ISHIHARA SANGYO KAISHA (4028) FY2027 Q1 Earnings Report

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Executive Summary

In Q1 of FY2027, Ishihara Sangyo recorded significant declines from operating income through net income, owing to lower revenue and deteriorating profitability in its core Organic Chemicals Business, in addition to the recognition of an impairment loss related to the Kobe Plant in the Inorganic Chemicals Business. Revenue was ¥39.29B (down 7.7% year on year), operating income was ¥2.21B (down 57.6%), ordinary income was ¥4.14B (down 33.1%), and net income was ¥1.02B (down 78.5%). Although the gross profit margin improved slightly to 29.0% from the previous year, the SG&A ratio rose to 23.4%, putting pressure on operating income. In addition, extraordinary losses of ¥2.67B, including an impairment loss of ¥2.52B, significantly reduced net income.

Factors Affecting Earnings

【Revenue】Revenue was ¥39.29B, down 7.7% year on year. By segment, the core Organic Chemicals Business posted a significant revenue decline to ¥21.12B (down 16.7% year on year), while the Inorganic Chemicals Business secured revenue growth at ¥17.03B (up 4.0%). By region, Japan (up 10.6%) and Asia (up 13.1%) grew, while overseas demand in the Americas (down 42.0%) and Europe (down 11.7%) declined substantially, contributing to the revenue decline in the Organic Chemicals Business.

【Profit and Loss】Operating income was ¥2.21B, down 57.6% year on year. Although the gross profit margin was maintained at 29.0%, SG&A expenses increased 29.1%, causing the SG&A ratio to rise to 23.4% from 16.7% in the previous year; this was the primary cause of the decline in operating income. By segment, the Organic Chemicals Business recorded segment profit of ¥1.84B (down 58.4%, profit margin 8.7%), while the Inorganic Chemicals Business recorded segment profit of ¥1.57B (down 17.8%, profit margin 9.2%), with both segments deteriorating. Ordinary income of ¥4.14B exceeded operating income, supported by ¥2.38B in non-operating income, including ¥1.56B in equity in earnings of affiliates and ¥440M in foreign exchange gains. Extraordinary losses of ¥2.67B, including a ¥2.52B impairment loss related to the Kobe Plant, significantly pressured income before tax and net income, resulting in net income of ¥1.02B (down 78.5%). This was a decline in both revenue and earnings, with the results particularly affected by the dual impact of deteriorating core profitability and a one-time impairment loss.

Segment Analysis

The Organic Chemicals Business, the core business making the largest contribution to consolidated earnings, experienced a significant deterioration in profitability despite its leading position, with revenue of ¥21.12B (down 16.7% year on year), segment profit of ¥1.84B (down 58.4%), and a profit margin of 8.7%, down approximately 8.7pt from 17.4% in the previous year. The Inorganic Chemicals Business secured revenue growth to ¥17.03B (up 4.0%), but segment profit declined to ¥1.57B (down 17.8%), with the profit margin falling approximately 2.5pt year on year to 9.2%. The business recognized a ¥2.52B impairment loss related to the Kobe Plant as an extraordinary loss, which reduced consolidated earnings separately from segment profit. Adjustments for corporate expenses and other items amounted to -¥1.25B, representing the difference between total segment profit of ¥3.45B and consolidated operating income of ¥2.21B.

Key Financial Indicators

【Profitability】The operating margin was 5.6%, down 6.6pt from 12.2% in the same period of the previous year, while the net profit margin also declined to 2.6%. Annualized ROE was 3.2% and the equity ratio was 53.9%, indicating a stable capital base, although there is room for improvement in capital efficiency. 【Cash Flow Quality】Accounts receivable of ¥47.60B and inventories of ¥45.00B indicate a substantial working capital investment. Accounts receivable increased year on year despite the decline in revenue, requiring monitoring from a capital efficiency perspective. 【Investment Efficiency】Investment securities amounted to ¥16.34B, generating ¥1.56B in equity in earnings of affiliates and supporting ordinary income. 【Financial Soundness】Current assets of ¥158.92B compared with current liabilities of ¥52.40B indicate that sufficient short-term funding capacity has been secured. Interest-bearing debt consists primarily of long-term borrowings of ¥43.22B, while the equity ratio of 53.9% was broadly maintained from 53.7% in the same period of the previous year.

Cash Flow Analysis

As no cash flow statement has been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits amounted to ¥29.74B, a slight increase from ¥29.42B in the same period of the previous year, indicating that the cash position was broadly maintained. Meanwhile, accounts receivable of ¥47.60B and inventories of ¥45.00B, including finished goods of ¥45.00B and raw materials of ¥24.39B, indicate a substantial working capital balance. Inventory and receivables have not been reduced despite the decline in revenue. Property, plant and equipment declined to ¥50.18B, partly owing to the recognition of the ¥2.52B impairment loss, while long-term borrowings decreased to ¥43.22B, suggesting that asset reduction and liability reduction are progressing simultaneously in terms of investment and financing. Retained earnings declined to ¥66.19B from ¥68.66B in the same period of the previous year, indicating weaker accumulation of internal reserves owing to lower net income and shareholder returns.

