MEDICAL SYSTEM NETWORK Co.,Ltd. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥63.86B
• Operating Income: ¥1.29B
• Net Income: ¥221M
• EPS: ¥15.48

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 Integrated Analysis

Analysis integrating XBRL data (GPT-5) and PDF earnings presentation (Claude)

Executive Summary

Medical System Network Co., Ltd. (TSE: 4350) delivered solid top-line growth and improving profitability in FY2026 Q2 under JGAAP. Revenue rose 6.9% year over year to ¥63.863 billion, while operating income increased 25.1% to ¥1.286 billion, signaling positive operating leverage. Gross profit of ¥24.664 billion translates to a robust 38.6% gross margin, indicating resilient pricing and/or favorable mix. Operating margin improved to roughly 2.0%, and ordinary income of ¥1.215 billion underscores disciplined financing costs amid rising earnings. Net income more than doubled to ¥452 million (net margin 0.71%), aided by margin expansion below gross profit. EBITDA reached ¥2.367 billion (3.7% margin), and EBIT interest coverage improved to 9.9x, suggesting manageable near-term debt service capacity. DuPont decomposition shows ROE of 2.72% driven by low net margin (0.71%), steady asset turnover (0.898x), and high financial leverage (assets/equity 4.28x). Balance sheet leverage remains elevated with total liabilities/ equity at 3.26x, but the recalculated equity ratio is approximately 23.4% (equity/assets), despite a reported 0.0% disclosure field. Liquidity is tight: current ratio is 0.93x and working capital is negative at ¥-1.75 billion, indicating reliance on short-term funding or efficient cash conversion to bridge near-term obligations. Operating cash flow of ¥517 million exceeded net income (OCF/NI 1.14x), a positive indicator for earnings quality, though below EBIT plus depreciation implies working capital or other non-cash/unusual headwinds in the period. Investing cash flows and cash balance were shown as zero, which likely means undisclosed rather than true zero; thus free cash flow cannot be reliably assessed from the provided data. No dividend was paid (DPS ¥0, payout 0%), consistent with a balance sheet/FCF preservation stance amid leverage and liquidity constraints. Overall, the company is demonstrating revenue momentum and improving profitability, but cash and liquidity disclosure gaps and high leverage temper the quality of the improvement. The sustainability of margin gains will depend on further scale benefits and cost control without eroding service quality. Key data such as inventories, cash and equivalents, and capex were not disclosed under the provided labels, limiting a fuller assessment of working capital dynamics and free cash flow. We therefore base our conclusions on the available non-zero data points and recalculated metrics where appropriate. Near-term focus should be on liquidity management, capital intensity, and the durability of operating leverage as growth normalizes.

From Earnings Presentation: In the second quarter of fiscal year ending March 2026, the company achieved record interim results with revenue of 63.86 billion yen (+6.9%) and operating income of 1.28 billion yen (+25.1%). The main drivers were expansion in the pharmacy support division (pharmaceutical network, digital shift, pharmaceutical manufacturing and sales, pharmaceutical logistics) and increased prescription unit prices (existing stores +4.1%). Although the operating margin improved to 2.0%, the progress rate against the full-year forecast of 3,400 million yen remains at 37.8%, making second-half profit accumulation critical. While high-cost pharmaceuticals are driving up prescription unit prices, existing store prescription volumes declined by 1.5%, leaving risks related to labor shortages and prescription trends. In October 2025, the company announced its long-term vision "Machi no Akari Vision 2035," outlining an integrated growth strategy across three domains—Medical, Medical Support, and Medical Supply—through B to C, B to B to C, and B to B approaches. An interim dividend of 6 yen was declared, with plans to gradually increase the dividend payout ratio to 35%.

