ISHIHARA SANGYO KAISHA,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Ishihara Sangyo Kaisha’s Q1 results saw a substantial decline in earnings, as a reversal in operating leverage caused by lower revenue in the Organic Chemicals Business and higher SG&A expenses was compounded by an impairment loss at a subsidiary of the Inorganic Chemicals Business. Revenue was ¥39.29B (¥42.56B in the same period of the previous year, YoY-7.7%), Operating Income was ¥2.21B (¥5.21B, YoY-57.6%), Ordinary Income was ¥4.14B (¥6.19B, YoY-33.1%), and Net Income was ¥1.02B (¥4.75B, YoY-78.5%). Ordinary Income was supported by non-operating factors such as equity-method investment gains of ¥1.56B and foreign exchange gains of ¥0.44B; however, Net Income was significantly compressed by the recognition of extraordinary losses of ¥2.67B, including an impairment loss of ¥2.52B.

Factors Affecting Performance

【Revenue】Revenue was ¥39.29B, a 7.7% year-on-year decline. The core Organic Chemicals Business fell sharply to ¥21.12B (53.8% of total, YoY-16.7%), leading the overall revenue decline. Meanwhile, the Inorganic Chemicals Business turned to revenue growth, reaching ¥17.03B (43.3% of total, YoY+4.0%), highlighting the divergent performance among segments.

【Profitability】Operating Income was ¥2.21B (YoY-57.6%), and the Operating Income margin declined significantly to 5.6% from 12.2% in the previous year. Although the cost of sales ratio was broadly unchanged and the gross margin was maintained at 29.0%, SG&A expenses expanded to ¥9.18B (¥7.11B in the previous year), causing the SG&A ratio to rise to 23.4% (16.7% in the previous year), which was the primary cause of the decline in Operating Income. Supported by equity-method investment gains and foreign exchange gains, Ordinary Income was ¥4.14B (YoY-33.1%), representing a smaller decline than Operating Income. However, extraordinary losses of ¥2.67B, including an impairment loss of ¥2.52B at the Kobe Plant of Fuji Titanium Industry, a subsidiary of the Inorganic Chemicals Business, were incurred, compressing Profit Before Tax to ¥1.57B. As a result, Net Income was ¥1.02B (YoY-78.5%), placing the company in the category of declining revenue and declining earnings.

Segment Analysis

The Organic Chemicals Business recorded revenue of ¥21.12B (YoY-16.7%), Operating Income of ¥1.84B (YoY-58.4%), and a margin of 8.7%, as deterioration in both pricing and volume directly impacted margins. The Inorganic Chemicals Business secured revenue growth at ¥17.03B (YoY+4.0%), but Operating Income declined to ¥1.57B (YoY-17.8%), with a margin of 9.2%. A notable feature was the recognition of an impairment loss at the Kobe Plant as an extraordinary loss. By region, Japan was the largest contributor at ¥15.02B, followed by Europe at ¥11.92B, Asia at ¥6.62B, and the Americas at ¥5.23B. Compared with the previous year, Europe and the Americas accounted for smaller proportions, while the weighting of Japan and Asia increased.

Key Financial Indicators

【Profitability】The Operating Income margin of 5.6% and Net Income margin of 2.6% both declined substantially from the previous year (12.2% and 11.1%, respectively), primarily due to the reversal in operating leverage resulting from higher SG&A expenses. 【Cash Quality】Non-operating income accounted for 6.1% of Revenue. While equity-method investment gains of ¥1.56B and foreign exchange gains of ¥0.44B supported Ordinary Income, extraordinary losses of ¥2.67B (including an impairment loss of ¥2.52B) reduced Net Income, making it important to distinguish recurring earnings from one-time losses. 【Investment Efficiency】ROE was 0.8%, with the sharp decline in the Net Income margin driving the deterioration in capital efficiency. 【Financial Soundness】The Equity Ratio remained high at 53.9% (53.7% in the previous year). Despite cash and deposits of ¥29.74B and long-term borrowings of ¥43.22B, the capital base remains stable.

Cash Flow Analysis

As the statement of cash flows was not disclosed, funding trends are analyzed based on changes in the balance sheet. Inventories increased to ¥45.00B (¥41.50B in the previous year), with a notable build-up in finished goods inventory, while raw materials declined substantially to ¥24.39B (¥32.88B in the previous year), indicating a shift in inventory composition. Cash and deposits were broadly unchanged at ¥29.74B (¥29.42B in the previous year), and no large-scale cash outflow was identified. Long-term borrowings declined to ¥43.22B (¥45.44B in the previous year), indicating progress in reducing interest-bearing debt, while short-term borrowings remained broadly unchanged at ¥22.01B (¥22.05B in the previous year). The build-up in finished goods inventory may reflect slowing demand or shipment timing and should be monitored as a factor affecting future funding efficiency.

