DAIICHI KIGENSO KAGAKU-KOGYO CO.,LTD FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥17.15B
• Operating Income: ¥1.10B
• Net Income: ¥38M
• EPS: ¥1.71

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend 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: Soft quarter operationally with sharp margin compression and heavy non-operating drag, offset by solid operating cash generation but negative comprehensive income. Revenue grew 0.8% YoY to 171.48, but operating income fell 29.4% YoY to 10.97 as cost pressure and SG&A absorption weighed on profitability. Gross profit was 45.57, implying a gross margin of 26.6%. Operating margin declined to 6.4% from an estimated 9.1% a year ago, a compression of roughly 275 bps. Ordinary income plunged to 3.66 (-99.4% YoY) due to sizable non-operating expenses of 8.71 (including 2.26 interest expense), overwhelming modest non-operating income of 1.40. Net income was 0.41 (+26.2% YoY), but this resilience stems from a very low prior-year base and an unusually high effective tax rate of 89.0% this quarter, indicating non-recurring tax and non-operating effects. Total comprehensive income was deeply negative at -15.44, suggesting significant valuation/FX losses below the P/L line that reduced equity despite positive net income. Cash generation from operations was healthy at 10.41, vastly exceeding net income (OCF/NI 25.4x), supported by non-cash charges (D&A 16.25) and likely working-capital normalization. However, capex of 11.49 drove implied FCF to approximately -1.1 (OCF – capex), indicating internal cash did not fully fund investment needs in the half. Balance sheet liquidity is strong (current ratio 344%), and solvency is acceptable (D/E 0.71x; interest coverage 4.85x, just below the >5x “strong” threshold). Capital efficiency remains weak: ROE is 0.1% and ROIC is 1.2% (below the 5% warning line), reflecting slim margins and low asset turnover (0.274x). The quarter’s profit structure is skewed by non-operating losses and an unusually high tax rate; earnings quality by cash conversion is good, but headline profitability is challenged. Given the negative comprehensive income and pressure from interest/non-operating items, near-term EPS visibility is limited until these headwinds normalize. The forward focus should be on restoring operating margin, reducing non-operating volatility (FX/valuation), and aligning capex with cash generation. Monitoring interest expense versus EBITDA and the trajectory of ordinary income will be critical for the second half. Overall, stable top line with deteriorated profitability and comprehensive losses signals a cautious near-term outlook pending cost, pricing, and non-operating normalization.

Profitability Analysis

ROE decomposition: ROE ~0.1% = Net Profit Margin (0.2%) × Asset Turnover (0.274) × Financial Leverage (1.71x). The most material deterioration stems from net margin compression, as operating income fell 29.4% on flat sales and ordinary income collapsed under non-operating losses. Business drivers: cost inflation and/or weaker product mix pressured operating margin (6.4%), while higher interest/other non-operating charges (8.71) and an 89% effective tax rate depressed bottom-line conversion. Sustainability: operating margin pressure could partially reverse with pricing/cost actions, but interest burden and FX/valuation losses may persist unless leverage is reduced and currency stabilizes; the elevated tax rate appears non-recurring. Watchouts: SG&A of 34.60 rose faster than revenue (revenue +0.8% YoY vs. OI -29.4%), signaling negative operating leverage and cost rigidity. EBITDA of 27.22 (15.9% margin) still covers interest (2.26) comfortably, but ordinary income sensitivity to non-operating items remains high.

Growth Assessment

Revenue was +0.8% YoY, indicating demand stability but limited growth momentum. Operating income decline (-29.4% YoY) shows costs/mix overwhelmed flat sales; pricing recovery and cost pass-through are needed for sustainable profit growth. Ordinary income fell sharply due to non-operating expenses; restoring ordinary income requires both operating margin recovery and lower FX/valuation losses. Net income (+26.2% YoY) is not a clean indicator given the tiny prior-year base and an 89% effective tax rate; normalized earnings likely lower than headline suggests. Order visibility not disclosed; given sector exposure (zirconium/functional chemicals), cyclical end-markets (electronics/ceramics/catalysts) and energy/raw material costs are key external drivers. Near-term outlook hinges on easing non-operating volatility, stabilizing interest costs, and managing capex pace to align with OCF. Margin rebuild is the primary lever for earnings growth in 2H and FY close.

