Rengo Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥497.22B
• Operating Income: ¥19.97B
• Net Income: ¥12.20B
• EPS: ¥44.50

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: Mixed quarter — stable top-line and slight operating improvement, but a sharp drop in net income due to below-the-line pressures and a higher effective tax burden. Revenue was 4,972.2 (100M JPY), up 0.4% YoY, indicating a largely flat demand environment with modest pricing/mix support. Gross profit reached 929.2, yielding a gross margin of 18.7%. SG&A was 729.4, and operating income inched up 0.9% YoY to 199.7, implying a slight operating margin increase to roughly 4.02%. Ordinary income declined 8.4% YoY to 200.4, reflecting a deterioration in non-operating balance (interest expense of 23.4 outweighing modest interest/dividend income of 18.7). Net income fell sharply by 41.6% YoY to 110.3, pulling net margin down to 2.22% and highlighting heavy below-the-line and tax headwinds (effective tax rate 38.1%). Operating margin expanded by about 2 bps YoY (from ~4.00% to ~4.02%), demonstrating small but positive operating leverage. In contrast, net margin compressed by approximately 159 bps YoY (from ~3.81% to 2.22%), underscoring that most of the earnings pressure is non-operational and tax-related. Interest coverage stands at 8.53x, still in a comfortable zone, though leverage is at the high end for the sector with D/E at 1.51x. Liquidity is adequate but not robust (current ratio 126%, quick ratio 111%). ROE is low at 2.2% and ROIC is flagged at 1.6%, well below a typical cost of capital, indicating weak capital efficiency. Total comprehensive income of 66.2 suggests additional valuation/FX-related hits versus net income, likely from investment securities and currency translation. Cash flow disclosure is limited this quarter, preventing validation of earnings quality via OCF/NI or FCF coverage. The calculated payout ratio is elevated at 73.7%, which looks stretched relative to low ROE/ROIC absent strong FCF. Forward-looking, modest operating resilience is encouraging, but net profit visibility hinges on interest/tax normalization and market valuation effects; deleveraging and tighter working capital control could improve ordinary income and cash generation. Watch raw material and energy cost trajectories and further price/mix realization to defend margins.

Profitability Analysis

ROE (2.2%) = Net Profit Margin (2.2%) × Asset Turnover (0.392x) × Financial Leverage (2.51x). The dominant driver of the YoY deterioration in equity returns is the collapse in net profit margin (net income -41.6% YoY vs revenue +0.4%), while asset turnover and leverage appear broadly stable. Business-wise, operating profit improved slightly, implying pricing/mix and cost discipline helped offset input inflation; however, higher interest burden and a heavier tax rate compressed net. The non-operating balance (interest expense 23.4 vs interest/dividend income 18.7) and valuation/FX effects likely explain the gap between operating and net trends. These below-the-line headwinds can partially normalize (interest expense if leverage declines; tax rate if one-offs abate), but reliance on market-sensitive items (investment securities, FX) introduces volatility that is not fully under management control. SG&A growth versus revenue is not explicitly disclosed, but given flat revenue and stable OI, SG&A appears generally contained; nonetheless, wage inflation (salaries/allowances 229.9) should be monitored for creep. Overall, the sustainability of the slight operating margin improvement is reasonable if price discipline holds and energy/wastepaper input costs remain stable, but net margin recovery will require balance-sheet and tax normalization.

Growth Assessment

Revenue growth was modest at +0.4% YoY to 4,972.2, consistent with a stable demand backdrop and incremental price/mix. Operating income rose +0.9% YoY to 199.7, indicating slight operating leverage despite cost inflation. Ordinary income fell -8.4% YoY and net income declined -41.6% YoY, showing deterioration below operating level due to interest burden, market-related items, and a higher effective tax rate (38.1%). Non-operating income of 47.4 was nearly offset by non-operating expenses of 46.7; interest expense (23.4) exceeded interest income (3.8), with dividend income (14.9) offering only partial relief. Profit quality is mixed: operating resilience is a positive, but the large divergence between OI stability and NI decline indicates higher earnings volatility and lower predictability at the net level. Outlook hinges on maintaining price/cost balance, managing energy and recovered paper input costs, and deleveraging to reduce interest expense. If tax rate normalizes and valuation/FX headwinds ease, a portion of the net margin compression could reverse; otherwise, growth in earnings per share will remain constrained.

