Sekisui Chemical (4204) FY2027 Q1 Earnings Report

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Executive Summary

During the quarter, operating income and ordinary income increased, while net income declined due to extraordinary losses, resulting in earnings that showed a divergence between revenue and profit growth and the quality of earnings. Revenue was ¥3329.7B (+9.1% YoY), operating income was ¥254.8B (+20.1%), and ordinary income was ¥280.8B (+39.1%), indicating improved profitability in the core business. However, net income attributable to owners of the parent was limited to ¥127.9B (-2.7% YoY). The primary factor was the recognition of ¥73.7B in extraordinary losses, including ¥66.6B in business structural reform expenses, meaning that the improvement at the operating level did not translate into final profit.

Factors Affecting Earnings

【Revenue】Revenue was ¥3329.7B, up +9.1% YoY. High Performance Plastics (¥1283.8B, +18.6%) and Urban Infrastructure & Environmental Products (¥604.6B, +16.4%) led growth, while Medical (¥217.2B, +5.7%) also expanded. Housing, meanwhile, was ¥1270.3B, down -1.0% YoY, making it almost the only segment to report a revenue decline. By region, overseas growth—particularly the expansion of High Performance Plastics in North America—supported overall growth, while Japan posted growth roughly in line with the previous year.

【Profit and Loss】Operating income was ¥254.8B (+20.1% YoY), with the gross profit margin improving to 32.7% (32.4% in the previous year) and the SG&A ratio improving to 25.1% (25.4% in the previous year), indicating an improved earnings structure. High Performance Plastics (13.4% margin), Urban Infrastructure & Environmental Products (11.4% margin, profit +97.9%), and Medical (11.1% margin, profit +60.7%) led the increase in profit. Housing’s profit margin declined to 4.4% (6.9% in the previous year), making it the only factor reducing company-wide profit. Ordinary income increased to ¥280.8B (+39.1%) due to a ¥46.4B increase in non-operating income, including ¥15.2B in dividend income and ¥15.1B in foreign exchange gains. However, owing to ¥73.7B in extraordinary losses, including ¥66.6B in business structural reform expenses, profit before income taxes was limited to ¥208.9B, and net income was ¥132.5B (-2.5% YoY; net income attributable to owners of the parent was ¥127.9B, -2.7% YoY). Overall, the company recorded higher revenue and operating profit, but extraordinary losses caused final profit to fall below the previous year.

Segment Analysis

High Performance Plastics reported revenue of ¥1283.8B (+18.6%) and profit of ¥171.7B (+24.9%), making it the core business accounting for more than half of total segment profit. Its 13.4% profit margin was the highest among the four businesses. Urban Infrastructure & Environmental Products posted revenue of ¥604.6B (+16.4%) and profit of ¥68.7B (+97.9%), representing a significant increase in profit, while its profit margin improved from 6.7% to 11.4%. Medical reported revenue of ¥217.2B (+5.7%) and profit of ¥24.1B (+60.7%), with its profit margin improving to 11.1%. Housing reported revenue of ¥1270.3B (-1.0%) and profit of ¥56.0B (-36.5%), with its profit margin declining to 4.4% (6.9% in the previous year), making it the only business offsetting the company-wide profit growth trend.

Key Financial Indicators

【Profitability】The operating margin improved to 7.7% from 7.0% in the same period of the previous year, and the gross profit margin also increased to 32.7%. Meanwhile, the net profit margin declined to 3.8% (4.3% in the previous year), indicating that the improvement at the operating level has not been reflected in final profit.【Cash Flow Quality】Operating cash flow (OCF) was negative ¥64.9B, and the OCF/net income ratio relative to net income attributable to owners of the parent of ¥127.9B was negative, indicating that earnings for the quarter did not generate cash. The primary factors were a ¥161.2B increase in inventories, an ¥81.7B decrease in trade payables, and ¥156.0B in income taxes paid.【Investment Efficiency】ROE (annualized) was 6.0%, while the equity ratio was 60.3%. The total asset turnover ratio remains relatively low, leaving room for improvement in capital efficiency. Capital expenditures of ¥185.8B exceeded depreciation and amortization of ¥143.0B, indicating that capacity-expansion investments are continuing.【Financial Soundness】Current assets of ¥7472.1B exceeded current liabilities of ¥4239.2B, indicating ample liquidity. Although the company had ¥500.0B in bonds and ¥410.7B in long-term borrowings, its equity ratio of 60.3% indicates a conservative financial foundation.

