NAKAYAMA STEEL WORKS (5408) FY2026 Q3 Earnings Report

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Executive Summary

For the cumulative Q3 period, revenue and earnings declined, primarily due to deteriorating market conditions in the core Steel Business, resulting in a significant deterioration in profitability. Revenue was ¥1097.1億 (down 15.4% YoY), Operating Income was ¥32.2億 (down 52.0%), Ordinary Income was ¥29.6億 (down 55.2%), and Net Income was ¥16.7億 (down 63.2%). The decline in Operating Income substantially exceeded the decline in Revenue, indicating that fixed-cost reductions failed to keep pace with the decrease in sales and that negative operating leverage has become evident.

Factors Affecting Performance

【Revenue】Revenue was ¥1097.1億, down 15.4% YoY. The Steel segment, which accounts for 98% of revenue, led the overall decline, falling 15.5% to ¥1077.5億. Engineering declined 11.4% to ¥12.2億, while Real Estate remained generally resilient, declining 1.1% to ¥7.3億.

【Profit and Loss】Operating Income was ¥32.2億 (down 52.0%), Ordinary Income was ¥29.6億 (down 55.2%), and Net Income was ¥16.7億 (down 63.2%). Gross margin declined to 12.2% (equivalent to 12.9% in the previous year). Although SG&A expenses were largely flat at ¥101.6億, the SG&A ratio rose to 9.3% as a result of the decline in Revenue, and the Operating Margin fell to 2.9%. The difference from Ordinary Income was attributable to an increase in non-operating expenses, including ¥1.4億 in interest expenses, while the difference from Net Income was primarily attributable to extraordinary losses, including ¥5.1億 in losses on disposal of fixed assets. This was a decline in both revenue and earnings accompanied by a significant contraction in profit margins, with deteriorating profitability in the Steel Business weighing on the overall earnings structure.

Segment Analysis

The Steel segment reported Revenue of ¥1077.5億 (down 15.5%) and segment profit, on an Ordinary Income basis, of ¥26.9億 (down 56.3%). Its profit margin declined from 4.8% to 2.5%, and it accounted for 83.4% of total segment profit. Engineering reported Revenue of ¥12.2億 (down 11.4%) and segment profit of ¥0.2億 (up 10.5%), representing a modest increase in earnings. Real Estate reported Revenue of ¥7.3億 (down 1.1%) and segment profit of ¥5.1億 (down 2.3%), with a profit margin of approximately 69.8%. Although it is a stable source of earnings with a margin substantially above those of the other segments, its profit contribution is small, and the Steel Business continues to determine the direction of company-wide performance.

Key Financial Indicators

【Profitability】The Operating Margin of 2.9% and Gross Margin of 12.2% both declined substantially from the previous year, while the Net Profit Margin remained at only 1.5%. 【Cash Flow Quality】Total extraordinary gains and losses of ¥5.2億, primarily consisting of ¥5.1億 in losses on disposal of fixed assets, represented 31.3% of Net Income of ¥16.7億. The ¥4.4億 difference between Ordinary Income and Net Income indicates low recurrence of current-period earnings. 【Investment Efficiency】Annualized ROE of 2.1% and ROIC of 3.1% were both low relative to the cost of capital. 【Financial Soundness】The Equity Ratio was 71.5%, the Current Ratio was 333.4%, and interest-bearing debt was ¥86.5億, with a Debt/Capital ratio of 7.5%, indicating a sound financial foundation. Cash and deposits increased 55.1% YoY to ¥237.9億, while inventories were reduced 30.2% to ¥119.9億.

Cash Flow Analysis

Although individual disclosure of the cash flow statement is not available, changes in the balance sheet provide insight into funding trends. Cash and deposits increased by ¥84.5億, or 55.1%, from the previous-year period to ¥237.9億, indicating improved liquidity. At the same time, inventories were reduced by ¥51.9億, or 30.2%, to ¥119.9億, suggesting that inventory reduction may have contributed to increased financial flexibility. Property, plant and equipment increased by ¥14.9億, indicating continued capital investment. Meanwhile, interest-bearing debt remained at ¥86.5億 and the Debt/Capital ratio remained low at 7.5%, limiting the burden on the funding structure.

