TOAGOSEI (4045) FY2026 Q2 Earnings Report

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Executive Summary

Revenue growth, together with an improvement in the gross margin, drove the increase in operating income, resulting in higher revenue and higher profits. Revenue was ¥82.40B (+2.6% YoY), operating income was ¥7.91B (+12.7%), ordinary income was ¥8.58B (+14.4%), and net income was ¥6.10B (+6.0%). The gross margin improved to 30.7% from the previous year and absorbed the increase in SG&A expenses. However, extraordinary losses exceeded extraordinary gains, causing net income to grow less than operating and ordinary income.

Factors Affecting Business Performance

【Revenue】Revenue was ¥82.40B, an increase of +2.6% YoY. By segment, the largest segment, CommodityChemicals (42.8% of revenue), declined to ¥35.31B, down -7.6% YoY. Meanwhile, PolymerAndOligomer (24.8% of revenue; ¥20.46B, +12.2%), Plastics (19.1%; ¥15.71B, +11.7%), and PerformanceChemicals (7.1%; ¥5.84B, +11.4%) drove revenue growth and offset the decline in basic chemicals.

【Profit and Loss】Operating income was ¥7.91B (+12.7% YoY), exceeding the rate of revenue growth. By segment, PerformanceChemicals (+96.7%), Plastics (+57.8%), and PolymerAndOligomer (+89.3%) recorded substantial increases in segment profit, while also maintaining high profit margins of 15.5%, 11.8%, and 11.7%, respectively. In contrast, CommodityChemicals reported segment profit of ¥3.50B, down -25.2% YoY, becoming a factor weighing on consolidated profit. Ordinary income increased to ¥8.58B (+14.4%) after adding ¥0.82B in dividend income and other non-operating income. However, extraordinary gains of ¥1.50B were offset by extraordinary losses of ¥1.74B (including ¥0.88B in gains on sales of fixed assets and ¥0.46B in impairment losses on investment securities), resulting in net income of ¥6.10B (+6.0%). Overall, the Company achieved higher revenue and higher profits.

Segment Analysis

CommodityChemicals, the basic chemicals segment, is the largest of the six segments, accounting for 42.8% of revenue. However, it posted lower revenue and lower profit, with revenue down -7.6% and profit down -25.2%, while its profit margin declined to 9.9%. In contrast, PolymerAndOligomer (11.7% profit margin, profit +89.3%), PerformanceChemicals (15.5%, +96.7%), and Plastics (11.8%, +57.8%) recorded notable increases in both revenue and profit, as well as improved profit margins, and were the primary drivers of consolidated profit growth. AdhesiveMaterial recorded revenue growth of +8.2%, but profit declined -21.7% and its profit margin was 2.8%, making it a low-profitability segment with room for improvement in its cost structure. Company-wide expenses (adjustments) were ¥1.25B, up from ¥1.21B in the previous year.

Key Financial Indicators

【Profitability】The operating margin improved to 9.6% from 8.7% in the same period of the previous year, while the net profit margin also improved slightly YoY to 7.4%. The gross margin rose to 30.7% from 28.6% in the previous year, serving as the primary driver of profit growth.【Cash Flow Quality】Operating cash flow (OCF) was ¥12.01B, approximately 2.0 times net income of ¥6.10B, indicating solid cash support for earnings. However, OCF declined -28.0% YoY, as increases in trade receivables and inventories tied up funds.【Investment Efficiency】While annualized ROE was 5.5% and the equity ratio was a high 74.5%, total asset turnover and financial leverage were low, leaving room for improvement in capital efficiency.【Financial Soundness】The equity ratio was 74.5% (74.3% in the previous year). Interest-bearing debt was limited to ¥10.00B in bonds and ¥3.70B in long-term borrowings, and the financial base remained stable even compared with cash and deposits of ¥20.02B.

Cash Flow Analysis

OCF was ¥12.01B, exceeding net income and indicating solid cash conversion of earnings, but declined 28.0% from ¥16.68B in the previous year. The main factors were a ¥0.92B increase in trade receivables, which shifted from cash collection in the previous year, and a ¥2.90B buildup in inventories. This was partially offset by a ¥3.03B increase in trade payables. Investing cash flow was negative ¥14.29B, of which capital expenditures accounted for ¥14.29B, substantially exceeding depreciation and amortization of ¥6.09B and indicating an active investment phase. As a result, free cash flow was negative ¥2.28B. Of negative ¥6.71B in financing cash flow, share repurchases of ¥2.71B and dividend payments were the primary uses of funds. The deterioration in working capital coincided with large-scale capital investment, indicating that investment and shareholder returns could not be fully funded by cash generated during the period alone.