Quality of Earnings

The earnings structure for the current period is characterized by a high degree of dependence on non-operating factors at the Ordinary Income level. Non-operating income of ¥2.38B (6.1% of Revenue) consisted of equity-method investment gains of ¥1.56B, foreign exchange gains of ¥0.44B, and dividends received of ¥0.03B. These items accounted for the majority of the ¥1.94B difference between Operating Income and Ordinary Income. Meanwhile, extraordinary losses of ¥2.67B, including an impairment loss of ¥2.52B, related to plant assets of a subsidiary in the Inorganic Chemicals Business and are classified as one-time factors. They were the primary cause of the approximately ¥3.1B divergence between Ordinary Income and Net Income. Comprehensive Income was ¥2.05B, exceeding Net Income of ¥1.02B, with valuation factors such as ¥0.72B in valuation difference on securities and ¥0.22B in foreign currency translation adjustments contributing to the increase. This is a situation in which operating earnings power must be assessed separately from the effects of non-operating and one-time factors.

Performance Forecasts and Guidance

The full-year plan calls for Revenue of ¥150.00B (YoY-3.2%), Operating Income of ¥14.20B (YoY-25.6%), and Ordinary Income of ¥13.30B (YoY-38.8%). Q1 progress rates were 26.2% for Revenue, 15.5% for Operating Income, and 31.1% for Ordinary Income. While Revenue and Ordinary Income are progressing broadly in line with standard levels, Operating Income is substantially below the 25% quarterly run-rate. Against the full-year Net Income plan of ¥0.70B, current-period results were ¥1.02B, representing a progress rate of 145%. This suggests that the full-year plan may have been set conservatively, incorporating additional costs and valuation effects expected in the second half of the fiscal year. Given that the performance forecast was revised during Q1, achievement of the full-year plan will require price pass-through in the Organic Chemicals Business and control of SG&A expenses.

Shareholder Returns

The annual dividend forecast is ¥130 per share. Although the change from the previous year’s actual dividend of ¥30 (reference value as of the interim period) requires confirmation, the Payout Ratio based on the full-year plan is expected to be high. Based on the full-year Net Income plan of ¥0.70B and the average number of shares outstanding during the period of 38.266 million shares, total annual dividends are calculated at approximately ¥4.97B, resulting in a Payout Ratio substantially exceeding planned Net Income. No revision to the dividend forecast was made during the quarter, and the existing policy has been maintained. No share repurchases were identified, and returns consist solely of dividends. Accordingly, this should be viewed as a Payout Ratio matter, and its sustainability should be monitored given the high degree of reliance on cash on hand and retained earnings.

Risk Factors

1. Inventory accumulation risk: Inventories increased to ¥45.00B (¥41.50B in the previous year, +8.4%), with a build-up in finished goods inventory. The company may be affected by slowing demand and shipment timing, creating risks of inventory write-downs and pricing responses.

2. Dependence on non-operating earnings: Equity-method investment gains of ¥1.56B and foreign exchange gains of ¥0.44B account for a significant portion of the contribution to Ordinary Income, creating a structure in which fluctuations in these items can readily affect the stability of Ordinary Income.

3. Potential for additional impairment losses: An impairment loss of ¥2.52B was recognized on plant assets of a subsidiary in the Inorganic Chemicals Business during the current period. Depending on the utilization of fixed assets and market conditions, additional valuation reviews may be required.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Profitability is below the industry median, with higher SG&A expenses and extraordinary losses contributing to the company’s relatively low position within the industry.

Growth and Capital Efficiency

Revenue growth was substantially below the industry median, and the impact of the demand and pricing cycle in the Organic Chemicals Business was pronounced in the industry comparison as well.

※Source: Compiled by the Company

Key Points in the Financial Results

1. SG&A expenses increased from ¥7.11B in the previous year to ¥9.18B, and operating leverage is reversing amid the decline in Revenue. Whether this structure persists and whether cost controls progress in the second half of the fiscal year will determine the direction of margins.

2. Ordinary Income has a high degree of contribution from non-operating factors such as equity-method investment gains and foreign exchange gains, while Net Income was significantly compressed by extraordinary losses (impairment loss of ¥2.52B). The difference in earnings quality between the Ordinary Income and Net Income levels must be assessed separately in future results evaluations.

3. Although the Net Income progress rate against the full-year plan has already reached 145%, Operating Income progress is lagging at 15.5%. This divergence suggests that conservative assumptions were incorporated into the second-half plan. How this divergence converges in subsequent quarters will be a key focus for understanding the earnings structure.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type, explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥2,478–¥2,615 at ±1% for the cost of equity, and ¥2,521–¥2,560 at ±0.1 for ω.

Notes:

• Since the progress of Net Income against the full-year forecast (145%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies progressing ahead of plan tend to exceed their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net Income is significantly compressed relative to Operating Income due to tax expenses, acquisition-related costs, minority interests, and other factors (Net Income ÷ Operating Income 5%). This figure reflects that compression at face value, and underlying earnings power may be higher if these factors are temporary.
• Since 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 relative to the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated somewhat above the appropriate level.

(Calculation model: Residual income model / Interest rate reference month: 2026-07 / This figure is not intended to 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. 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 professionals as necessary.

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