Sekisui Chemical (4204) FY2026 Q3 Earnings Report

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Executive Summary

The current period posted higher revenue but lower profit, with declining profitability being the key issue. Revenue reached a record high of ¥9,599.1B (+0.5% YoY), while Operating Income was ¥729.0B (-5.8%) and Ordinary Income was ¥807.3B (-6.2%). Net Income attributable to owners of the parent declined significantly to ¥478.3B (-30.2%), exceeding the decline in Operating Income. The primary factor was the recognition of ¥202.4B in extraordinary losses, including an impairment loss of ¥177.6B related to the Kuji Plant (biorefinery demonstration project). The decline in operating profit was primarily attributable to SG&A expenses increasing at a faster pace than revenue growth, while the deterioration in gross margin was limited.

Factors Affecting Performance

【Revenue】Revenue was ¥9,599.1B, representing a modest 0.5% YoY increase. High Performance Plastics (¥3,377.9B) and Housing (¥3,950.6B), the core businesses, drove revenue growth, while Urban Infrastructure & Environmental Products and Medical posted revenue declines due to weak market conditions, including the Indian market and a slowdown in overseas testing demand.

【Profit and Loss】Operating Income was ¥729.0B (-5.8% YoY), and the Operating Margin declined to 7.6% from 8.1% in the previous year. The gross margin was nearly flat at 32.4%, but the SG&A ratio increased to 24.8%, and SG&A expenses grew by +2.2%, exceeding revenue growth and serving as the primary cause of the profit decline. Ordinary Income was ¥807.3B (-6.2% YoY), with non-operating income, including dividend income of ¥33.6B and foreign exchange gains of ¥31.6B, partially offsetting the decline. Net Income attributable to owners of the parent declined substantially to ¥478.3B (-30.2% YoY), well beyond the decline in Operating Income. This was because extraordinary losses of ¥202.4B, primarily the ¥177.6B impairment loss at the Kuji Plant, acted as a temporary factor; extraordinary gains of ¥54.8B, including a ¥54.2B gain on the sale of investment securities, were insufficient to offset them. In conclusion, the current period saw higher revenue but lower profit.

Segment Analysis

The Housing Business, the largest segment by revenue composition (¥3,950.6B, 41.2% of total revenue), is the core business, with Operating Income of ¥260.7B (6.6% margin). High Performance Plastics recorded the highest Operating Income at ¥440.5B, with a 13.0% margin, the highest among the four segments, making a significant contribution to company-wide profit. The Urban Infrastructure & Environmental Business recorded Operating Income of ¥141.3B (8.2% margin), while Medical recorded ¥73.0B (10.7% margin). While High Performance Plastics, as a high-margin segment, supports the overall profit margin, Housing has the largest revenue scale but a relatively low profit margin, resulting in a pronounced difference in profitability among segments. Urban Infrastructure & Environmental Products and Medical experienced declines in profit due to weak Indian market conditions and a slowdown in overseas testing demand, contributing to the overall profit decline.

Key Financial Metrics

Profitability: ROE 7.7% (down YoY), Operating Margin 7.6% (deteriorated from 8.1% in the previous year)
Cash flow quality: Operating CF/Net Income (attributable to owners of the parent) of 1.10x, indicating that cash support for earnings was maintained; FCF was -¥116.4B
Investment efficiency: Capital expenditures/Depreciation and amortization of 1.71x, indicating a phase of growth investment
Financial soundness: Equity Ratio 60.9%, Current Ratio 184.0%

Cash Flow Analysis

Operating CF was ¥527.6B, down 23.2% YoY. It remained at 1.10x Net Income attributable to owners of the parent, indicating that cash support for earnings itself was maintained. Investing CF was -¥644.0B, of which capital expenditures accounted for ¥717.0B, reflecting a structure in which growth investment is front-loaded. Financing CF was -¥117.6B, with share repurchases of ¥259.7B and dividend payments serving as the primary cash outflows. FCF was negative at -¥116.4B, as capital expenditures exceeded Operating CF. Cash generation requires monitoring, as working capital pressure from increased inventories and decreased trade payables affected the decline in Operating CF.

