NAKAYAMA STEEL WORKS,LTD. FY2027 Q1 Earnings Report

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Executive Summary

For Q1 of the fiscal year ending March 2027, core operations posted lower revenue and income due to deteriorating profitability in the Steel Business, while net income increased primarily as a result of gains on the sale of fixed assets. Revenue was ¥38.30B (-1.5% YoY), Operating Income was ¥0.64B (-64.2%), and Ordinary Income was ¥0.61B (-65.6%). Net Income was ¥1.91B (+76.7% YoY), but this increase was driven by extraordinary income of ¥2.41B, including a ¥2.37B gain on the sale of fixed assets, presenting a stark contrast with the decline in core earnings power.

Factors Affecting Results

【Revenue】Revenue was ¥38.30B, a decrease of -1.5% YoY. The core Steel segment generated ¥37.64B (-1.6% YoY), accounting for more than 98% of total Company revenue and representing the primary source of the decline. Engineering revenue increased to ¥0.41B (+6.2% YoY), but its scale was small, while Real Estate revenue declined slightly to ¥0.24B (-3.2% YoY).

【Profit and Loss】Operating Income declined substantially to ¥0.64B (-64.2% YoY), while Ordinary Income was ¥0.61B (-65.6% YoY). The gross margin was 10.8%, down approximately 2.4pt from 13.2% in the previous year, suggesting that selling prices were unable to keep pace sufficiently with raw material and energy prices. SG&A expenses increased to ¥3.49B (+4.6% YoY), and the higher fixed-cost burden amid declining revenue further pressured Operating Income. By segment, Ordinary Income in the Steel Business fell sharply to ¥0.48B (-70.6% YoY), making it the primary driver of the Company-wide decline. Meanwhile, profit before tax was lifted to ¥2.99B by extraordinary income of ¥2.41B, including a ¥2.37B gain on the sale of fixed assets, resulting in Net Income of ¥1.91B (+76.7% YoY). It should be noted that core operations experienced lower revenue and income, while the increase in Net Income was attributable to temporary factors.

Segment Analysis

The Steel segment reported revenue of ¥37.64B (-1.6% YoY) and segment profit, on an Ordinary Income basis, of ¥0.48B (-70.6% YoY), with its margin declining substantially to 1.3% from approximately 4.2% in the previous year. As the core business accounting for the majority of total segment profit, its deteriorating profitability is directly weighing on consolidated earnings. The Real Estate segment maintained a high margin of 68.3%, with revenue of ¥0.24B and profit of ¥0.16B, but its scale is small and its contribution to the Company as a whole is limited. Although the Engineering segment increased revenue to ¥0.41B (+6.2% YoY), it continued to report a loss of ¥-0.01B.

Key Financial Indicators

【Profitability】The Operating Income margin was 1.7%, down approximately 2.9pt from 4.6% in the previous year period, while the gross margin also narrowed to 10.8% from 13.2% in the previous year, a decrease of approximately 2.4pt. Although the Net Income margin was 5.0%, the Operating Income margin of 1.7% should be emphasized as the more relevant indicator of recurring earnings power because Net Income includes gains on the sale of fixed assets.【Cash Flow Quality】Gains on the sale of fixed assets accounted for ¥2.37B of extraordinary income of ¥2.41B, exceeding Net Income of ¥1.91B, indicating a high degree of reliance on temporary factors.【Capital Efficiency】Annualized ROE was 6.9%, while asset turnover against total assets of ¥157.16B was limited. Improving the earnings efficiency of core operations remains a challenge within this capital-intensive business structure.【Financial Soundness】The Equity Ratio was 70.5% (having changed from approximately 70.5% in the previous year to 71.6%), while cash and deposits of ¥26.28B substantially exceeded interest-bearing debt, indicating an overall solid financial foundation.

Cash Flow Analysis

Cash flow statement items for the current quarter have not been disclosed; therefore, funding trends are assessed based on changes in the balance sheet. Cash and deposits increased by ¥3.03B to ¥26.28B from ¥23.25B in the previous year period. Meanwhile, accounts receivable and notes receivable totaled ¥32.51B, and inventories totaled ¥13.76B, both increasing from the previous year period, suggesting that the accumulation of working capital may be affecting capital efficiency. Accounts payable and notes payable also increased to ¥18.32B, with the expansion of trade payables providing a certain degree of support for working capital. Property, plant and equipment totaled ¥48.23B, a decrease of ¥2.09B from the previous year period, suggesting that the sale of land and resulting reduction in fixed assets contributed to the increase in cash. Given the substantial proportion of Net Income attributable to gains on the sale of fixed assets, it would be inappropriate to equate the increase in funds during the period with an improvement in recurring cash-generation capacity.