Financial Health

Liquidity: very strong with current ratio 343.9% and ample working capital of 229.37; no liquidity warning (Current Ratio comfortably >1.0). Solvency: D/E at 0.71x is moderate; interest coverage 4.85x is adequate but slightly below the >5x ‘strong’ benchmark. Debt profile: short-term loans 9.00 vs current assets 323.42 implies low near-term refinancing risk; long-term loans 151.30 dominate liabilities, reducing maturity mismatch risk. No explicit off-balance-sheet obligations reported. Equity remains solid at 366.18, though negative comprehensive income (-15.44) eroded capital this period. Conclusion: balance sheet is sound, but watch interest burden relative to EBITDA and any further unrealized losses hitting equity.

Cash Flow Quality

OCF of 10.41 vs net income of 0.41 yields OCF/NI of 25.39x, indicating high cash conversion largely due to non-cash D&A (16.25) and likely working capital tailwinds. Implied free cash flow is approximately -1.08 (OCF 10.41 minus capex 11.49), suggesting capex exceeded internally generated cash this half. Financing CF of -2.93 reflects modest net outflows (including 1.13 for share repurchases). Earnings quality: strong from a cash perspective, but headline profit is depressed by non-operating/tax effects; normalized NI likely sits between OCF and reported NI once non-cash/timing effects unwind. No clear signs of aggressive working capital manipulation from available data, though incomplete disclosure on inventories/receivables changes limits assessment.

Dividend Sustainability

Reported dividend data are limited; payout ratio (calculated) appears elevated at 1547.3% due to extremely low net income, not necessarily reflecting actual cash outflow policy. With implied FCF slightly negative and ordinary income weak, near-term dividend headroom relies on balance sheet strength and 2H cash generation. Coverage: absent full dividend and investing CF disclosures, hard coverage cannot be confirmed; prudence would suggest that sustainable payouts hinge on margin recovery and stable non-operating line. Policy outlook: expect cautious stance until operating margin and ordinary income normalize; buybacks were modest (1.13), indicating disciplined capital returns in light of earnings pressure.

Risk Assessment

Business Risks:

• Margin pressure from raw material and energy cost inflation impacting zirconium/functional chemical products
• Product mix deterioration and limited pricing power vs. specialty peers
• Cyclical demand in electronics/ceramics/catalyst end-markets affecting volumes

Financial Risks:

• Non-operating volatility (FX and valuation losses) depressing ordinary income and comprehensive income
• Interest burden (2.26) with interest coverage at 4.85x, slightly below strong benchmark
• ROIC at 1.2% well below 5% warning threshold, indicating weak capital efficiency

Key Concerns:

• Operating margin compression of ~275 bps YoY with revenue nearly flat
• Very high effective tax rate (89%) distorting bottom-line earnings
• Negative total comprehensive income (-15.44) eroding equity despite positive net income
• Implied negative FCF in the half due to capex exceeding OCF

Investment Implications

Key Takeaways:

• Stable revenue but significant operating and ordinary income deterioration
• OCF robust relative to NI, but capex led to marginally negative implied FCF
• Balance sheet liquidity is strong; solvency acceptable but interest coverage only moderate
• Capital efficiency remains weak (ROE 0.1%, ROIC 1.2%), requiring margin and turnover improvements
• High non-operating and tax noise reduces earnings visibility near term

Metrics to Watch:

• Operating margin trajectory (targeting recovery from 6.4%)
• Ordinary income stabilization and composition of non-operating expenses
• Interest coverage trend vs. EBITDA and debt mix
• Comprehensive income (FV/FX impacts) and equity sensitivity
• OCF vs. capex to ensure sustained positive FCF
• Asset turnover improvements to lift ROIC above 5%

Relative Positioning: Within specialty chemicals, the company shows resilient cash generation but underperforms on profitability and capital efficiency versus peers due to margin compression and outsized non-operating losses; strong liquidity partially offsets weaker earnings quality and ROIC.

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