NAKAYAMA STEEL WORKS (5408) FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended March 2026, the Company reported lower revenue and a disproportionately larger decline in earnings, primarily due to deteriorating steel market conditions and lower operating rates. Revenue was ¥1,483.1B (-12.4% YoY), Operating Income was ¥49.1B (-41.8%), Ordinary Income was ¥48.1B (-40.8%), and Net Income was ¥24.6B (-58.2%). The decline in Operating Income exceeding the rate of revenue decline indicates an increased fixed-cost burden and the high sensitivity of the Steel Business to market conditions. In addition, the recognition of ¥14.8B in extraordinary losses further pressured Net Income.

Factors Affecting Financial Performance

【Revenue】Revenue was ¥1,483.1B, down -12.4% YoY. The Steel Business, which accounted for 98.2% of the composition, declined by -12.5% YoY and drove the decline in company-wide revenue. The Engineering Business also declined by -10.5% YoY, while the Real Estate Business was almost flat at -1.0% YoY, indicating a declining revenue trend across all segments.

【Profit and Loss】Operating Income was ¥49.1B (-41.8% YoY), and Ordinary Income was ¥48.1B (-40.8%), representing declines substantially exceeding the rate of revenue decline. SG&A expenses were ¥136.2B, almost unchanged from ¥136.4B in the previous fiscal year. As revenue declined, the SG&A ratio increased to 9.2% from approximately 8.1% in the previous fiscal year, highlighting reduced fixed-cost absorption. Steel segment profit, on an Ordinary Income basis, was ¥42.1B (-46.1% YoY), the primary cause of the decline in company-wide earnings. In addition, extraordinary losses of ¥14.8B, including ¥5.2B in losses on retirement of fixed assets, were recognized, compressing Net Income to ¥24.6B (-58.2% YoY). In conclusion, the Company reported lower revenue and lower earnings.

Segment Analysis

The Steel Business, with revenue of ¥1,456.7B (-12.5% YoY), segment profit of ¥42.1B on an Ordinary Income basis (-46.1%), and a profit margin of 2.9%, experienced a significant deterioration in profitability despite being the core business accounting for 98.2% of company-wide revenue. The Real Estate Business generated revenue of ¥9.7B (-1.0% YoY) and secured Ordinary Income of ¥6.8B, achieving an extremely high profit margin of 70.3% despite its small scale. The Engineering Business posted revenue of ¥16.6B (-10.5% YoY) and fell into a loss, recording an Ordinary Loss of ¥0.2B. The high profitability of the Real Estate Business supports company-wide earnings, but its small scale limits its ability to mitigate sensitivity to steel market conditions. Note that segment profit is based on Ordinary Income and differs in definition from consolidated Operating Income.

Key Financial Metrics

【Profitability】The Operating Margin declined significantly to 3.3% from 5.0% in the previous fiscal year, while the Net Profit Margin fell to 1.7% from 3.4%. The Gross Margin also declined to 12.5% from 13.0%, reflecting the earnings structure of the highly commoditized Steel Business.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥152.7B, approximately 6.2 times Net Income of ¥24.6B, indicating strong cash backing for earnings. However, it should be noted that this included a one-time cash inflow from working capital, including a ¥72.4B decrease in inventories.【Investment Efficiency】ROE declined significantly to 2.3%, while EPS fell to ¥45.44 from ¥105.14 in the previous fiscal year. CapEx was ¥50.8B, exceeding depreciation and amortization expense of ¥30.6B, indicating continued capital investment above maintenance levels.【Financial Soundness】The Equity Ratio remained high at 71.6%, and cash and deposits increased to ¥232.4B (+¥78.99B YoY). Interest-bearing debt was limited, and the financial foundation was generally conservative.

Cash Flow Analysis

Operating Cash Flow was ¥152.7B, a substantial increase of +107.9% YoY and significantly above Net Income of ¥24.6B. This increase was substantially supported by working-capital cash inflows, including a ¥72.4B decrease in inventories, a ¥12.6B decrease in trade receivables, and a ¥13.4B increase in trade payables. It should be noted that this included not only an improvement in recurring earnings power but also a one-time effect from inventory reduction. Investing Cash Flow was -¥48.5B, primarily consisting of ¥50.8B in capital expenditures. Free Cash Flow, calculated by deducting capital expenditures from OCF, was positive at ¥104.2B, indicating that investments were fully financed with internally generated funds. Financing Cash Flow was -¥25.2B, primarily due to cash outflows from dividend payments and debt repayments. Cash and deposits increased to ¥232.4B, representing a significant improvement in the cash position from the previous fiscal year.

