SHINAGAWA REFRA CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

While revenue increased 21.8%, profitability at the operating level declined substantially due to deterioration in the gross profit margin and widening losses in the Engineering Business, while net income increased with support from extraordinary income. Revenue was ¥465.9B (+21.8% YoY), Operating Income was ¥17.4B (-39.9%), Ordinary Income was ¥30.1B (-2.8%), and Net Income attributable to owners of the parent was ¥46.8B (+166.2%). The gross profit margin declined to 20.1% from 25.2% in the previous year, and the improvement in the SG&A ratio was insufficient to offset this decline, resulting in a decrease in the operating margin to 3.7% from 7.6%. Ordinary Income was supported by non-operating income, including ¥11.8B in foreign exchange gains, while Net Income increased substantially due to the one-time gain on the sale of property, plant and equipment of ¥37.6B.

Factors Behind Earnings Changes

【Revenue】Revenue was ¥465.9B, up +21.8% YoY. By segment, Refractories maintained its position as the core business at ¥301.4B (+14.9%, composition ratio 64.7%), while Engineering expanded substantially to ¥114.8B (+57.5%, composition ratio 24.7%). Insulation Materials and Advanced Equipment also recorded revenue growth, at ¥41.6B (+6.9%) and ¥11.7B (+21.0%), respectively.

【Profit and Loss】Cost of sales increased at a faster rate than revenue, causing the gross profit margin to decline by 513bp to 20.1% from 25.2% in the previous year. The SG&A ratio improved to 16.4% from 17.7%, but this was insufficient to fully absorb the impact, and Operating Income contracted to ¥17.4B (-39.9%), resulting in an operating margin of 3.7% versus 7.6% in the previous year. The primary factor was the Engineering Business’s operating loss of ¥9.9B, which deteriorated substantially from the same period of the previous year, indicating that revenue expansion has not translated into earnings. Ordinary Income was maintained at nearly the previous year’s level at ¥30.1B (-2.8%), supported by ¥11.8B in foreign exchange gains. Following the recognition of a ¥37.6B gain on the sale of property, plant and equipment as extraordinary income, Profit Before Tax was ¥67.4B and Net Income was ¥46.8B (+166.2%). Although the Company experienced higher revenue but lower operating-level earnings, bottom-line profit increased substantially due to one-time factors.

Segment Analysis

Refractories generated revenue of ¥301.4B (+14.9%) and Operating Income of ¥22.9B (+1.5%), with a margin of 7.6%, making it the main contributor to Company-wide earnings. Engineering recorded substantial revenue growth to ¥114.8B (+57.5%), but posted an operating loss of ¥9.9B, with its margin deteriorating to -8.6%, diluting the Company-wide margin. Insulation Materials recorded revenue of ¥41.6B (+6.9%) and Operating Income of ¥4.2B (-18.7%), resulting in higher revenue but lower earnings, while its margin remained relatively high at 10.1%. Advanced Equipment recorded revenue of ¥11.7B (+21.0%) and a modest operating loss of ¥0.3B, corresponding to a margin of -2.8%, indicating continued losses. Revenue composition was 64.7% for Refractories, 24.7% for Engineering, 8.9% for Insulation Materials, and 2.5% for Advanced Equipment, demonstrating the Company’s high earnings dependence on Refractories.

Key Financial Indicators

【Profitability】The operating margin was 3.7%, down 382bp from 7.6% in the previous year, primarily due to the deterioration in the gross profit margin, which declined from 25.2% to 20.1%. Meanwhile, the net profit margin was high at 10.0% (Net Income attributable to owners of the parent of ¥46.8B / revenue of ¥465.9B); however, it should be noted that this includes a temporary boost from extraordinary income.【Cash Flow Quality】Although Operating Cash Flow (OCF) has not been disclosed, accounts receivable and notes receivable of ¥448.2B and inventories of ¥147.2B indicate a substantial level of working capital, suggesting potential delays in cash collection relative to profit growth.【Investment Efficiency】ROE was 3.8%, and basic EPS was ¥102.55 (¥38.54 in the previous year, +166.1%), while BPS steadily increased to ¥2,414.18 from ¥2,343.45 in the previous year.【Financial Soundness】The Equity Ratio was stable at 50.9%, but short-term borrowings increased substantially to ¥260.4B from ¥166.2B in the previous year, indicating a higher degree of dependence on short-term funding.

Cash Flow Analysis

Although the statement of cash flows has not been disclosed, funding trends can be assessed from changes in the balance sheet. Cash and deposits were ¥201.1B, down from ¥213.6B in the previous year, while short-term borrowings increased substantially to ¥260.4B from ¥166.2B. Working capital items remained high, with accounts receivable and notes receivable of ¥448.2B and inventories of ¥147.2B, potentially indicating increased funding requirements accompanying revenue growth. The ¥37.6B gain on the sale of property, plant and equipment recognized as extraordinary income was a temporary source of cash inflow and should be distinguished from the core business’s cash-generating capacity. The increasing dependence on short-term borrowings warrants monitoring as a change in the Company’s future funding structure.

