NAKAYAMA STEEL WORKS,LTD. FY2027 Q1 Earnings Report

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Executive Summary

This quarter’s results were asymmetric, with gains on the sale of fixed assets offsetting the decline in core operating profitability and boosting net income. Revenue was ¥383.0B, essentially flat year on year at -1.5%, while Operating Income fell sharply to ¥6.4B (-64.2%) and Ordinary Income to ¥6.1B (-65.6%). Meanwhile, extraordinary income of ¥24.1B, including a ¥23.7B gain on the sale of fixed assets, was recorded, resulting in a substantial increase in Net Income to ¥19.1B (+76.7%). The contraction in the spread in the core Steel Business and higher SG&A expenses were the main factors behind the deterioration at the operating level. It is important to note that the increase in Net Income depends on a temporary factor.

Factors Affecting Results

【Revenue】Revenue was ¥383.0B, essentially flat year on year at -1.5%. Steel, which accounts for 98.0% of revenue, declined slightly to ¥376.9B (-1.6%), while Real Estate was ¥3.6B (-0.8%) and Engineering was ¥4.1B (+1.7%); none were at a level capable of materially affecting the company as a whole. The business portfolio is close to being overly concentrated in Steel, resulting in a structure highly sensitive to demand and price trends.

【Profit and Loss】The gross margin declined sharply to 10.8% from approximately 13.2% in the prior year, while SG&A expenses increased to ¥34.9B from ¥33.4B. As a result, Operating Income plunged to ¥6.4B, representing an Operating Margin of 1.7%. Ordinary Income was also limited to ¥6.1B, as non-operating income and expenses were nearly neutral, with non-operating income of ¥1.1B and non-operating expenses of ¥1.3B. However, extraordinary income of ¥24.1B, primarily comprising a ¥23.7B gain on the sale of fixed assets, was recorded, expanding Profit Before Tax to ¥29.9B and resulting in Net Income of ¥19.1B. In conclusion, the core business experienced both revenue and profit declines, while final profit increased temporarily due to extraordinary income. The results cannot be simply categorized as either revenue growth with profit growth or revenue decline with profit decline; in substance, Net Income was boosted by a special factor amid an underlying declining profit trend.

Segment Analysis

Segment profit, based on Ordinary Income, was ¥4.8B for Steel (-70.6% year on year), a loss of ¥▲0.1B for Engineering (also negligible in the prior year), and ¥1.6B for Real Estate (-7.3%). Total segment profit for the company contracted sharply to ¥6.3B from ¥18.0B in the prior year. Although Steel accounts for 98.0% of revenue, its profit margin declined to approximately 1.3%, making it the primary cause of the company-wide profit decline. Real Estate has a small revenue base but a high and stable profit margin of approximately 68%; however, it lacks sufficient scale to offset the company-wide decline. Engineering has turned to a small loss, making profitability improvement an issue.

Key Financial Indicators

【Profitability】The Operating Margin declined sharply to 1.7% from 4.6% in the prior year, while the Net Profit Margin increased to 5.0% from 2.8%. However, the latter was primarily driven by extraordinary income and does not reflect the earning power of the core business. 【Cash Flow Quality】Cash and deposits increased to ¥262.8B from ¥233.5B in the prior year, while inventories increased by +18.6% to ¥137.6B from ¥116.0B, and accounts receivable remained high at ¥325.1B compared with ¥319.1B in the prior year, suggesting a buildup of working capital. 【Investment Efficiency】ROE was 1.7% and the total asset turnover ratio was 0.244x, both low levels indicating room for improvement in asset efficiency. The breakdown of Net Profit Margin of 5.0% × total asset turnover of 0.244 × financial leverage of 1.42x also indicates that ROE was boosted by reliance on extraordinary income. 【Financial Soundness】The Equity Ratio remained extremely high at 70.5%, although down from 71.6% in the prior year. Liquidity was strong, with current assets of ¥997.8B against current liabilities of ¥313.0B. Interest-bearing debt, including long-term borrowings of ¥58.8B, was limited, and overall financial risk was low.

Cash Flow Analysis

Although no cash flow statement has been disclosed, funding trends can be inferred from changes in the balance sheet. Cash and deposits increased by +¥30.3B year on year to ¥262.8B, apparently primarily due to the realization of a ¥23.7B gain on the sale of fixed assets associated with the sale of land, with land declining from ¥226.1B in the prior year to ¥206.1B. Meanwhile, inventories increased by +¥21.6B and accounts receivable by +¥6.0B, suggesting that funds tied up in operating activities may have increased. Accounts payable also increased by +¥29.3B, indicating that adjustments on the payment side provided some relief to cash management. Overall, the increase in cash this quarter was supported by the temporary factor of asset sales and does not demonstrate strong, recurring cash-generation capacity from operating activities.

