KANSAI PAINT CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥289.22B
• Operating Income: ¥24.33B
• Net Income: ¥17.99B
• EPS: ¥91.88

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 Financial Analysis

Executive Summary

Verdict: A mixed FY2026 Q2—core operations softened, but stronger non-operating gains lifted ordinary and bottom-line results, with liquidity and coverage metrics remaining solid. Revenue declined 1.6% YoY to 2,892.23, and operating income fell 7.6% YoY to 243.26, indicating pressure at the core business level. Ordinary income rose 10.0% YoY to 286.06 on a sizable positive non-operating contribution (+42.79), and net income increased 3.2% YoY to 161.87. Operating margin contracted by roughly 54 bps YoY to 8.4% (from about 8.95%), while net margin expanded by about 26 bps to 5.6% helped by non-operating gains. Gross margin stands at 32.2%, indicating reasonable pricing and/or input cost control, though we lack prior-period gross profit to quantify YoY change. Non-operating income (73.83) meaningfully outpaced non-operating expenses (31.04), with interest income (10.42) and dividends (3.57) contributing; the remainder likely includes FX or investment-related gains. EBITDA was 348.35 with a 12.0% margin, and interest coverage remains strong at 17.31x, underscoring manageable financing risk. OCF of 153.42 is 0.95x net income, slightly below the high-quality threshold but not a red flag; estimated FCF of about 44.3 (OCF minus capex of 109.13) suggests limited capacity to fund both shareholder returns and growth if replicated for the full year. The effective tax rate is elevated at 35.7%, partially muting bottom-line leverage. Comprehensive income (43.72) was far below net income (161.87), implying sizable negative OCI (e.g., FX translation or securities valuation), which weighs on equity even as reported net income grew. Balance sheet liquidity is robust with a 191% current ratio and 161% quick ratio; D/E of 1.16x and Debt/EBITDA of 0.52x imply conservative leverage. ROE is modest at 4.7%, in line with DuPont decomposition (Net margin 5.6% × Asset turnover 0.385 × Leverage 2.16x), and ROIC of 5.3% sits below a typical 7–8% target range—signaling room for improvement in capital efficiency. The ordinary income uplift is heavily supported by non-operating items (non-operating income ratio 45.6%), raising questions about recurrence. Forward-looking, sustaining earnings growth will likely depend on restoring operating margin (via price-cost management and mix) and improving asset turnover, amid potential headwinds from raw material inflation and FX. Overall, the quarter shows defensive financial strength but a need to re-accelerate core profitability to lift ROIC and ROE sustainably.

Profitability Analysis

ROE decomposition: ROE (4.7%) = Net Profit Margin (5.6%) × Asset Turnover (0.385) × Financial Leverage (2.16x). The most notable movement this quarter, inferred from YoY trends, is margin dynamics: operating income fell faster than revenue (-7.6% vs -1.6%), pointing to operating margin compression (~54 bps), while net margin expanded (~26 bps) thanks to stronger non-operating gains. Business reason: core paint operations likely faced weaker volumes/end-market mix or lingering input cost/price lags, while non-operating tailwinds (interest income and other gains, possibly FX) supported ordinary profit. Sustainability: non-operating boosts are typically volatile; absent structural drivers, reliance on them to support net margin is not sustainable. Asset turnover at 0.385 is low for a manufacturing/distribution business and likely pressured by inventory and receivables intensity; with revenue down, turnover probably softened YoY, though prior assets are not disclosed to confirm the magnitude. Operating leverage worked against the company as SG&A (not disclosed in detail YoY) did not flex sufficiently with the top line, visible in the larger decline in operating income than revenue. Watch for any SG&A efficiency measures or pricing/volume recovery to restore operating margin and lift ROE.

Growth Assessment

Top-line contracted 1.6% YoY, implying softer demand or mix in key end markets (construction/industrial/auto). Operating profit declined 7.6% YoY, indicating negative operating leverage. Ordinary profit rose 10.0% due to a strong non-operating contribution (+42.79 net), which is unlikely to be a consistent growth driver. Net income grew 3.2% YoY, aided by non-operating gains despite an elevated effective tax rate of 35.7%. Gross margin sits at 32.2%, signaling adequate pricing against inputs, but operating margin compression suggests residual fixed cost absorption or cost inflation not fully offset. ROIC at 5.3% is below a typical 7–8% target, and improving it will require either margin expansion or better asset utilization. Near-term growth visibility depends on price-cost management, volume recovery in housing/auto, and FX trends affecting non-operating items. Absent a rebound in core segments, profit growth looks less repeatable given the contribution from non-operating income.

