TOKYO TEKKO CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Although revenue increased in Q1, profit declined as rising costs compressed margins, resulting in higher revenue but lower profit. Revenue grew to ¥200.8B (¥192.7B in the previous year, YoY +4.2%), while Operating Income fell to ¥25.4B (¥35.9B in the previous year, YoY -29.2%) and Ordinary Income declined to ¥25.3B (¥36.6B in the previous year, YoY -30.8%). Net Income attributable to owners of the parent was ¥15.4B (¥23.3B in the previous year, YoY -33.9%), with a higher effective tax rate and deterioration in equity-method investment gains and losses causing a further decline from the Ordinary Income level. The primary reason for the decline in profit was a lower gross margin due to an increase in cost of sales. Progress in passing on higher costs to prices and trends in product mix will be the focus for future margin recovery.

Factors Affecting Results

【Revenue】Revenue increased to ¥200.8B (YoY +4.2%), securing higher revenue. By segment, the Steel Business increased to ¥198.5B (YoY +4.3%), while Other Businesses increased to ¥13.5B (YoY +7.7%), with both segments reporting higher revenue. The Steel Business accounted for 93.6% of segment revenue and led the Company-wide revenue increase.

【Profit and Loss】Operating Income was ¥25.4B (YoY -29.2%), and the Operating Income margin was 12.7%, down approximately 590bp from 18.6% in the previous year. As cost of sales increased by +12.1% to ¥151.8B (¥135.4B in the previous year), gross profit declined to ¥49.0B (YoY -14.4%), while the gross margin contracted to 24.4% from 29.7% in the previous year, a decrease of approximately 530bp. Selling, general and administrative expenses increased to ¥23.6B (YoY +10.4%), and cost growth exceeding the benefit of higher revenue reduced operating leverage. Ordinary Income was ¥25.3B (YoY -30.8%), with the decline from Operating Income widening. This was primarily because equity-method investment gains and losses shifted from a profit of ¥0.10B in the previous year to a loss of ¥0.81B in the current period. Extraordinary loss was limited to a minor one-time factor consisting solely of a ¥0.05B loss on disposal of fixed assets. Against profit before tax of ¥25.3B, corporate income taxes and other taxes of ¥9.7B were recorded, resulting in an effective tax rate of 38.3%, up from 34.5% in the previous year, further compressing Net Income attributable to owners of the parent to ¥15.4B (YoY -33.9%). In conclusion, Q1 delivered higher revenue but lower profit, primarily due to higher costs and deterioration in equity-method investment gains and losses.

Segment Analysis

The Steel Business accounted for 93.6% of revenue (¥198.5B, YoY +4.3%), while Other Businesses (including freight transportation and equipment maintenance) generated ¥13.5B (YoY +7.7%). Operating Income in the Steel Business was ¥24.4B (YoY -30.3%), and its margin declined significantly to 12.3% from 18.4% in the previous year, making it the primary driver of the Company-wide profit decline. Operating Income in Other Businesses was ¥0.9B (YoY +9.4%), with the margin remaining broadly flat at 6.9% (6.8% in the previous year). This clearly demonstrates that the decline in the Steel Business margin directly weighed on Company-wide results.

Key Financial Indicators

【Profitability】The Operating Income margin was 12.7%, down approximately 590bp from 18.6% in the previous year, while the Net Income margin (on an attributable-to-owners-of-the-parent basis) was 7.7%, down approximately 440bp from 12.1% in the previous year. ROE (based on actual results for the current quarter, not annualized) was 2.5%.【Cash Flow Quality】Comprehensive income was ¥18.1B, exceeding consolidated Net Income of ¥15.6B, primarily due to a ¥2.3B contribution from valuation differences on securities. This indicates a certain divergence between realized gains and losses and valuation gains and losses.【Investment Efficiency】Total asset turnover for the current quarter was 0.237 times, while research and development expenses were ¥1.2B, equivalent to 0.6% of revenue and limited in scale. Asset efficiency is therefore a bottleneck for return on capital.【Financial Soundness】The Equity Ratio was 74.5% (78.8% in the previous year), while the current ratio and quick ratio remained robust at 296.6% and 219.0%, respectively. Meanwhile, long-term borrowings increased to ¥51.8B (¥33.6B in the previous year, +54.2%). EBIT (¥25.4B) was approximately 79 times interest expense (¥0.3B), and debt-servicing capacity remained strong.

Cash Flow Analysis

Cash and deposits increased by +4.9% to ¥75.2B from ¥71.7B in the previous year, while working capital continued to build. Inventories stood at ¥106.1B, and receivables-related assets, including electronically recorded monetary claims, also increased from the previous year, indicating that assets are expanding at a pace exceeding revenue growth (+4.2%). To finance this increase in working capital, long-term borrowings rose by +54.2% from ¥33.6B to ¥51.8B, while short-term borrowings also remained high at ¥20.3B. Meanwhile, treasury stock increased from ¥0.4B in the previous year to ¥5.4B, suggesting that share repurchases were conducted during this period. Overall, the funding structure maintained cash balances while financing the expansion of working capital and shareholder returns through increased borrowings. Trends in inventory levels and the collection cycle for receivables will determine future cash-generation capacity.

Quality of Earnings

The decline in profit in Q1 was attributable to recurring cost increases, while extraordinary loss was limited to a small ¥0.05B loss on disposal of fixed assets, meaning that the impact of one-time factors was limited. In non-operating income and expenses, equity-method investment gains and losses shifted from a profit of ¥0.10B in the previous year to a loss of ¥0.81B in the current period. This relatively non-recurring fluctuation was the primary reason that the decline in Ordinary Income (-30.8%) exceeded the decline in Operating Income (-29.2%). Non-operating income consisted primarily of ¥0.6B in dividend income, while foreign exchange gains were minimal at ¥0.01B. Non-operating expenses mainly consisted of interest expense of ¥0.3B and the aforementioned equity-method investment loss of ¥0.8B. Comprehensive income was ¥18.1B, exceeding consolidated Net Income of ¥15.6B. This difference was primarily attributable to a +¥2.3B change in valuation differences on securities. The fact that unrealized valuation gains increased accounting profit is a factor that warrants attention from an accrual perspective.

Earnings Forecasts and Guidance

Progress against the full-year Company plan was 26.4% for revenue (¥200.8B/¥760.0B), 25.4% for Operating Income (¥25.4B/¥100.0B), and 25.3% for Ordinary Income (¥25.3B/¥100.0B), representing generally standard levels relative to the 25% benchmark for evenly distributed quarterly progress. Meanwhile, progress for Net Income attributable to owners of the parent was somewhat slower at 21.7% (¥15.4B/¥71.0B), as the higher effective tax rate and deterioration in equity-method investment gains and losses slowed progress at the net income level. No revisions were made to the earnings forecast or dividend forecast during the current quarter.

Shareholder Returns

The annual dividend forecast is ¥100.00 per share, unchanged from the previous year's actual dividend of ¥100. Based on the Company's planned EPS of ¥277.46, the Payout Ratio is approximately 36.0% (¥100/¥277.46). Given the Company's low financial leverage (Equity Ratio of 74.5%) and strong debt-servicing capacity, this level does not impair dividend sustainability. It should be noted that a 3-for-1 stock split of common shares was implemented with April 1, 2026 as the effective date, and the dividend amount for the previous fiscal year (fiscal year ended March 2026) is stated at the actual pre-split amount. No revisions were made to the dividend forecast during the current quarter.

Risk Factors

1. Narrowing spread between raw material costs and product prices: Cost of sales increased by YoY +12.1% in Q1, while revenue increased by only +4.2%, causing the gross margin to decline to 24.4% from 29.7% in the previous year, a decrease of approximately 530bp. Progress in passing on higher costs to prices will be key to future margin recovery.

2. High concentration in the core Steel Business: The Steel Business accounted for 93.6% of segment revenue, and its Operating Income margin declined significantly to 12.3% from 18.4% in the previous year. The earnings structure has a high dependence on a single business and is susceptible to market fluctuations.

3. Increase in working capital and volatility in equity-method investment gains and losses: Inventories (¥106.1B) and receivables-related assets increased at a pace exceeding revenue growth, indicating declining capital efficiency. In addition, equity-method investment gains and losses shifted from a profit of ¥0.10B in the previous year to a loss of ¥0.81B in the current period, increasing the impact of investee performance fluctuations on Ordinary Income.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

In terms of profitability, both the Operating Income margin and Net Income margin exceed the industry median. Although both have declined from the previous year, their relative levels remain in the upper tier of the industry.

Growth and Capital Efficiency

The revenue growth rate is slightly below the industry median, and the momentum of revenue growth remains around the middle of the industry.

※Source: Compiled by the Company

Key Earnings Highlights

1. The Operating Income margin declined to 12.7% from 18.6% in the previous year, a decrease of approximately 590bp. Progress in passing on higher costs to prices and improving product mix in response to rising costs is the structural focus for restoring profitability.

2. Full-year progress is at standard levels, with revenue at 26.4% and Operating Income at 25.4%. However, Net Income progress is somewhat slower at 21.7%, against a backdrop of a higher effective tax rate (34.5%→38.3%) and deterioration in equity-method investment gains and losses.

3. The financial foundation remains strong, with an Equity Ratio of 74.5% and interest coverage of approximately 79 times. Comprehensive income (¥18.1B) exceeded consolidated Net Income (¥15.6B), reflecting a contribution from valuation gains on securities.

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 share price or a recommendation of any specific investment action.

Sensitivity: ¥2,663–¥2,819 at ±1% for the cost of equity, and ¥2,734–¥2,747 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter 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 / Interest Rate Reference Month: 2026-06 / This value does not forecast 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 professionals as necessary.

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