Financial Analysis

Profitability

ROE_decomposition:

• net_profit_margin: 0.71% (¥452m / ¥63,863m)
• asset_turnover: 0.898x (¥63,863m / ¥71,108m)
• financial_leverage: 4.28x (¥71,108m / ¥16,627m)
• calculated_ROE: 2.72% (matches reported 2.72%) margin_quality:
• gross_margin: 38.6% (¥24,664m / ¥63,863m) – strong for the sector, implying pricing discipline and/or mix benefits
• operating_margin: 2.01% (¥1,286m / ¥63,863m) – up YoY with operating income +25.1% vs revenue +6.9%
• ordinary_margin: 1.90% (¥1,215m / ¥63,863m)
• net_margin: 0.71% – still thin, leaving limited room for shocks
• EBITDA_margin: 3.7% – scope for further efficiency gains operating_leverage: Positive: operating income grew 25.1% on 6.9% revenue growth, indicating better fixed-cost absorption and/or SG&A control. Sustaining this will require continued volume growth and mix improvement without incremental cost creep.

Growth

revenue_sustainability: 6.9% YoY revenue growth suggests healthy underlying demand. Sustainability depends on prescription volume growth, store network productivity, and service mix (not disclosed). profit_quality: Expansion from gross to operating profit indicates improving core profitability. However, thin net margin (0.71%) and reliance on leverage reduce resilience to external pressures (reimbursement, wage inflation). outlook: If cost control persists, operating leverage could continue modestly. Watch for reimbursement changes, generic mix, and labor cost trends. Absent disclosure on inventories and capex, supply chain and capital intensity assumptions remain tentative.

Financial Health

liquidity:

• current_ratio: 0.93x (¥22,627m / ¥24,377m) – tight
• quick_ratio: 0.93x (inventories undisclosed; ratio likely overstated if inventories are material)
• working_capital: ¥-1,750m – implies reliance on short-term funding or rapid cash conversion
• cash_position: Cash & equivalents not disclosed (shown as 0). Actual liquidity headroom cannot be verified from supplied data. solvency_capital_structure:
• total_assets: ¥71,108m
• total_liabilities: ¥54,241m
• total_equity: ¥16,627m
• debt_to_equity: 3.26x (using total liabilities as proxy for debt)
• equity_ratio: Approx. 23.4% (recalculated equity/assets), reported field shows 0.0% which appears undisclosed
• interest_coverage: 9.9x (EBIT/interest: ¥1,286m / ¥130m) – serviceable near term

Cash Flow

earnings_quality: OCF/Net income = 1.14x (¥517m/¥452m), indicating cash earnings broadly in line with accounting earnings. FCF_analysis: Investing CF is shown as 0 (undisclosed). Without capex data, free cash flow cannot be reliably computed; reported FCF of 0 should be treated as ‘not available.’ working_capital: Given D&A of ¥1,081m and EBIT of ¥1,286m, OCF of ¥517m implies a working capital outflow and/or other non-cash adjustments. Lack of inventories and receivables/payables detail limits attribution.

Dividend Sustainability

payout_ratio_assessment: No dividend (DPS ¥0; payout 0%). With net income at ¥452m, the company retained all earnings. FCF_coverage: Not assessable due to undisclosed investing cash flows and cash balance; reported FCF coverage 0.00x should be treated as ‘not disclosed.’ policy_outlook: Given tight liquidity (current ratio 0.93x) and elevated leverage (3.26x liabilities/equity), a conservative dividend stance appears consistent with balance sheet priorities until cash generation and liquidity visibility improve.

Business Outlook

Full-year forecast maintained at revenue of 125,500 million yen (+2.5%) and operating income of 3,400 million yen (+7.8%). First-half progress rates are 50.9% (revenue) and 37.8% (operating income), with plans to accumulate profits in the second half. Key initiatives include: ①Regional pharmacy existing store prescription volumes +2.4% (cultivating medical mindset and providing high-quality pharmaceutical care), ②Medical mall-centered store development: 25 stores, recruitment: 10 locations, ③Pharmaceutical network membership: 12,000 locations (+997), ④Digital shift implementation: 6,850 stores (+830), ⑤Pharmaceutical manufacturing and sales: 9,000 stores (+1,819), pharmaceutical logistics: 3,700 stores (+2,128). Prescription unit prices are rising due to high-cost pharmaceuticals, and continued price increases in the second half could provide upside potential for revenue. However, if the negative trend of -1.5% in existing store prescription volumes continues, both revenue and profit face downside risks. Improvement in operating margin to 2.7% depends on operating leverage against the backdrop of a high SG&A ratio of 36.6%, making second-half revenue growth critical.