Earnings Quality

The earnings structure this quarter was characterized by weak recurring earning power and a strong dependence on temporary gains. Operating Income of ¥6.4B and Ordinary Income of ¥6.1B both declined by more than 60% from the prior year. Non-operating income and expenses were also slightly negative on a net basis at ¥▲0.3B, despite including ¥0.6B in dividend income, indicating that earnings at the Ordinary Income level were fundamentally weak. In contrast, extraordinary income of ¥24.1B, primarily consisting of a ¥23.7B gain on the sale of fixed assets, was recorded, expanding Profit Before Tax to ¥29.9B. The majority of Net Income of ¥19.1B was generated by this temporary factor. The gap between Ordinary Income of ¥6.1B and Net Income of ¥19.1B reached approximately 3.1x, and under normal circumstances this gap is a clear indicator of the magnitude of temporary items. Comprehensive Income was ¥20.1B, close to Net Income of ¥19.1B. As OCI items, including valuation differences on other securities of ¥1.3B, were limited, the gap between Comprehensive Income and Net Income itself was small. Overall, the period’s profit does not accurately reflect the core business’s earning power in qualitative terms. It will be important to confirm the establishment of an earnings base that does not depend on extraordinary income from the next fiscal year onward.

Earnings Forecast and Guidance

The Q1 progress rate against the full-year forecast was 24.4% for Revenue, calculated as 383.0/1570.0B, broadly in line with the plan. By contrast, Operating Income was 18.8%, calculated as 6.4/34.0B, and Ordinary Income was 30.5%, calculated as 6.1/20.0B, with progress at the operating level below the standard 25%. Net Income was 49.0%, calculated as 19.1/39.0B, significantly ahead of schedule. However, this was primarily due to the accelerated recognition of the temporary gain on the sale of fixed assets and is not expected to arise evenly throughout the full year. The earnings forecast was revised in these results. Given that Operating Income is projected to decline by -30.8% year on year for the full year and Ordinary Income by -58.4%, the company appears to recognize the deterioration in the earning power of its core business.

Shareholder Returns

The full-year dividend forecast is ¥20 per share, an increase from ¥8 in the prior year, which is provided as a reference value including interim results and other factors. Based on the full-year Net Income forecast of ¥39.0B and the EPS forecast of ¥64.24, the Payout Ratio is approximately 31.1% (¥20 ÷ ¥64.24), representing a level that maintains a certain degree of shareholder returns while prioritizing retained earnings. No revision to the dividend forecast was made this time. The company holds 8.86 million treasury shares, approximately 14.0% of issued shares. However, this disclosure focused on dividends as the shareholder return measure, with no new mention of share repurchases.

Risk Factors

1. Business concentration risk: The Steel Business accounts for 98.0% of Revenue, while segment profit declined sharply by -70.6% year on year. The business structure is highly susceptible to changes in steel spreads and demand trends, which can directly affect company-wide results.

2. Working capital accumulation risk: Inventories remained high at ¥137.6B, up +18.6% year on year, and accounts receivable remained high at ¥325.1B, up +1.9%. Attention should be paid to the potential delay in cash generation and the possibility of inventory valuation losses.

3. Earnings quality risk: The ¥23.7B gain on the sale of fixed assets accounts for a significant portion of Net Income of ¥19.1B, creating a substantial gap from Ordinary Income of ¥6.1B. The key issue going forward will be whether the company can restore the earning power of its core business without relying on asset sales.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the Operating Margin and Net Profit Margin were below the industry median, with the company’s Operating Margin particularly weak relative to its industry peers.

Growth and Capital Efficiency

Revenue growth was also significantly below the industry median, placing the company in the lower tier of its industry in terms of growth.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The Operating Margin declined to 1.7%, a substantial deterioration from the prior year. The primary causes were the contraction in the spread in the core Steel Business and higher SG&A expenses. The weakness of the core business’s earning power was the structural feature of these results.

2. Net Income of ¥19.1B (+76.7%) depended heavily on the temporary ¥23.7B gain on the sale of fixed assets, and the gap from Ordinary Income of ¥6.1B reached approximately 3.1x. The full-year progress rates also showed a significant difference between Net Income at 49.0% and Operating Income at 18.8%; this must be considered when assessing earnings quality.

3. The Equity Ratio was 70.5% and the Current Ratio was also high, indicating sound financial health. However, the high levels of inventories and accounts receivable warrant monitoring from a working capital efficiency perspective. The degree to which cash-generation capacity recovers will be a key structural evaluation point going forward.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market price or a recommendation to take any specific investment action.

Sensitivity: ¥1,656–¥1,752 at Cost of Equity ±1%; ¥1,692–¥1,710 at ω ±0.1.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the quarter-end are used; there is a timing gap relative to the full-year forecast.
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-07 / This value does not forecast or guarantee the future share price.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings report 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 a professional as necessary.

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