Earnings Quality

Non-operating income of ¥3.2億 accounted for only 0.3% of Revenue and mainly comprised recurring items such as dividend income and interest income, indicating a limited dependence on such income. Meanwhile, non-operating expenses of ¥5.8億 included ¥1.4億 in interest expenses, resulting in Ordinary Income falling ¥2.5億 below Operating Income. Profit Before Tax of ¥25.2億 was a further ¥4.4億 below Ordinary Income of ¥29.6億, primarily due to extraordinary losses centered on ¥5.1億 in losses on disposal of fixed assets. Total extraordinary gains and losses of ¥5.2億, comprising a ¥0.1億 gain on sale of fixed assets and a ¥5.1億 loss on disposal of fixed assets, represented 31.3% of Net Income of ¥16.7億. Net Income was therefore more volatile than the underlying profitability indicated at the Operating Income and Ordinary Income levels, with a substantial impact from temporary factors.

Earnings Forecast and Guidance

The cumulative Q3 progress rates against the full-year forecasts—Revenue of ¥1480.0億, Operating Income of ¥42.0億, Ordinary Income of ¥40.0億, and Net Income of ¥23.0億—were 74.1%, 76.6%, 74.1%, and 72.5%, respectively. Progress for Revenue and Ordinary Income was broadly in line with the standard 75%, while Operating Income progress exceeded this benchmark by 1.6pt. Net Income progress was 2.5pt below the benchmark due to the impact of extraordinary losses. Required Operating Income in Q4 is only ¥10.8億; however, given that the Steel segment’s profit margin has declined to 2.5%, achievement of the full-year target will depend on improvements in selling prices, the raw-material spread, and fixed-cost absorption. The earnings forecast was revised during Q3.

Shareholder Returns

The Q2 dividend was ¥8.00 per share, and the full-year dividend forecast is ¥13.00 per share. Based on the full-year Net Income forecast of ¥23.0億 and the average number of shares outstanding during the period, the forecast Payout Ratio is approximately 30.6%, a conservative level relative to earnings. The financial structure of cash and deposits of ¥237.9億, interest-bearing debt of ¥86.5億, and a Debt/Capital ratio of 7.5% could support continued dividend payments. However, Net Income declined 63.2% YoY, and future dividend capacity will depend on a recovery in the profitability of the Steel Business and whether extraordinary losses recur.

Risk Factors

1. Risk of deteriorating profitability in the Steel Business: The core Steel segment reported Revenue of ¥1077.5億 (down 15.5%) and segment profit of ¥26.9億 (down 56.3%), with its profit margin declining to 2.5%. The company’s earnings structure is highly sensitive to even modest fluctuations in the selling price/raw-material price spread and operating rates.

2. Declining profitability and capital efficiency: The Operating Margin of 2.9%, annualized ROE of 2.1%, and ROIC of 3.1% are all low. Improving the efficiency of converting substantial shareholders’ equity, reflected in an Equity Ratio of 71.5%, and Property, Plant and Equipment of ¥499.8億 into earnings remains a key issue.

3. Volatility in Net Income due to temporary losses: Total extraordinary losses of ¥5.2億, primarily consisting of ¥5.1億 in losses on disposal of fixed assets, accounted for 31.3% of Net Income. Current-period Net Income has fluctuated beyond the level indicated by recurring earnings power. The occurrence of similar expenses in the future should be closely monitored.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both profitability indicators were substantially below the industry median, placing the company at the lower end of the manufacturing industry.

Growth and Capital Efficiency

Revenue growth was substantially below the industry median, and the extent of the decline was particularly pronounced even among industry peers.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Progress toward the full-year Operating Income forecast of ¥42.0億 was 76.6%, above the standard level. However, the Steel segment’s profit margin has declined to 2.5%, and achievement of the full-year plan will depend on trends in market conditions, the raw-material spread, and fixed-cost absorption.

2. The Real Estate segment has a high profit margin of approximately 69.8%, but its profit contribution is small. Company-wide performance continues to be determined by profitability in the Steel Business.

3. The increase in cash and deposits (+55.1%) and the reduction in inventories (-30.2%) are positive financial factors. A sound financial foundation, reflected in a Current Ratio of 333.4% and a Debt/Capital ratio of 7.5%, provides resilience during periods of declining profitability.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥1,547–¥1,636 at ±1% for the cost of equity capital, and ¥1,578–¥1,599 at ±0.1 for ω.

Notes:

• Net Income is substantially compressed relative to Operating Income due to tax burdens, acquisition-related expenses, non-controlling interests, and other factors (Net Income ÷ Operating Income 55%). This value reflects that compression at face value; if these factors are temporary, underlying earnings power may be higher.
• Because forecast ROE is below the cost of equity capital, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used, resulting in a timing mismatch 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 stock price or a recommendation of any specific investment action, and does not predict or guarantee future stock prices.)

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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. 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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