Earnings Quality

While operating income and ordinary income increased +12.7% and +14.4%, respectively, net income grew only +6.0%, with the difference attributable to extraordinary gains and losses. Extraordinary gains of ¥1.50B (including ¥0.28B in gains on sales of investment securities and ¥0.88B in gains on sales of fixed assets) represented non-recurring income, while extraordinary losses of ¥1.74B (including ¥0.46B in impairment losses on investment securities and ¥0.03B in disaster losses) resulted in net extraordinary losses exceeding gains by ¥0.24B. At the ordinary income level, dividend income of ¥0.82B was the main component of non-operating income, with stable income from the investment portfolio contributing in addition to business-derived earnings. OCF being approximately 2.0 times net income indicates that accounting profits are supported by cash generation. However, increases in working capital—trade receivables and inventories—require monitoring as a future accrual trend.

Earnings Forecast and Guidance

The full-year forecast calls for revenue of ¥170.00B (+4.7% YoY), operating income of ¥15.50B (+9.3%), and ordinary income of ¥16.30B (+8.2%). Based on first-half results (revenue of ¥82.40B, operating income of ¥7.91B, and ordinary income of ¥8.58B), progress toward the full-year forecasts is approximately 48.5%, 51.0%, and 52.6%, respectively. Progress in operating income and ordinary income is slightly ahead of revenue progress, indicating that the first-half improvement in profit margins is broadly reflected in the full-year plan. During the quarter, both the earnings forecast and dividend forecast were revised, and the full-year outlook has been updated as of the latest reporting date.

Shareholder Returns

The Q2 dividend was ¥36.0 per share, an increase from ¥32.5 in the previous year, while the full-year dividend forecast is ¥72.0. Based on first-half net income, the payout ratio is approximately 57.3%, calculated using total first-half dividends of ¥3.49B against net income of ¥6.10B. In addition, the Company conducted share repurchases of ¥2.71B. Combining dividends and share repurchases, the total return ratio was approximately 102% of first-half net income, representing capital returns exceeding earnings for the period. OCF exceeded the combined amount of dividends and share repurchases, but free cash flow was negative due to large-scale capital investment. Accordingly, the funding source for shareholder returns depends to a certain extent on cash on hand and other financial resources.

Risk Factors

1. Declining revenue and profit in the basic chemicals business: CommodityChemicals reported revenue of -7.6% and segment profit of -25.2%, and weakness continues in the largest segment, which accounts for 42.8% of consolidated revenue. The sustainability of the structure in which growth in high-margin segments offsets this weakness will be a key focus.

2. Deterioration in working capital: Trade receivables increased by ¥0.92B, reversing the cash collection recorded in the same period of the previous year, while inventories also increased by ¥2.90B, reducing OCF by 28.0% YoY. If market conditions deteriorate, this could lead to inventory valuation losses and additional cash constraints.

3. Risk of fluctuations in securities prices: Investment securities totaled ¥42.42B, representing 14.3% of total assets. During the period, the Company recorded ¥0.46B in impairment losses on investment securities as an extraordinary loss. Changes in valuation differences may increase the volatility of comprehensive income and net assets.

Industry Benchmark (Reference, Based on Our Research)

Industry Benchmark (manufacturing)

Profitability and Returns

The operating margin is approximately in line with the industry median, while the net profit margin exceeds the median, indicating a favorable relative level of final profit including non-operating and extraordinary gains and losses.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, indicating relatively moderate top-line growth.

※Source: Based on our research

Key Points from the Earnings Results

1. The improvement in the gross margin from the same period of the previous year (28.6%→30.7%) drove the improvement in the operating margin to 9.6%. A shift in the revenue mix toward high-margin segments (PolymerAndOligomer and PerformanceChemicals) supports the quality of profit growth.

2. OCF was approximately 2.0 times net income, providing solid cash support for earnings. However, OCF declined -28.0% YoY, and changes in working capital, including increases in trade receivables and inventories, may affect cash generation in the second half.

3. Progress toward the full-year earnings forecast was generally on track, with operating income at 51.0% and ordinary income at 52.6% of the respective forecasts. Whether the structure of offsetting declining profit in the basic chemicals business with profit growth in other segments will continue in the second half is a key point of focus.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,836–¥1,940 at cost of equity ±1%; ¥1,881–¥1,891 at ω±0.1.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets at the quarter-end are used (there is a timing difference relative to 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; it does not predict the market share price or recommend any specific investment action, nor does it 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 summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by our Company based on publicly disclosed earnings data. Investment decisions should be made at your own responsibility, after consulting specialists as necessary.

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