Financial Health

Liquidity is adequate: current ratio 126.1% (>1.0 but <1.5 benchmark) and quick ratio 111.3% (>1.0), implying coverage of short-term obligations without excess buffer. No explicit warning on current ratio (<1.0) is needed. Solvency shows elevated leverage: D/E at 1.51x sits at the upper bound of a conservative range; watch for potential covenant headroom and interest sensitivity. Short-term loans total 1,457.4 against cash 810.8, receivables 2,850.0, and inventories 573.7, suggesting manageable but non-trivial maturity concentration in the short term; rolling risk is moderate given working capital coverage but could tighten if credit conditions worsen. Long-term loans are 1,870.7, indicating a balanced but meaningful debt stack. Investment securities are sizable at 1,631.3, adding market valuation volatility to equity and comprehensive income. Goodwill (241.0) and other intangibles (435.9) create potential impairment risk in downturns. No off-balance sheet obligations were reported in the provided data.

Cash Flow Quality

Operating, investing, and financing cash flows were unreported; therefore, OCF/Net Income and FCF cannot be assessed this quarter. Given the sharp divergence between operating income (+0.9% YoY) and net income (-41.6% YoY), there is a potential quality concern at the net level, but without OCF we cannot confirm cash realization. Working capital levels (AR 2,850.0; inventories 573.7; AP 1,480.3) appear stable relative to scale; no explicit signs of end-period working capital pull-forward or delay are detectable from the disclosed balances alone. With capex and dividends unreported, FCF coverage for shareholder returns cannot be determined. Monitoring OCF/NI (>1.0) and cash conversion cycle will be critical in subsequent quarters.

Dividend Sustainability

The calculated payout ratio is 73.7%, which is elevated versus a <60% benchmark and looks aggressive given ROE at 2.2% and ROIC at 1.6%. Annual DPS and total dividends paid were unreported, limiting precision; the payout ratio likely implies an annualized DPS near the low-30s JPY against EPS of 44.5 JPY. Without OCF and capex data, FCF coverage of dividends cannot be validated. Sustainability hinges on stabilization of net income and evidence of positive, recurring FCF; any further net profit volatility or higher interest/tax burden would pressure coverage. Policy-wise, management may prioritize stability of DPS, but scope for increases appears limited until ROIC/OCF improve or leverage is reduced.

Risk Assessment

Business Risks:

• Input cost volatility (recovered paper, pulp, energy) impacting gross margin
• Pricing power risk in containerboard/packaging if demand softens
• Demand cyclicality tied to industrial production and e-commerce volumes
• Execution risk on cost control amid wage inflation (salaries and allowances rising)
• Potential impairment risk on goodwill (240.99) and intangibles (435.88)

Financial Risks:

• Elevated leverage (D/E 1.51x) increasing interest burden and refinancing risk
• Interest rate risk on floating-rate debt; short-term loans 1,457.38 create rollover exposure
• Market valuation risk on investment securities (1,631.30) driving OCI volatility
• Tax rate variability (effective tax 38.1%) creating net income volatility
• Dividend sustainability risk given payout ratio 73.7% and low ROIC

Key Concerns:

• Sharp net margin compression (~159 bps YoY) despite flat revenue and stable OI
• ROIC at 1.6% well below typical cost of capital — capital efficiency flag
• Limited cash flow disclosure prevents assessment of earnings quality and dividend coverage
• Ordinary income down 8.4% YoY as non-operating costs offset non-operating income

Investment Implications

Key Takeaways:

• Operational resilience: slight operating income growth (+0.9% YoY) and stable ~4.0% OPM
• Net profit volatility: NI -41.6% YoY with higher effective tax rate and interest burden
• Leverage at the upper bound (D/E 1.51x); interest coverage still comfortable at 8.53x
• Capital efficiency weak (ROE 2.2%, ROIC 1.6%), constraining TSR potential absent improvements
• Payout ratio elevated (~74%); dividend flexibility limited without stronger FCF

Metrics to Watch:

• Operating CF and OCF/NI (>1.0 target) to validate earnings quality
• Price/cost spread: paper and energy input indices vs realized ASP
• Interest expense trajectory and debt mix (short vs long term) for deleveraging progress
• Effective tax rate normalization and any one-off items below the line
• Working capital turns (AR days, inventory days) and cash conversion cycle
• Valuation movements in investment securities and FX translation impacts on OCI

Relative Positioning: Within the Japanese paper and packaging peer set, Rengo’s operating margin is middling but stable; however, its capital efficiency (ROE/ROIC) is currently weak and leverage is on the high side, leaving it more exposed to interest and valuation swings than best-in-class peers who combine stronger ROIC with more conservative balance sheets.

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