Earnings Quality

The quality of earnings for the period has two aspects: a decline in recurring earnings power and an increase driven by temporary gains. Operating Income of ¥0.64B and Ordinary Income of ¥0.61B both declined substantially, clearly indicating a weakening of the earning power of core operations. In contrast, extraordinary income of ¥2.41B, primarily consisting of a ¥2.37B gain on the sale of fixed assets, accounted for approximately 80% of profit before tax of ¥2.99B, meaning that Net Income of ¥1.91B was strongly affected by extraordinary gains and losses. Non-operating income and expenses included recurring income such as dividends received of ¥0.06B, as well as expenses such as interest paid of ¥0.06B. On a net basis, these resulted in only a slight excess of expenses and did not represent a significant factor affecting the bridge from core operating income to Ordinary Income. Comprehensive Income was ¥2.01B, approximately in line with Net Income of ¥1.91B, indicating only a small divergence attributable to other comprehensive income items such as valuation differences on securities. Overall, earnings growth for the period depended on temporary items and does not indicate sustainable earnings improvement.

Earnings Forecast and Guidance

Progress against the full-year Company forecast was 24.4% for revenue, 18.8% for Operating Income, 30.5% for Ordinary Income, and 49.0% for Net Income. Operating Income progress was below the standard quarterly benchmark of 25%, making recovery in core operating profit a challenge for achieving the full-year plan. The high progress rate for Net Income was primarily driven by the gain on the sale of fixed assets, and the repeatability of such temporary factors remains limited even relative to the full-year Net Income forecast of ¥3.90B. The full-year forecast itself anticipates a +5.9% YoY increase in revenue, while incorporating declines of -30.8% in Operating Income and -58.4% in Ordinary Income, indicating that management also expects continued pressure on core profitability. The earnings forecast was revised during the current quarter.

Shareholder Returns

The full-year dividend forecast is ¥20.0 per share, and forecast EPS is ¥64.24, resulting in an expected Payout Ratio of approximately 31.1%. This Payout Ratio uses dividends alone as the numerator and should be distinguished from the Total Return Ratio, which includes share repurchases. The dividend forecast has not been revised. With net assets of ¥110.83B and cash and deposits of ¥26.28B, interest-bearing debt is limited, and financial capacity remains sufficient to support continued dividend payments. However, because current-period Net Income includes a significant gain on the sale of fixed assets, dividend sustainability should be assessed based on the extent of recovery in Operating Income from core operations.

Risk Factors

1. Deteriorating profitability in the Steel Business: Ordinary Income in the Steel segment was ¥0.48B, down -70.6% YoY, while its margin declined to 1.3%. If recovery in the spread between raw material and energy prices and selling prices is delayed, recovery in core operating profit may also be delayed.

2. Accumulation of working capital: Accounts receivable and notes receivable totaled ¥32.51B, while inventories totaled ¥13.76B, both increasing from the previous year period. Increases in receivables and inventories amid declining revenue warrant attention from the perspectives of capital efficiency and inventory valuation risk.

3. Reliance on temporary gains: A ¥2.37B gain on the sale of fixed assets was recognized against Net Income of ¥1.91B, and extraordinary gains and losses had a significant impact on earnings. The repeatability of this gain is limited, and future earnings will depend on the profitability of core operations.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both of the Company’s profitability metrics were below the industry median, with the gap particularly pronounced for the Operating Income margin.

Growth and Capital Efficiency

The Revenue Growth Rate was also below the industry median, placing the Company at a relatively low level within the industry in terms of growth.

Source: Compiled by the Company

Key Takeaways from the Earnings

1. Core operations experienced lower revenue and income, with the decline in the Operating Income margin to 1.7% and the contraction in the gross margin representing the most important issues in these results.

2. The increase in Net Income to ¥1.91B depended on the ¥2.37B gain on the sale of fixed assets, and the high progress rate of 49.0% was also attributable to temporary factors.

3. The Steel segment is the core source of revenue and profit, but segment profit declined -70.6% YoY. Together with the 18.8% progress rate against the full-year Operating Income forecast of ¥3.40B, the pace of recovery in core operations will be a key point to monitor going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,656–¥1,752 for ±1% in the Cost of Equity, and ¥1,692–¥1,710 for ±0.1 in ω.

Notes:

• Because 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 difference relative to 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 value based solely on publicly disclosed data; it 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 discretion and responsibility, after consulting with a professional as necessary.

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