NOF (4403) FY2027 Q1 Earnings Report

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Executive Summary

Although revenue increased substantially, the Company did not achieve higher operating income due to an increase in the cost ratio, resulting in higher revenue but lower earnings. Revenue increased to ¥69.01B (+23.1% YoY), while Operating Income declined to ¥10.70B (-9.7%), Ordinary Income to ¥11.50B (-6.3%), and Net Income to ¥7.60B (-11.7%). The sharp expansion in sales of the Explosives Business drove the increase in revenue, while a significant decline in the Pharmaceuticals, Medical, and Healthcare Business and an across-the-board increase in the cost ratio were the primary causes of the earnings decline.

Factors Affecting Results

【Revenue】Revenue increased to ¥69.01B, up +23.1% YoY. By segment, the Functional Chemicals Business was the core business, with revenue of ¥40.12B (+7.6% YoY) and a 58.1% revenue composition ratio. The Explosives Business expanded sharply to ¥18.41B (+197.7% YoY), becoming the largest driver of revenue growth. Meanwhile, the Pharmaceuticals, Medical, and Healthcare Business declined to ¥11.58B (-16.8% YoY).

【Profit and Loss】Operating Income declined to ¥10.70B (-9.7% YoY). The gross margin was 31.2%, down approximately 8.4pt from 39.5% in the previous year, primarily because cost of sales increased by +40.2%, exceeding the +23.1% growth in revenue. The SG&A expense ratio improved to 15.7% from 18.4% in the previous year, indicating that the earnings decline was attributable to the higher cost ratio rather than expenses. By segment, Operating Income for the Functional Chemicals Business was ¥7.85B (+11.0% YoY), while the Explosives Business turned profitable at ¥2.30B from a slight loss in the previous year; however, its 12.5% operating margin remained below that of the core business. The Pharmaceuticals, Medical, and Healthcare Business recorded a significant decline in Operating Income to ¥1.22B (-77.6% YoY), with its margin falling to 10.6%. Ordinary Income was ¥11.50B, ¥0.81B above Operating Income, while extraordinary items resulted in a net loss of ¥0.04B, having a limited impact on Net Income. In conclusion, revenue increased but earnings declined.

Segment Analysis

The Functional Chemicals Business remained the core earnings contributor, with revenue of ¥40.12B (+7.6% YoY), Operating Income of ¥7.85B (+11.0% YoY), and an operating margin of 19.6%, maintaining both revenue and earnings growth. The Explosives Business posted sharp revenue growth to ¥18.41B (+197.7% YoY), and Operating Income turned positive at ¥2.30B from an approximately breakeven level in the previous year; however, its 12.5% margin was below that of the Functional Chemicals Business. The Pharmaceuticals, Medical, and Healthcare Business recorded revenue of ¥11.58B (-16.8% YoY) and Operating Income of ¥1.22B (-77.6% YoY), resulting in a significant earnings decline and a margin decrease to 10.6%. Given the high contribution of the Functional Chemicals Business to consolidated earnings, its earnings growth offset the sharp expansion of the Explosives Business and the downturn in the Pharmaceuticals Business.

Key Financial Indicators

【Profitability】The Operating Margin declined to 15.5% from 21.1% in the previous year, while the Net Profit Margin of 11.0% was also below the previous year’s 15.4%. The gross margin declined to 31.2% from 39.5% in the previous year, down approximately 8.4pt, reflecting the fact that the increase in cost of sales exceeded the pace of revenue growth.【Cash Quality】Cash and deposits declined 26.6% YoY to ¥64.85B, but remained substantially above interest-bearing debt of ¥3.45B.【Investment Efficiency】Annualized ROE was 10.3%, consisting of the combination of the Net Profit Margin, Total Asset Turnover (0.72x), and Financial Leverage (1.30x). The relatively low turnover reflects the Company’s conservative capital structure.【Financial Soundness】The Equity Ratio was 77.0%, while the current ratio was approximately 310%, based on current assets of ¥216.46B and current liabilities of ¥69.79B, an exceptionally high level. Dependence on interest-bearing debt was also low.

Cash Flow Analysis

Although individual disclosure of the cash flow statement is limited, trends in the balance sheet indicate the following movements in funds. Cash and deposits stood at ¥64.85B, a decline of ¥23.52B (26.6%) from the same period of the previous year. Meanwhile, work in process increased to ¥10.22B, up ¥2.07B (25.4%) YoY, suggesting that funds may have been allocated to production expansion and inventory accumulation accompanying the sharp expansion of the Explosives Business. Although accounts receivable and notes receivable declined slightly to ¥68.77B, total inventories increased to ¥35.36B, indicating that the expansion of working capital contributed to the decline in cash. Interest-bearing debt remained modest at ¥3.45B, suggesting that the Company financed the increase in working capital with internal funds rather than relying on external financing.

