a decline in revenue but an increase in profit.

Segment Analysis

The core Steel Structures segment led Company-wide earnings, with revenue of ¥126.5B (+3.1%), Operating Income of ¥24.0B (+113.2%), and a profit margin of 19.0%. Solutions maintained high profitability, with revenue of ¥18.9B (+8.2%), Operating Income of ¥7.1B, and a profit margin of 37.5%. Construction remained solid, with revenue of ¥42.0B (-2.4%), Operating Income of ¥4.1B (+20.0%), and a profit margin of 9.9%. Meanwhile, Civil Engineering recorded revenue of ¥59.4B (-26.4%) and an Operating Loss of ¥12.7B, a substantial deterioration from the ¥25M profit in the same period of the previous year, offsetting the growth in total segment profit of ¥22.5B. Profitability gaps between segments are substantial, and the correction of Civil Engineering’s earnings is key to improving the Company-wide margin.

Key Financial Indicators

【Profitability】The Operating Margin of 4.7% (3.9% in the previous year) and Net Profit Margin of 8.6% (5.8% in the previous year) both improved. However, Non-operating Income (¥18.0B, approximately 6.9% of revenue) made a significant contribution to the expansion of Ordinary Income, and the growth in core earnings power was comparatively moderate. 【Cash Flow Quality】ROE remained low at 2.3%, with the Total Asset Turnover Ratio of 0.17x serving as a downward factor. 【Investment Efficiency】Accounts Receivable from Completed Construction Contracts declined 32.9% YoY to ¥384.7B, indicating progress in cash collection. 【Financial Soundness】The Equity Ratio was high at 63.9%, and the Current Ratio was 174.3%. Interest-bearing debt was ¥96.6B, compared with Cash and Deposits of ¥277.9B, placing the Company in a net cash position.

Cash Flow Analysis

Although no cash flow statement has been disclosed, an analysis of cash trends based on changes in the balance sheet indicates that Cash and Deposits increased to ¥277.9B from ¥175.6B in the same period of the previous year, an increase of +58.2%, suggesting improved cash generation capacity. The primary factor was the substantial reduction in working capital resulting from the decline in Accounts Receivable from Completed Construction Contracts from ¥573.3B to ¥384.7B. Meanwhile, Advances Received on Uncompleted Construction Contracts (customer advances) declined from ¥93.6B to ¥80.5B, indicating a slight reduction in the customer-advance cushion. Long-term borrowings declined from ¥88.8B to ¥80.8B, indicating continued deleveraging, while the Company’s conservative approach to funding is also evident in its investing and financing activities.

Quality of Earnings

In the current period, there were few notable extraordinary gains or losses, and profit increased despite the absence of the ¥3.75B gain on the sale of investment securities recorded in the previous year. This is a positive factor in that the increase does not depend on temporary factors. However, Non-operating Income was ¥18.0B, accounting for approximately 6.9% of revenue, with equity-method investment income of ¥13.4B and subsidy income of ¥3.3B as the primary components. Much of the growth in Ordinary Income was therefore attributable to factors outside the core business. The difference between Ordinary Income of ¥27.2B and Net Income of ¥22.6B was primarily due to income taxes and other taxes (an effective tax rate of approximately 16.6%), and the divergence remained within the range of the tax burden. Comprehensive Income was ¥23.1B, broadly in line with Net Income of ¥22.6B, with no significant divergence attributable to valuation difference items such as valuation differences on other securities or adjustments related to retirement benefits. The decline in Accounts Receivable from Completed Construction Contracts suggests an improvement in the quality of accruals, and soundness in terms of cash generation has been maintained.

Earnings Forecast and Guidance

Progress against the Full-Year plan was 21.0% for revenue (¥262.7B/¥1,250B) and 17.3% for Operating Income (¥12.4B/¥72.0B), both below the standard quarterly progress rate of 25%. On the other hand, Ordinary Income was ahead at 28.6% (¥27.2B/¥95.0B), and Net Income was also ahead at 31.8% (¥22.6B/¥71.0B), reflecting the contribution of non-operating factors such as equity-method investment income and subsidy income. The Full-Year plan calls for both Operating Income and Ordinary Income to decline YoY (-16.3% and -14.1%, respectively), making the correction of profitability in the Civil Engineering segment and the execution of projects in the Steel Structures and Solutions businesses in the second half of the fiscal year key to achieving the plan. There were no revisions to the earnings forecast or dividend forecast this time.

Shareholder Returns

The Full-Year dividend forecast is ¥42 per share (after taking into account the stock split in April 2026), and the Payout Ratio calculated based on the Full-Year forecast EPS of ¥138.46 is approximately 30.3%. There was no revision to the dividend forecast, indicating a continuation of the policy from the same period of the previous year. Treasury stock increased from ¥0.67B in the same period of the previous year to ¥15.68B, confirming progress in share repurchases. The Payout Ratio based solely on dividends is approximately 30%, but the level of Total Return, taking into account the increase in treasury stock, is considered to be higher than the dividend-only Payout Ratio. Given the net cash position and high Equity Ratio (63.9%), the Company has comparatively ample capacity to fund shareholder returns.

Risk Factors

1. Deterioration in Civil Engineering segment profitability: The segment recorded revenue of ¥59.4B (-26.4%) and an Operating Loss of ¥12.7B, a substantial deterioration from the ¥25M profit in the same period of the previous year. This offset the growth in Company-wide segment profit, and continued losses would constrain the Company-wide margin.

2. Credit and provisioning risk related to construction projects: Accounts Receivable from Completed Construction Contracts declined 32.9% YoY to ¥384.7B but remains substantial, while a provision for construction contract losses of ¥3.51B (-¥0.31B YoY) was recorded. Changes in the profitability of individual projects could affect future earnings.

3. Dependence on Non-operating Income: The growth in Ordinary Income depends heavily on non-operating factors such as equity-method investment income of ¥13.4B and subsidy income of ¥3.3B. These items are susceptible to fluctuations in the performance of investees and changes in relevant policies, and the structural divergence from core earnings (Operating Income) is a characteristic of the Company.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Operating Margin is below the industry median, while the Net Profit Margin exceeds the industry median, partly due to the contribution of non-operating factors.

Growth and Capital Efficiency

The Revenue Growth Rate is substantially below the industry median, placing the Company in the lower tier of the industry in terms of growth.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The Company secured higher Operating Income through an improved gross profit margin and high profitability in the Steel Structures and Solutions businesses. However, the growth in Ordinary Income and Net Income relies heavily on non-operating factors such as equity-method investment income and subsidy income, which must be distinguished from the growth in core earnings power.

2. The Civil Engineering segment fell into the red, with revenue down 26.4% and an Operating Loss of ¥12.7B, becoming a factor limiting further improvement in the Company-wide margin. Progress in correcting the segment’s profitability will be a key monitoring point going forward.

3. The substantial reduction in Accounts Receivable from Completed Construction Contracts and the accumulation of Cash and Deposits (+58.2% YoY) have improved cash generation capacity and balance sheet soundness. The Equity Ratio of 63.9% and net cash position indicate broad options for future capital policy.

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). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥1,782–¥1,886 at a ±1% change in the Cost of Equity, and ¥1,829–¥1,835 at a change of ±0.1 in ω.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter 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 somewhat higher.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-07 / This value does not forecast 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 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 a professional as necessary.

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