Earnings Quality

Ordinary income of ¥4.14B exceeded operating income of ¥2.21B, with the difference dependent on ¥2.38B in non-operating income, including ¥1.56B in equity in earnings of affiliates and ¥440M in foreign exchange gains. Non-operating income reached 6.1% of revenue and should be distinguished from core earnings power when evaluating the quality of ordinary income. Extraordinary losses of ¥2.67B were approximately 2.5 times net income of ¥1.02B, of which ¥2.52B was an impairment loss related to the Kobe Plant and a non-cash, one-time factor. Extraordinary income was limited to a ¥100M gain on the sale of investment securities, resulting in a net extraordinary loss of ¥2.57B. Accordingly, net income for the period was strongly affected by the one-time impairment loss, and core earnings power can be assessed more accurately through trends in operating income and the operating margin.

Earnings Forecasts and Guidance

The full-year company forecast calls for revenue of ¥150.00B (down 3.2% year on year), operating income of ¥14.20B (down 25.6%), and ordinary income of ¥13.30B (down 38.8%), and the earnings forecast was revised during the current quarter. Q1 progress rates were 26.2% for revenue, 15.5% for operating income, and 31.1% for ordinary income. Operating income progress was below the standard 25%, while ordinary income exceeded the standard owing to the contribution from non-operating income. Against the full-year net income forecast of ¥700M, Q1 net income of ¥1.02B has already exceeded the forecast. The full-year forecast therefore appears to incorporate conservative assumptions, including additional loss risks in the second half of the fiscal year.

Shareholder Returns

The full-year dividend forecast is ¥130.0 per share, and no revision to the dividend forecast was made during the current quarter. Based on the average number of shares outstanding during the period of 38,265,560 shares, the approximate annual dividend total is approximately ¥4.98B, resulting in an estimated payout ratio of more than 700% against the full-year net income forecast of ¥700M, substantially exceeding the level of earnings for the period. This level of dividends can be viewed as a continuation of shareholder returns dependent on financial capacity, including retained earnings of ¥66.19B and cash and deposits of ¥29.74B. Dividend sustainability will depend on future recovery in operating income and greater working capital efficiency. As no data on share repurchases has been provided, this section is limited to an assessment of the payout ratio.

Risk Factors

1. Deterioration in profitability of the core business: The Organic Chemicals Business, the largest contributor to consolidated earnings, experienced a significant deterioration in profitability, with revenue of ¥21.12B (down 16.7% year on year) and segment profit of ¥1.84B (down 58.4%). This was driven by declining overseas demand, particularly in the Americas (down 42.0%) and Europe (down 11.7%).

2. Temporary earnings pressure from impairment losses: An impairment loss of ¥2.52B was recognized for the Kobe Plant in the Inorganic Chemicals Business. Extraordinary losses of ¥2.67B were approximately 2.5 times net income of ¥1.02B, significantly increasing the volatility of net income for the period.

3. Prolonged working capital cycle: Accounts receivable of ¥47.60B and inventories of ¥45.00B indicate a substantial working capital balance, and accounts receivable increased year on year despite declining revenue. Monitoring is required from the perspectives of inventory valuation and capital efficiency during periods of demand volatility.

Industry Benchmark (For Reference; Company Research)

Industry Benchmark (manufacturing)

Profitability and Returns

Compared with the industry median, both the operating margin and net profit margin are lower, placing profitability toward the lower end of the industry.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, contrasting with peer companies that are generally experiencing revenue growth.

※Source: Company research

Key Points in the Earnings Results

1. Although the gross profit margin was maintained at 29.0%, the operating margin declined to 5.6% as the SG&A ratio rose to 23.4% from 16.7% in the previous year. In addition to revenue recovery, the management of fixed costs and SG&A expenses will be a structural factor determining future trends in the operating margin.

2. Ordinary income was heavily supported by non-operating income, including equity in earnings of affiliates and foreign exchange gains. Core earnings power therefore needs to be assessed through operating income and the operating margin. The gap between operating income and other items will remain a key point of focus in future earnings releases.

3. The impairment loss at the Kobe Plant indicates a reassessment of asset profitability in the Inorganic Chemicals Business. The degree of recovery in utilization rates and profit margins after the impairment will be a key point in evaluating the quality of consolidated earnings.

Theoretical Share Price (Reference Value)

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

Notes:

• Because net income progress against the full-year forecast is 145%, exceeding the standard 25%, forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of schedule tend to outperform forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net income is substantially compressed relative to operating income owing to the tax burden, acquisition-related expenses, and non-controlling interests, among other factors (net income ÷ operating income 5%). This figure reflects that compression at face value; if the factors are temporary, underlying earnings power may be higher.
• 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 mismatch with the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual income model (Ohlson type; explicit 5-year fade) / Interest rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market share price, a recommendation of any specific investment action, or a prediction or guarantee of 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 responsibility, and you should consult a professional as necessary.

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