Management Guidance

While the message from President and Representative Director Inao Tajiri is not explicitly stated in the materials, the announcement of the long-term vision "Machi no Akari Vision 2035" outlines the growth strategy and capital policy direction toward 2035. Specifically: ①Gradually increase dividend payout ratio from 27.0% (FY2025/3 actual) to 35.0% (FY2035/3 target), ②Promote strategic investments with focus on capital efficiency and shareholder value, ③Strengthen management foundation through three strategies: DX (improving medical access, enhancing pharmaceutical care quality, operational efficiency), human resources (empathy-driven talent development, diversity, workplace satisfaction improvement), and finance (capital efficiency focus), ④Pursue dual objectives of contributing to community-based integrated care and stabilizing pharmacy management. The 7th Medium-Term Management Plan is scheduled for announcement in May 2026, with specific numerical targets and KPIs expected. The dividend policy states "while securing internal reserves for business expansion, human resource development, and financial strength enhancement, the dividend payout ratio will be gradually increased in line with business performance growth," demonstrating consideration for dividend sustainability.

Strategic Initiatives

• Regional Pharmacies: Cultivate medical mindset and provide high-quality pharmaceutical care, target existing store prescription volumes +2.4%, medical mall-centered store development of 25 stores and recruitment of 10 locations, improve productivity through appropriate cost control
• Pharmaceutical Network: Year-end target membership of 12,000 locations (+997), distribution improvement (once-daily weekday delivery, no Saturday delivery, reduced urgent deliveries), service expansion (training, new service development), area network construction (establish inventory sharing system)
• Digital Shift: Year-end target implementation of 6,850 stores (+830), continue enhancing LINE-based features including prescription transmission, medication notebooks, pharmacy consultations, online medication guidance, and questionnaires
• Pharmaceutical Manufacturing and Sales: Stable supply, annual cumulative transaction stores of 9,000 (+1,819), expand sales of approximately 7 billion yen (approximately 1.3% penetration rate) in covered market of approximately 540 billion yen within the generic pharmaceutical market of approximately 1.8 trillion yen
• Pharmaceutical Logistics: Stable supply, annual cumulative transaction stores of 3,700 (+2,128), strengthen logistics infrastructure through 100% ownership of Medilogi Net Co., Ltd.
• Leasing and Equipment: Target Wisteria occupancy rate of 91.8% (+1.6pt), improve profitability (address rent, management fees, and inflation)
• Food Service and Home Nursing: Address inflation and raise break-even line, review unprofitable divisions
• Investment and Financial Strategy: Implement company-wide cost control, secure profits and build capital, execute strategic investments with focus on capital efficiency and shareholder value
• Long-Term Vision: Integrate expertise and advanced technology across three domains—Medical (B to C), Medical Support (B to B to C), and Medical Supply (B to B)—to balance contribution to community healthcare and stabilization of pharmacy management

Risk Assessment

Business Risks:

• Reimbursement and regulatory changes affecting pharmacy margins
• Labor cost inflation and pharmacist availability impacting SG&A
• Supplier terms and drug price revisions compressing gross margin
• Execution risk in store operations and service mix optimization
• Competitive pressure from chains and online/telepharmacy models

Financial Risks:

• Tight liquidity (current ratio 0.93x; negative working capital)
• High leverage (liabilities/equity 3.26x) amplifies earnings volatility
• Refinancing and interest rate risk despite current 9.9x interest coverage
• Limited disclosure on cash, capex, and inventories constrains FCF visibility