Quality of Earnings

Current-period earnings were sufficiently supported by OCF, which reached approximately 6.2 times Net Income. However, while extraordinary losses of ¥14.8B, including ¥5.2B in losses on retirement of fixed assets, were recognized, extraordinary gains were limited to ¥0.7B. The resulting net extraordinary loss of ¥14.1B significantly pressured Net Income and should be distinguished as a temporary factor. Non-operating income and expenses were negative on a net basis, with non-operating income of ¥3.8B versus non-operating expenses of ¥4.9B, leaving Ordinary Income slightly below Operating Income. The ¥72.4B decrease in inventories, a factor boosting OCF, represented a temporary release of working capital; therefore, the Company’s normalized operating cash-generation capacity should be assessed. Comprehensive Income was ¥39.4B, exceeding Net Income of ¥24.6B, aided by increases in items such as ¥9.4B in adjustments related to retirement benefits and ¥5.4B in valuation differences on securities.

Earnings Forecast and Guidance

Progress against the full-year company forecast was 94.5% for revenue, 144.4% for Operating Income, and 240.3% for Ordinary Income, with Operating Income and Ordinary Income already exceeding forecast levels. Meanwhile, progress toward Net Income attributable to owners of the parent was limited to 70.3%, resulting in uneven earnings progress due to the impact of extraordinary losses. The company forecast calls for revenue of ¥1,570.0B (+5.9% YoY), Operating Income of ¥34.0B (-30.8%), and Ordinary Income of ¥20.0B (-58.4%), incorporating further deterioration in profitability for the full year. The final level of one-time gains and losses and the tax burden will determine the extent to which full-year Net Income is achieved.

Shareholder Returns

Annual dividends totaled ¥14.00, consisting of an interim dividend of ¥8.00 and a year-end dividend of ¥6.00, resulting in a Payout Ratio of 30.8%. No share repurchases were identified; therefore, shareholder returns are assessed using the Payout Ratio rather than the Total Return Ratio. Dividend payments were sufficiently covered by Free Cash Flow of ¥104.2B, leaving ample capacity to fund dividends for the current fiscal year. The company’s full-year forecast calls for annual dividends of ¥20.00, above the current-period actual dividend. Given cash and deposits of ¥232.4B and low interest-bearing debt, the Company is not immediately constrained from a financial perspective in maintaining dividend payments. However, as current-period Free Cash Flow includes a temporary cash inflow from inventory reduction, the Company’s capacity to return capital at normalized levels should be confirmed.

Risk Factors

1. Business concentration risk: The Steel Business accounts for 98.2% of revenue, meaning that fluctuations in market conditions, raw-material costs, and operating rates are almost directly reflected in company-wide performance. During the current period, Steel segment profit declined by -46.1% YoY, substantially exceeding the -12.5% rate of revenue decline.

2. Profitability deterioration risk: The Operating Margin of 3.3% and Gross Margin of 12.5% both declined from the previous fiscal year, while the SG&A ratio increased to 9.2%. If increases in raw-material, energy, and labor costs cannot be passed through to prices, earnings may decline further.

3. Risk of recurrence of one-time losses: Extraordinary losses of ¥14.8B, including ¥5.2B in losses on retirement of fixed assets, significantly pressured Net Income for the current period. If similar one-time items recur, Net Income volatility may increase.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability is significantly below the industry median and ranks toward the lower end.

Growth and Capital Efficiency

The Company’s revenue growth rate is also significantly below the industry median, with the magnitude of its revenue decline standing out within the industry.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Operating Income declined sharply by -41.8% compared with a -12.4% decline in revenue, highlighting the high earnings elasticity of the Steel Business in the current-period results. The increase in the SG&A ratio indicates challenges in absorbing fixed costs when operating rates decline.

2. OCF was ¥152.7B, substantially exceeding Net Income, and the financial foundation was solid, with an Equity Ratio of 71.6%. However, the increase in OCF included the temporary factor of inventory reduction, making confirmation of normalized cash-generation capacity an important focus going forward.

3. While Operating Income and Ordinary Income have already progressed above full-year forecast levels, progress toward Net Income remains limited to 70.3%. The key points of focus are whether extraordinary losses recur and the final full-year earnings outcome.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥1,635–¥1,729 for ±1% in the Cost of Equity, and ¥1,670–¥1,688 for ±0.1 in ω.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market stock price or a recommendation of any specific investment action, and does not forecast or guarantee the future stock price.)

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This report is an earnings analysis document automatically generated by AI through analysis of 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 with a professional as necessary.

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