Earnings Quality

The current period’s earnings structure is highly dependent on one-time factors. Against Ordinary Income of ¥30.1B, the largest contributor among non-operating income was ¥11.8B in foreign exchange gains, equivalent to 67.7% of Operating Income of ¥17.4B. In addition, the Company recorded a ¥37.6B gain on the sale of property, plant and equipment as extraordinary income, directly boosting Profit Before Tax of ¥67.4B and Net Income of ¥46.8B. The gap between Ordinary Income of ¥30.1B and Net Income of ¥46.8B was primarily attributable to extraordinary income, and the growth in Net Income (+166.1%) does not reflect an improvement in operating performance. Comprehensive Income was ¥58.0B, exceeding Net Income of ¥46.8B, with valuation difference on available-for-sale securities of ¥9.4B and foreign currency translation adjustments of ¥3.6B contributing positively. Accordingly, the high net profit margin for the period should be interpreted with due consideration that it was supported by temporary items.

Earnings Forecast and Guidance

Progress against the full-year earnings forecast was 23.5% for revenue at ¥465.9B/¥1980.0B and 13.4% for Operating Income at ¥17.4B/¥130.0B, indicating a noticeable lag in Operating Income relative to revenue. Ordinary Income was ¥30.1B/¥140.0B, representing progress of 21.5%; achieving the full-year forecast, which is -12.4% YoY, will therefore require a recovery at the operating level. Against the full-year Net Income forecast, approximately ¥105.0B based on EPS of ¥230.1, current-period Net Income of ¥46.8B represents progress of 44.6%. However, this high progress rate was substantially boosted by extraordinary income, and there is no assurance that this level will continue in the second half and beyond. The Company revised its earnings forecast and dividend forecast during the quarter, and correcting Engineering profitability for the full year will be key to achieving its targets.

Shareholder Returns

From the fiscal year ending March 2027, the Company changed its policy from the previous dividend payout ratio-based approach to a progressive dividend policy based on a consolidated dividend on equity (DOE) of 4% or more. The full-year dividend forecast is ¥95, compared with ¥45 in the previous year, and the payout ratio based on the full-year EPS forecast of ¥230.1 is approximately 41.3%. Equity attributable to owners of the parent was substantial at ¥1,101.7B, providing a foundation for dividend stability under the DOE policy. As the increase in Net Income depends on extraordinary income, dividend sustainability should be assessed together with the recovery in core earnings power.

Risk Factors

1. Deterioration in Engineering Business profitability: The operating loss in Q1 was ¥9.9B, with a margin of -8.6%, substantially widening from -¥1.5B in the same period of the previous year. While revenue increased +57.5%, profitability has not kept pace, making this the primary factor depressing the Company-wide operating margin of 3.7%.

2. Increasing dependence on short-term funding: Short-term borrowings were ¥260.4B, up +56.7% from ¥166.2B in the previous year. Cash and deposits were ¥201.1B, below short-term borrowings, and continued changes in the funding structure will require monitoring.

3. Dependence on one-time profit: Of Net Income of ¥46.8B, the ¥37.6B gain on the sale of property, plant and equipment (extraordinary income) and ¥11.8B in foreign exchange gains (non-operating income) made substantial contributions. Excluding these items, underlying earnings power remains at the level of Operating Income of ¥17.4B, consistent with the lag in full-year progress, where Operating Income progress was 13.4%.

Industry Benchmark (Reference; Company Analysis)

Industry Benchmark (manufacturing)

Profitability and Returns

The operating margin is below the industry median, while the net profit margin exceeds the industry median due to the boost from extraordinary income.

Growth and Capital Efficiency

The revenue growth rate ranks high within the industry; however, viewed together with the underperformance of the operating margin, the key characteristic is that growth has not sufficiently translated into profitability.

※Source: Company aggregation

Key Points from the Earnings Results

1. Revenue growth of +21.8% substantially exceeded the industry average, but deterioration in the gross profit margin and widening losses in the Engineering Business caused the operating margin to decline to 3.7% from 7.6% in the previous year. The fact that revenue growth has not translated into higher operating-level earnings is a structural characteristic of the current period.

2. The increase in Net Income (+166.1%) depended heavily on temporary, non-core factors, namely the ¥37.6B gain on the sale of property, plant and equipment and ¥11.8B in foreign exchange gains. The gap between Net Income progress of 44.6% and Operating Income progress of 13.4% for the full year is an important point to monitor when assessing earnings quality.

3. The dividend policy has shifted to a progressive dividend approach based on DOE of 4% or more. This represents a change from the previous payout ratio-based policy, and the resulting change in the basis for calculating future shareholder returns should be recorded as a structural change in the earnings data.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,406–¥2,545 for Cost of Equity ±1%; ¥2,472–¥2,475 for ω±0.1.

Note:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).

(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, after consulting professionals as necessary.

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