Key Concerns:

• Sustainability of operating leverage with thin net margins (0.71%)
• Undisclosed cash and capex hinder assessment of dividend capacity and deleveraging
• Potential working capital outflows evidenced by OCF below EBIT plus D&A

Risk Factors from Presentation:

• Margin pressure from medical fee and drug price revisions (biennial revisions impact revenue and profit)
• Pharmacist shortage and rising personnel costs (high SG&A ratio of 36.6% amplifies risk of reverse operating leverage)
• Declining trend in existing store prescription volumes of -1.5% (prescription fluctuations directly impact revenue)
• Reversal risk from increased prescription unit prices due to high-cost pharmaceuticals (potentially temporary)
• Short-term liquidity risk with current ratio of 92.8% and working capital of -1.75 billion yen (increased receivables due to reduced factoring)
• Interest rate sensitivity with debt-to-equity ratio of 3.26x and financial leverage of 4.28x (increased interest burden during rate hikes)
• Integration risks from M&A and new store openings (goodwill impairment, initial cost burden)
• Changes in supply chain and distribution conditions (fluctuations in procurement prices and rebate practices)
• Rising compliance costs due to strengthened regulatory and governance requirements
• Limited visibility into FCF and inventory turnover due to undisclosed investment CF and inventory (uncertainty in capital allocation)

Investment Implications

Key Takeaways:

• Revenue up 6.9% with operating income up 25.1% indicates improving operating leverage
• ROE 2.72% is leverage-assisted; margin enhancement is needed for higher returns
• Liquidity is tight (current ratio 0.93x; working capital ¥-1.75bn)
• Earnings quality reasonable (OCF/NI 1.14x), but FCF not verifiable
• Interest coverage healthy at 9.9x despite elevated leverage

Metrics to Watch:

• Operating margin and SG&A ratio trends
• OCF vs. EBIT+D&A and working capital movements
• Capex and store investment cadence (to assess true FCF)
• Cash and equivalents; net debt and maturity profile
• Gross margin sensitivity to drug price revisions and mix

Relative Positioning: Improving profitability with solid gross margins and positive operating leverage, but positioned conservatively versus peers given tighter liquidity and higher leverage; disclosure gaps on cash, inventories, and capex limit full comparability.

Supplementary Insights (Key Highlights)

• Pharmaceutical network membership reached 11,511 locations (+10.3% YoY), with pharmaceutical manufacturing and sales at 7,823 stores (+37.2%) and pharmaceutical logistics at 3,064 stores (first year), rapidly expanding the transaction base
• Prescription unit prices at existing stores increased +4.1% YoY, with significant contribution from high-cost pharmaceuticals (drug cost per prescription +3.9%, technical fees per prescription +4.8%)
• Operating leverage functioned effectively, achieving operating income growth of +25.1% against revenue growth of +6.9% (high fixed cost ratio directly translates revenue growth to profit)
• New store openings: 17 locations (68.0% of 25 planned), medical facility recruitment: 17 locations (170.0% achievement, exceeding 10 planned), with balanced progress in openings and recruitment
• Regional pharmacy store count: 469 stores (+12 from previous period-end), acquired 7 stores through M&A (5 in Hokkaido, 1 in Kanto/Koshinetsu, 1 in Kyushu/Okinawa)
• Digital shift implementation stores: 6,339 stores (+13.7%), accelerating penetration of pharmacy SaaS solutions
• Operating cash flow: 259 million yen (-257 million yen YoY), with cash conversion rate declining due to increased receivables from reduced factoring
• Interim dividend of 6 yen declared (payment date: December 8, 2025), with long-term policy announced to gradually increase dividend payout ratio to 35% by 2035
• Existing store prescription volumes decreased -1.5% YoY, with prescription trends and talent acquisition emerging as risk factors
• Announced long-term vision "Machi no Akari Vision 2035," strengthening management foundation through three pillars: DX strategy, human resource strategy, and financial strategy

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
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