Financial Health

Liquidity is strong: Current ratio 191.4% and quick ratio 161.4%, well above benchmarks; no warning triggers. Solvency is conservative: D/E 1.16x and Debt/EBITDA 0.52x; interest coverage 17.31x indicates ample buffer. Maturity mismatch risk appears low: current assets (3,534.30) comfortably exceed current liabilities (1,846.29); cash (688.65) alone covers short-term loans (180.45) nearly 3.8x. Equity base is solid at 3,469.97, though comprehensive income was much lower than net income, which could modestly pressure equity if OCI headwinds persist. No off-balance sheet obligations are disclosed in the provided data.

Cash Flow Quality

OCF/Net Income is 0.95x—slightly below the >1.0x high-quality benchmark but above the 0.8x concern threshold; quality is acceptable with mild caution. Estimated FCF is roughly 44.3 (OCF 153.42 minus capex 109.13), positive but not ample relative to potential dividend outflows and strategic investments. Working capital appears to be a swing factor for cash generation in this business model; with AR at 1,324.17 and inventories at 553.87, tight management is essential—no explicit signs of manipulation are visible, but disclosure is limited. Financing CF is -111.37, reflecting shareholder returns (buybacks -4.87) and/or debt service; dividends paid are unreported, constraining precise FCF coverage analysis. Overall, cash conversion is decent but not robust enough to comfortably fund elevated payouts and growth simultaneously if replicated beyond this half.

Dividend Sustainability

The calculated payout ratio is 55.0%, within the generally sustainable <60% threshold. Using NI of 161.87, implied dividends would be ~89.0 if applied for the period; against estimated FCF of ~44.3, cash coverage would be tight for the half (noting seasonality and disclosure gaps). Dividends paid are unreported; therefore, we cannot confirm actual cash outflow timing or full-year coverage. With strong liquidity and low leverage, near-term capacity exists to maintain policy; however, sustainability improves if core operating cash flow strengthens and/or capex moderates. Policy outlook likely hinges on restoring operating margin and improving ROIC toward management targets.

Risk Assessment

Business Risks:

• Raw material price volatility (resins, solvents, titanium dioxide) could pressure gross margin.
• End-market demand sensitivity in construction, industrial, and automotive coatings.
• Execution risk in pricing/mix needed to offset cost inflation.
• Intangible assets and goodwill (total ~1,120.35) raise impairment risk if growth underperforms.
• Dependence on non-operating gains this quarter increases earnings volatility.

Financial Risks:

• OCF/NI at 0.95x indicates only moderate cash conversion; weaker cash flow would pressure FCF coverage.
• Negative other comprehensive income (low comprehensive income vs net income) could erode equity if persistent.
• Currency fluctuation risk affecting non-operating items and OCI.
• Potential working capital build (AR/inventory intensive model) could consume cash in a downturn.

Key Concerns:

• Operating margin compressed by ~54 bps YoY while ordinary and net profit relied on non-operating gains.
• ROIC is 5.3%, below the 7–8% target range, suggesting capital efficiency improvement is needed.
• Non-operating income ratio of 45.6% highlights elevated reliance on items that may not be recurring.

Investment Implications

Key Takeaways:

• Core profitability softened: revenue -1.6% YoY, operating income -7.6% YoY, operating margin ~8.4%.
• Ordinary and net income growth driven by stronger non-operating gains; sustainability uncertain.
• Liquidity and solvency are strong (current ratio ~191%, interest coverage ~17x, Debt/EBITDA ~0.5x).
• Cash conversion acceptable but not robust (OCF/NI 0.95x); estimated FCF ~44.3 in the period.
• ROE 4.7% and ROIC 5.3% indicate room for improvement via margin expansion and asset turnover.
• Comprehensive income materially below net income signals FX/valuation headwinds to equity.

Metrics to Watch:

• Operating margin trajectory and SG&A efficiency vs revenue trend.
• Gross margin resilience vs raw material costs (titanium dioxide, resins) and pricing.
• Asset turnover and working capital intensity (AR days, inventory days).
• Non-operating income composition (FX, investment gains) and recurrence.
• ROIC progress toward ≥7–8% and OCF/NI >1.0x.
• OCI drivers (FX translation, securities valuation) and impact on equity.

Relative Positioning: Within the Japan paint/coatings peer set, Kansai Paint shows solid balance sheet strength and coverage, but lags on profitability momentum and capital efficiency this quarter, with higher reliance on non-operating items versus peers emphasizing stable operating margin expansion.

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
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis