KYOEI STEEL LTD. FY2027 Q1 Earnings Report

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Executive Summary

This was a case of revenue growth accompanied by lower earnings: revenue increased by double digits due to the expansion of the overseas steel business, while operating income declined by double digits owing to deteriorating profitability in the domestic steel business. Revenue was ¥871.2B (+17.5% YoY), operating income was ¥34.0B (-20.9%), ordinary income was ¥34.1B (-16.2%), and net income attributable to owners of the parent was ¥19.4B (-28.8%). The primary reason for the revenue increase was expanding demand in the overseas steel business, while the main reason for the earnings decline was the compression of the gross margin to 10.7% (-290bp YoY), as the increase in cost of sales (+21.4%) exceeded revenue growth.

Factors Affecting Results

【Revenue】Revenue was ¥871.2B, representing an increase of +17.5% YoY (+¥129.7B). By segment, the overseas steel business posted a substantial revenue increase to ¥529.3B (60.8% composition ratio, YoY +36.3%), driving the overall result. The domestic steel business declined to ¥312.8B (35.9% composition ratio, YoY -4.3%), while the environmental recycling business recorded ¥17.9B (YoY +20.2%). Revenue growth was primarily attributable to expanding demand in the overseas business, whereas the domestic business was affected by a lull in demand.

【Profit and Loss】Operating income declined by ¥9.0B, or -20.9% YoY, to ¥34.0B. Cost of sales increased at a pace exceeding revenue growth, causing the gross margin to fall to 10.7% (13.6% in the previous year, -290bp). By segment, operating income from the overseas steel business rose substantially to ¥31.7B (YoY +435.6%, profit margin 6.0%), making it the core source of company-wide earnings. In contrast, operating income from the domestic steel business plunged to ¥2.9B (YoY -92.7%, profit margin 0.9%), resulting in a shift in the earnings structure toward overseas operations. The environmental recycling business maintained a high margin, generating operating income of ¥3.1B (YoY +936.7%, profit margin 17.4%) and supporting overall earnings. Ordinary income was ¥34.1B (YoY -16.2%); non-operating income of ¥7.0B, including a ¥2.0B foreign exchange gain, was largely offset by non-operating expenses of ¥7.0B, including ¥6.5B in interest expense. Extraordinary income and losses were negligible at a net loss of ¥0.1B. Net income attributable to owners of the parent was ¥19.4B (YoY -28.8%), with the deduction of ¥7.1B in net income attributable to non-controlling interests widening the decline from ordinary income. In conclusion, this was a result of revenue growth accompanied by lower earnings.

Segment Analysis

The overseas steel business recorded revenue of ¥529.3B (60.8% composition ratio, YoY +36.3%) and operating income of ¥31.7B (YoY +435.6%, profit margin 6.0%), representing substantial revenue and earnings growth and accounting for the majority of company-wide profit. The domestic steel business recorded revenue of ¥312.8B (35.9% composition ratio, YoY -4.3%) and operating income of ¥2.9B (YoY -92.7%, profit margin 0.9%), a sharp decline in earnings. Whereas the domestic business was the main high-profitability segment in the same period of the previous year, the overseas business has assumed that role in the current period, indicating a structural shift. The environmental recycling business recorded revenue of ¥17.9B (YoY +20.2%) and operating income of ¥3.1B (YoY +936.7%, profit margin 17.4%). Although small in scale, its high margin supported the quality of earnings. The adjustment for company-wide expenses increased slightly to -¥5.05B (previous year -¥4.66B).

Key Financial Indicators

【Profitability】The operating margin was 3.9%, down 189bp from 5.8% in the previous year. The net margin, based on net income attributable to owners of the parent, was 2.2%, down 147bp from 3.7% in the previous year. The gross margin was 10.7%, down 290bp from 13.6% in the previous year, indicating margin compression beginning at the cost level. 【Cash Flow Quality】Comprehensive income was ¥31.4B, of which ¥22.8B was attributable to owners of the parent, exceeding net income of ¥19.4B by ¥3.4B. However, the primary source of this difference was foreign currency translation adjustments of +¥7.6B, which does not represent recurring earnings power. 【Investment Efficiency】ROE based on net income attributable to owners of the parent was 0.9%, while total asset turnover remained approximately 0.24x on a quarterly basis. 【Financial Soundness】The equity ratio was 57.3%, improving 0.6pt from 56.7% at the end of the previous fiscal year, while the current ratio was 218.4%, indicating ample liquidity.

Cash Flow Analysis

Cash and deposits amounted to ¥486.9B, declining by ¥142.5B (-22.6%) from ¥629.5B at the end of the previous fiscal year. Meanwhile, accounts receivable increased to ¥531.9B (previous period ¥498.3B, +6.7%), and inventories increased to ¥377.3B (previous period ¥364.5B, +3.5%). Both increases were moderate relative to revenue growth (+17.5%), suggesting a slight improvement in working capital efficiency. Accounts payable increased to ¥289.9B (previous period ¥238.8B, +21.4%), reflecting increased procurement of raw materials and greater use of extended payment terms. Property, plant and equipment increased to ¥1205.5B (previous period ¥1174.3B, +¥31.3B), indicating progress in capital investment. Interest-bearing debt was broadly flat at ¥856.8B (previous period ¥846.3B). The decline in cash is therefore considered primarily attributable to funding needs related to the buildup of working capital, capital investment, and dividend payments.

Quality of Earnings

Against ordinary income of ¥34.1B, extraordinary income and losses were negligible at a net loss of ¥0.1B (extraordinary income of ¥0.1B and extraordinary loss of ¥0.2B from the disposal and sale of fixed assets), resulting in a limited impact on profit before tax of ¥33.9B. After deducting income taxes of ¥7.4B (effective tax rate 21.8%) and net income attributable to non-controlling interests of ¥7.1B, net income attributable to owners of the parent amounted to ¥19.4B. Comprehensive income was ¥31.4B, of which ¥22.8B attributable to owners of the parent exceeded net income of ¥19.4B by ¥3.4B. This difference was attributable to foreign currency translation adjustments of +¥7.6B and represents a temporary factor arising from the yen translation of overseas subsidiary assets. The ¥2.0B foreign exchange gain included in non-operating income is similarly subject to market fluctuations, and it should be noted that it has a temporary aspect as a factor supporting ordinary income.

Earnings Forecast and Guidance

Progress against the full-year plan was 24.1% for revenue (¥871.2B/¥3620.0B), 21.9% for operating income (¥34.0B/¥155.0B), 24.4% for ordinary income (¥34.1B/¥140.0B), and 23.1% for net income (¥19.4B/¥84.0B). Compared with the 25% benchmark for quarterly progress, operating income is progressing somewhat slowly, and deteriorating profitability in the domestic steel business could become a downside factor for achieving the full-year plan. Although the earnings forecast was revised during the current quarter, there was no revision to the dividend forecast.

Shareholder Returns

The dividend forecast is ¥70.00 per share. Based on approximately 43,459 thousand expected dividend-eligible shares, calculated by deducting 1,440 thousand treasury shares from 44,899 thousand issued shares, the annual total dividend is estimated at approximately ¥30.4B. The payout ratio against the full-year net income forecast of ¥84.0B is approximately 36.2%. There was no revision to the dividend forecast during the current quarter, and the existing plan remains unchanged. No disclosure regarding share repurchases was identified, and shareholder returns appear to be centered on dividends.

Risk Factors

1. Deterioration in profitability of the domestic steel business: The operating margin of the domestic steel business remained at 0.9%, while operating income plunged to ¥2.9B, a YoY decline of -92.7%. If delays in passing through prices or the impact of higher costs persist, this could become a downside factor for the full-year plan.

2. Profitability gap between segments and increasing overseas dependence: The overseas steel business accounts for 60.8% of revenue and generates the majority of segment profit. Although its profit margin improved to 6.0%, the company-wide earnings structure has become more susceptible to overseas market conditions and foreign exchange movements.

3. Decline in cash and deposits: Cash and deposits declined by ¥142.5B (-22.6%) from the end of the previous fiscal year to ¥486.9B. Accounts payable increased by +21.4%, and property, plant and equipment increased by +¥31.3B. Trends in funding requirements associated with working capital and investment will therefore be a key monitoring point.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

Both the operating margin and net margin are in the lower range compared with the manufacturing industry median.

Growth and Capital Efficiency

The revenue growth rate substantially exceeds the industry median, placing the company in the upper range in terms of growth.

Source: Compiled by the company

Key Points from the Earnings Results

1. A structural change has occurred in which the profitability of the domestic and overseas steel segments has reversed. In the same period of the previous year, the domestic steel business had a higher profit margin than the overseas steel business. In the current period, however, the overseas steel business (profit margin 6.0%) has become the growth driver, while the domestic steel business has declined to 0.9%.

2. Progress against the full-year earnings forecast is somewhat behind schedule, with revenue at 24.1% versus operating income at 21.9%. Given that the earnings forecast was revised during the current quarter, progress toward full-year profit will be a focus going forward.

3. The dividend forecast remains unchanged at ¥70, and the payout ratio based on the full-year plan is approximately 36.2%. The company is maintaining its dividend policy despite declining earnings, and consistency with future earnings trends will be an area to monitor.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥4,206–¥4,449 at ±1% for the cost of equity, and ¥4,301–¥4,340 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 54%). 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, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference from the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat on the high side.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / 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 release 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 discretion and responsibility, after consulting professionals as necessary.

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