Sekisui Kasei Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

In Q1, revenue declined mainly due to a substantial contraction in the European business within the Industry segment, while Operating Income, Ordinary Income, and Net Income all increased significantly due to improved gross profit and the recognition of gains on the sale of non-current assets. Revenue was ¥256.1B (-19.9% YoY), Operating Income was ¥10.4B (+298.1%), Ordinary Income was ¥11.6B (+426.8%), and Net Income attributable to owners of the parent was ¥17.95B (+476.8%). The primary factors behind the earnings growth were the improvement in the gross margin to 26.4% from 20.6% in the same period last year and the recognition of ¥13.5B in extraordinary income (gain on sale of non-current assets). However, challenges remain regarding the cash backing of earnings, as Operating Cash Flow (OCF) was only ¥2.3B.

Factors Affecting Performance

【Revenue】Revenue was ¥256.1B, down -19.9% YoY, primarily due to the contraction of the European business in the Industry segment. By segment, HumanLife secured higher revenue of ¥144.0B (+10.9%), mainly driven by domestic demand, while Industry recorded a substantial decline in revenue to ¥113.1B (-40.7%). By region, Industry’s European revenue (the combined total for the Czech Republic, Germany, and other Europe) fell sharply from ¥94.9B in the same period last year to ¥5.8B in the current period, reflecting changes in the business structure. Domestic revenue in Japan increased in both segments (Industry Japan +12.8%, HumanLife Japan +11.1%), indicating a solid domestic foundation.

【Profit and Loss】Operating Income was ¥10.4B (+298.1% YoY), and the Operating Income margin improved to 4.1% from 0.8% in the same period last year. The primary factors behind the improvement were the higher gross margin (20.6%→26.4%) and an absolute reduction in selling, general and administrative expenses (¥63.1B→¥57.1B). Non-operating income and expenses made a net positive contribution, mainly due to ¥2.3B in dividend income, resulting in Ordinary Income of ¥11.6B (+426.8%). The recognition of ¥13.5B in extraordinary income (gain on sale of non-current assets) brought Profit Before Tax to ¥23.5B, while Net Income attributable to owners of the parent reached ¥17.95B (+476.8%). Excluding extraordinary income, the increase in earnings would have been limited to the Ordinary Income level, and most of the sharp expansion in Net Income depended on temporary factors. In conclusion, the Company recorded lower revenue but higher earnings in the quarter.

Segment Analysis

Segment profit was ¥10.2B for HumanLife (revenue mix ratio 56.2%, segment profit margin 7.1%) and ¥9.4B for Industry (revenue mix ratio 44.2%, segment profit margin 8.3%), with Industry posting the higher profit margin. Despite the sharp decline in European revenue (¥94.9B in the same period last year→¥5.8B in the current period), Industry secured profit of ¥9.4B through increased revenue in Japan, Asia, and other regions (Japan +12.8%, Asia +4.1%, other regions +24.7%) and improved profitability. HumanLife recorded higher revenue and profit, supported by expanded domestic revenue (¥129.06B→¥143.32B, +11.1%). Company-wide expenses and other adjustments amounted to negative ¥8.0B (negative ¥7.15B in the same period last year), and the adjustment between total segment profit of ¥19.7B and Ordinary Income of ¥11.6B widened from the previous year.

Key Financial Indicators

【Profitability】The Operating Income margin improved to 4.1% from 0.8% in the same period last year, while the Ordinary Income margin was 4.5% (0.7% in the same period last year) and the Net Income margin, based on Net Income attributable to owners of the parent, was 7.0% (1.0% in the same period last year), with both improving substantially. However, it should be noted that the improvement in the Net Income margin includes the contribution from ¥13.5B in extraordinary income.【Cash Quality】OCF was only ¥2.3B, and its ratio to Net Income attributable to owners of the parent of ¥17.95B was a low 0.13x. Deterioration in working capital due to increases in accounts receivable and inventories constrained the conversion of earnings into cash.【Investment Efficiency】ROE improved to 3.4% from 0.6% in the same period last year, but remained low in absolute terms. Net Income as a percentage of total assets of ¥1263.6B was 1.4%.【Financial Soundness】The Equity Ratio edged up to 42.0% from 41.0% in the same period last year. The current ratio was 132.7%, and the quick ratio, calculated by excluding inventories from current assets, was 113.9%, indicating that short-term payment capacity was secured. Interest-bearing debt totaled ¥383.5B, comprising short-term borrowings of ¥73.5B, bonds due within one year of ¥70.0B, and long-term borrowings of ¥240.0B, representing a certain level of balance relative to equity of ¥530.8B.