Earnings Quality

The difference between Operating Income and Ordinary Income was ¥0.81B, primarily attributable to non-operating income of ¥0.98B, including dividend income of ¥0.57B and foreign exchange gains of ¥0.17B; these items are relatively recurring in nature. Extraordinary income and losses consisted of a gain on the sale of fixed assets of ¥0.04B and a loss on disposal of ¥0.08B, resulting in a net loss of ¥0.04B and having a minor impact on Net Income. Comprehensive Income was ¥10.56B, exceeding Net Income of ¥7.60B. The difference was primarily due to an increase of ¥2.78B in valuation differences on available-for-sale securities, indicating that the expansion of unrealized gains on held shares boosted Comprehensive Income separately from business earnings. The decline in Operating Income reflects the underlying business condition of a higher cost ratio, and distortion from temporary factors appears limited.

Earnings Forecast and Guidance

The full-year Company forecast calls for revenue of ¥319.00B (+23.7% YoY), Operating Income of ¥50.00B (+5.5% YoY), and Ordinary Income of ¥51.00B (+1.3% YoY), with no revisions to either the earnings or dividend forecasts. The Q1 progress rates were 21.6% for revenue and 21.4% for Operating Income, slightly below the standard 25%, although the shortfall was limited to approximately 3–4pt. The full-year forecast Operating Margin is 15.7%, nearly in line with the Q1 actual result of 15.5%, indicating that the Company plan does not assume a significant improvement in margins. Going forward, continued revenue growth in the Explosives Business and a recovery in the profitability of the Pharmaceuticals, Medical, and Healthcare Business will be the key factors in achieving the full-year plan.

Shareholder Returns

The full-year dividend forecast is ¥70.00 per share, implying a Payout Ratio of 41.3% based on forecast EPS of ¥169.60. Although the Company’s policy appears to call for an increase in the full-year dividend from the previous year’s dividend result of ¥26 (interim portion), there was no revision to the dividend forecast as of the current quarter. The strong financial base, comprising an Equity Ratio of 77.0% and interest-bearing debt of ¥3.45B, supports the Company’s dividend-paying capacity.

Risk Factors

1. Declining profitability in the Pharmaceuticals, Medical, and Healthcare Business: Revenue declined -16.8% YoY, while segment income decreased -77.6%, resulting in a significant earnings decline and a reduction in the margin to 10.6%. This was the largest factor behind the decline in the consolidated margin, and the timing of a recovery will be a key focus going forward.

2. Deteriorating profitability due to a higher cost ratio: Cost of sales increased +40.2% YoY, exceeding the +23.1% growth in revenue, while the gross margin declined by approximately 8.4pt. It will be necessary to determine whether raw material and energy costs and changes in product mix are temporary or structural.

3. Tied-up working capital: Work in process increased +25.4% YoY, while total inventories also expanded to ¥35.36B. The accumulation of inventory and work in process accompanying the sharp expansion of the Explosives Business will require monitoring from the perspective of capital efficiency.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s Operating Margin and Net Profit Margin both exceed the industry median and upper range, indicating a high level of profitability within the industry.

Growth and Capital Efficiency

The revenue growth rate significantly exceeds the industry median, demonstrating an outstanding rate of revenue growth within the industry due to the expansion of the Explosives Business.

※Source: Compiled by the Company

Key Takeaways from the Results

1. Revenue increased 23.1%, significantly exceeding the industry average, while Operating Income declined 9.7%, resulting in a divergence between scale growth and profitability. The primary cause was the higher cost ratio, and determining whether this is temporary or structural will be an important focus of future analysis.

2. The core Functional Chemicals Business achieved both revenue and earnings growth while maintaining a 19.6% margin, serving as the central contributor to consolidated earnings. Meanwhile, the margin of the Pharmaceuticals, Medical, and Healthcare Business declined substantially from an equivalent level of 39.9% to approximately 10.9%, indicating a change in the earnings structure of the business portfolio.

3. The strong financial base, comprising an Equity Ratio of 77.0% and interest-bearing debt of ¥3.45B, demonstrates resilience against rising cost ratios and expanding working capital. The upward trend in work in process should be continuously monitored as a change in capital efficiency accompanying the expansion of the Explosives Business.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,446–¥1,531 at Cost of Equity ±1%, and ¥1,483–¥1,494 at ω±0.1.

Notes:

• Net assets as of the quarter-end are used (there is a timing discrepancy with 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 solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not forecast or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary 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, after consulting professionals as necessary.

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