Earnings Quality

The approximately 41% gap between Ordinary Income of ¥807.3B and Net Income attributable to owners of the parent of ¥478.3B is well above the 10% threshold. The primary factor was the temporary impact of ¥202.4B in extraordinary losses, particularly the ¥177.6B impairment loss related to the Kuji Plant. Most of the ¥54.8B in extraordinary gains consisted of a ¥54.2B gain on the sale of investment securities, which was also temporary in nature. Non-operating income of ¥113.7B represented 1.2% of revenue and was not large enough to exceed the 5% threshold. Operating CF exceeded Net Income attributable to owners of the parent, and from an accrual perspective, there are no significant concerns regarding earnings quality.

Earnings Forecasts and Guidance

Progress against the Full-Year forecast was 72.3% for revenue, 66.3% for Operating Income, and 72.1% for Ordinary Income, with Operating Income slightly below the standard progress benchmark of approximately 75% after nine cumulative months. Revenue and Ordinary Income are progressing broadly in line with standard levels, while the delay in Operating Income depends on the achievement of the planned profit growth in High Performance Plastics and Housing during the second half. The company plans second-half Operating Income of ¥646B and expects higher revenue and higher profit in all four segments.

Shareholder Returns

The annual dividend forecast is ¥80 per share, representing the 16th consecutive fiscal period of dividend growth. The Payout Ratio is approximately 45.3% based on forecast annual EPS of ¥176.7. Total shareholder returns, including ¥259.7B in share repurchases, will reach ¥602.0B when combined with ¥342.2B in dividend payments, resulting in a high Total Return Ratio. Although FCF is negative at -¥116.4B, shareholder returns are being maintained, and the sustainability of these returns will depend on the future recovery of Operating CF and progress in recovering capital expenditures.

Catalysts

【Short Term】Progress toward higher profit in High Performance Plastics and Housing during the second half, and trends in the recovery of overseas Medical testing demand, including demand related to infectious disease outbreaks. 【Long Term】The future direction of the biorefinery business, including the Kuji Plant, and the operation and monetization progress of large-scale capital expenditures, with a Full-Year plan of ¥1,050B.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company’s profitability metrics are both below the industry median and are positioned in the lower half of the IQR.

Growth and Capital Efficiency

The revenue growth rate is also below the industry median but remains within the IQR range.

※Source: Compiled by the Company

Risk Factors

1. Prolonged inventory turnover: Inventories increased from the previous year and reduced Operating CF by ¥242.7B. If a mismatch between demand and production persists, it could pressure profit margins through inventory write-downs and discounting pressure.

2. Delayed recovery of capital expenditures: Capital expenditures were ¥717.0B, reaching 1.71x depreciation and amortization, while construction in progress increased to ¥730.7B. If investment recovery is delayed, FCF deficits could persist and asset impairment risks could arise.

3. Increase in short-term borrowings: Short-term borrowings increased substantially from the previous year, raising dependence on current liabilities. Although the Equity Ratio is 60.9% and the Current Ratio is 184.0%, indicating a sound financial base, the company may become more susceptible to refinancing conditions and interest-rate trends.

Key Points in the Earnings Report

1. The decline in Net Income for the current period (-30.2%) was primarily attributable to the temporary factor of the ¥177.6B impairment loss at the Kuji Plant, differing in scale from the decline in Operating Income (-5.8%). The deterioration in underlying recurring earning power was limited to an approximately 50bp decline in the Operating Margin.

2. The increase in the SG&A ratio to 24.8%, expanding at a faster pace than revenue growth (+0.5%), was the primary cause of the decline in Operating Income. The structure in which the relatively high-margin High Performance Plastics segment (13.0% margin) supports the company-wide profit margin was confirmed.

3. The company plans its 16th consecutive fiscal period of dividend growth, with Total shareholder returns, including share repurchases, reaching ¥602.0B. Meanwhile, FCF was -¥116.4B, creating a structure in which the sources of shareholder returns depend on retained earnings, borrowings, and other funding sources.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,016–¥2,133 at ±1% in the cost of equity, and ¥2,073–¥2,074 at ω±0.1.

Notes:

• Goodwill amortization of ¥3.1 per share is added back to earnings (due to its non-cash nature and for comparability with IFRS companies).
• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing gap relative to the Full-Year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat high.

(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 constitute a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through integrated analysis of XBRL earnings summary data and PDF earnings presentation materials. 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, after consulting professionals as necessary.

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