Cash Flow Analysis

OCF was ¥2.3B, down -47.6% from ¥4.5B in the same period last year, representing a significant divergence from Net Income attributable to owners of the parent of ¥17.95B. OCF before changes in working capital was ¥11.3B, but increases in trade receivables (-¥23.3B) and inventories (-¥10.1B) weighed on cash, while an increase in trade payables (+¥30.0B) partially offset the impact. Investing Cash Flow was +¥6.2B, a temporary positive figure resulting from proceeds from the sale of non-current assets of ¥26.5B exceeding capital expenditures of ¥10.1B. Financing Cash Flow was -¥11.1B, mainly due to repayments of long-term borrowings and other factors. Free cash flow, calculated as the sum of OCF and Investing Cash Flow, was +¥8.5B; however, dependence on proceeds from asset sales was high, and the normalization trend in working capital must be monitored when assessing recurring cash-generating capacity.

Earnings Quality

Of Profit Before Tax of ¥23.5B in the quarter, ¥13.5B in extraordinary income (gain on sale of non-current assets) made a substantial contribution. The net contribution of extraordinary income and expenses relative to Ordinary Income of ¥11.6B reached a positive ¥11.9B. Non-operating income of ¥3.4B consisted mainly of dividend income of ¥2.3B and foreign exchange gains of ¥0.5B; these were small relative to revenue and had moderate recurrence potential. OCF of ¥2.3B was substantially below Net Income attributable to owners of the parent of ¥17.95B, confirming an expansion in accruals due to increases in trade receivables and inventories. Comprehensive income was ¥28.2B, and the approximately ¥10.3B difference from Net Income was attributable mainly to valuation differences on securities of ¥6.6B and foreign currency translation adjustments of ¥3.0B, among other items, indicating a material impact from asset valuation fluctuations outside operating results.

Earnings Forecast and Guidance

The Q1 progress rates against the Company’s full-year plan were 24.4% for Revenue, 33.7% for Operating Income, 44.8% for Ordinary Income, and 71.8% for Net Income, based on income attributable to owners of the parent. Operating Income and Ordinary Income were progressing above the simple 25% allocation, while Net Income was significantly ahead due to the recognition of ¥13.5B in extraordinary income. The full-year plan calls for Revenue of ¥1050.0B (-7.8% YoY), Operating Income of ¥31.0B (+21.5%), and Ordinary Income of ¥26.0B (+15.6%). From the second half onward, the accumulation of underlying earnings independent of extraordinary income and expenses will be the key to achieving the plan.

Shareholder Returns

Under the Company’s plan, the Payout Ratio is approximately 31.0%, based on full-year DPS of ¥17.0 and forecast EPS of ¥54.83. Although the earnings forecast was revised during the quarter, the dividend forecast was unchanged. Free cash flow was +¥8.5B as of the current quarter, but dependence on proceeds from asset sales was high. The repeatability of funds available for dividends therefore needs to be assessed in light of the recovery trend in OCF.

Risk Factors

1. Risk of changes in the overseas business structure: Industry’s European revenue (the combined total for the Czech Republic, Germany, and other Europe) fell sharply from ¥94.9B in the same period last year to ¥5.8B in the current period. Losses on business liquidation were also recorded in extraordinary losses, requiring close monitoring of changes in the earnings base associated with the restructuring of the European business.

2. Risk of deterioration in working capital: Accounts receivable increased to ¥214.3B (¥194.99B in the previous year, +9.9%), while inventories increased to ¥79.5B (¥75.13B in the previous year, +5.8%). OCF of ¥2.3B was substantially below Net Income attributable to owners of the parent of ¥17.95B.

3. Risk of transitory earnings: Most of the increase in Net Income was attributable to the ¥13.5B gain on sale of non-current assets, and the pace of recurring earnings growth excluding this item was relatively moderate.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Operating Income margin was below the industry median, while the Net Income margin was approximately at the median level, partly due to the contribution from extraordinary income.

Growth and Capital Efficiency

The Revenue growth rate ranked significantly toward the bottom of the industry, reflecting the pronounced impact of the contraction of the European business in the Industry segment.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The substantial earnings growth despite lower revenue was significantly affected by extraordinary income and expenses associated with the contraction of the European business in the Industry segment, including the ¥13.5B gain on sale of non-current assets. This should be assessed separately from the growth in recurring earnings capacity.

2. The substantial gap between OCF of ¥2.3B and Net Income attributable to owners of the parent of ¥17.95B reflects the expansion of working capital due to increases in accounts receivable and inventories. The recovery trend in future cash-generating capacity will be a key focus.

3. Full-year progress was ahead of schedule at 44.8% for Ordinary Income and 71.8% for Net Income, but the gap from the 33.7% progress rate for Operating Income was attributable to extraordinary income and expenses. The trend in underlying earnings toward the second half will be critical to achieving guidance.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥993–¥1,050 at ±1% for the cost of equity, and ¥1,016–¥1,024 at ±0.1 for ω.

Notes:

• Because Net Income progress against the full-year forecast (72%) exceeds the standard benchmark (25%), forecast EPS has been adjusted upward within an upper limit of +10% (because companies progressing ahead of schedule tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Because 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).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-06 / This value does not forecast or guarantee 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 is not a recommendation to invest 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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