Cash Flow Analysis

Operating cash flow was negative ¥64.9B, deteriorating significantly from positive ¥82.7B in the same period of the previous year. The primary causes of cash outflows were a ¥161.2B increase in inventories, an ¥81.7B decrease in trade payables, and ¥156.0B in income taxes paid; these were not fully offset by ¥41.9B in cash inflows from a decrease in trade receivables and contract assets. Investing cash flow was negative ¥215.4B, as capacity-expansion investments, including ¥185.8B in capital expenditures, continued. Free cash flow, calculated as operating cash flow plus investing cash flow, was negative ¥280.3B. This funding shortfall was covered by positive financing cash flow of ¥277.8B, primarily through an increase in short-term borrowings. Cash and deposits remained at ¥1009.0B, and the company’s ample liquidity provided resilience against the deterioration in cash flow during the quarter.

Quality of Earnings

The increases in operating income and ordinary income reflected a combination of structural factors—an improved gross profit margin and a lower SG&A ratio—and the boost from non-operating income, namely ¥15.2B in dividend income and ¥15.1B in foreign exchange gains. Foreign exchange gains may fluctuate depending on market conditions, and a considerable portion of the 39.1% growth in ordinary income depends on such non-operating factors. Meanwhile, the decline in net income was attributable to the temporary factor of ¥73.7B in extraordinary losses, primarily consisting of ¥66.6B in business structural reform expenses, rather than a deterioration in the company’s recurring earnings power. Comprehensive income was ¥167.0B (¥161.1B attributable to owners of the parent), exceeding net income of ¥132.5B, with a ¥44.5B gain from foreign currency translation adjustments contributing to the increase. The divergence between net income and comprehensive income indicates that the effects of asset valuation and foreign exchange fluctuations related to overseas businesses have been added to reported performance.

Earnings Forecast and Guidance

The full-year company forecast calls for revenue of ¥1兆4084.0B (+7.6% YoY), operating income of ¥1150.0B (+8.0%), and ordinary income of ¥1140.0B (-2.7%), and the company has revised its earnings forecast in Q1. Q1 progress rates were 23.6% for revenue and 22.2% for operating income. Although these were slightly below the standard 25% benchmark, there was no significant deviation. The fact that the full-year ordinary income forecast represents a year-on-year decline suggests that the company does not assume that Q1 non-operating income, including foreign exchange gains, will continue at the same level throughout the year. The EPS forecast is ¥188.21, and the progress rate calculated from Q1 EPS of ¥31.69 is only approximately 17%; whether temporary factors, including extraordinary losses, recur will determine the extent to which the full-year earnings forecast is achieved.

Shareholder Returns

The full-year forecast dividend per share is ¥81.00, and no revision to the dividend forecast was made during the quarter. Based on average shares outstanding during the period of 403,712 thousand shares, the estimated total annual dividend is approximately ¥327B, resulting in a payout ratio of approximately 43% against the full-year forecast net income attributable to owners of the parent of ¥760B. Although operating cash flow and free cash flow were both negative during the quarter, cash and deposits of ¥1009.0B and the high equity ratio support the company’s capacity to maintain dividends. No share repurchases were confirmed during the quarter.

Risk Factors

1. Deterioration in Housing business profitability: Segment profit declined -36.5% YoY, while the profit margin fell from 6.9% to 4.4%. If fluctuations in housing demand and construction profitability continue, this could become a structural risk that offsets the profit growth generated by the other businesses.

2. Deterioration in cash conversion: Operating cash flow was negative ¥64.9B, primarily due to a ¥161.2B increase in inventories and ¥156.0B in income taxes paid. If working capital improvements are delayed, dependence on investing cash flow and financing cash flow may continue.

3. Downside risk to final profit from extraordinary losses: The company recognized ¥73.7B in extraordinary losses, including ¥66.6B in business structural reform expenses, resulting in a -2.5% YoY decline in net income. If similar temporary losses recur, the situation in which operating-level improvements are not readily reflected in final profit may persist.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net profit margin are below the industry median, with the net profit margin ranking particularly low within the industry.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, placing the company’s revenue growth pace relatively high within the industry.

※Source: Compiled by the company

Key Points of the Financial Results

1. The operating margin improved +70bp YoY, confirming an improvement in the business mix centered on High Performance Plastics (13.4% profit margin). The simultaneous progress in revenue growth and margin improvement is noteworthy as a qualitative change in the business.

2. The decline in Housing’s profit margin (4.4%, compared with 6.9% in the previous year) is offsetting the company-wide profit growth effect. Recovery in Housing’s profitability is structurally critical to sustained improvement in overall earnings.

3. Operating cash flow was negative ¥64.9B, creating a significant divergence from net income. The primary causes were inventory accumulation and income taxes paid, and the timing of earnings conversion into cash should be monitored in light of future working capital management trends.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,111–¥2,234 at ±1% in the cost of equity, and ¥2,171–¥2,172 at ±0.1 in ω.

Notes:

• Goodwill amortization of ¥3.4/share is added back to profit (to account for a non-cash expense and 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 end of the quarter 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 / Mechanically calculated using only publicly disclosed data; this is not 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 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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