GMS Group Co.,Ltd. FY2027 Q1 Earnings Report

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Executive Summary

Although the first quarter of FY2027 recorded an operating loss, Net Income was substantially positive due to the one-time gain on negative goodwill, making this an earnings result that requires attention to earnings quality. Revenue was ¥169.4B, Operating Income was ¥-6.4B (operating margin: -3.8%), Ordinary Income was ¥-2.3B, and Net Income was ¥61.2B (EPS: ¥88.05). At the operating level, the gross margin of 23.0% was outweighed by an SG&A ratio of 26.8%, resulting in insufficient fixed-cost absorption and an operating loss. However, the recognition of a ¥66.0B gain on negative goodwill associated with the share transfer enabled the Company to secure a substantial final profit.

Factors Affecting Performance

【Revenue】Of the ¥169.4B in Revenue, Asia was the largest segment at ¥117.6B (44.5% of the total), followed by Japan at ¥98.5B and Europe and the Americas at ¥48.2B. Progress against the full-year plan of ¥810.0B was 20.9%, below the standard quarterly progress benchmark of 25%, indicating a weak start.

【Profit and Loss】The SG&A ratio of 26.8% exceeded the gross margin of 23.0%, resulting in an operating loss of ¥6.4B. Non-operating income of ¥5.8B (including ¥3.4B in interest and dividend income and ¥1.7B in foreign exchange gains) exceeded non-operating expenses of ¥1.7B, reducing the Ordinary Loss to ¥2.3B. The Company recorded a ¥66.0B gain on negative goodwill associated with the share transfer as extraordinary income, resulting in Profit Before Tax of ¥63.6B and Net Income of ¥61.2B. The divergence between operating results and Net Income was primarily attributable to the one-time extraordinary income. In substance, the Company experienced a decline in Revenue and profit on a core-business basis, while Net Income increased substantially due to extraordinary factors, creating a non-continuous earnings structure.

Segment Analysis

Segment losses were ¥2.6B in Japan (profit margin: -2.7%), ¥2.1B in Europe and the Americas (profit margin: -4.4%), and ¥1.1B in Asia (profit margin: -0.9%), resulting in losses across all regions. Asia, which has the highest share of Revenue, had a relatively smaller loss margin and superior profitability. However, Europe and the Americas experienced the greatest deterioration in margins, indicating substantial scope to review the cost structure and pricing conditions. The fact that all regions were loss-making indicates that insufficient fixed-cost absorption is a common regional issue.

Key Financial Indicators

【Profitability】The operating margin was -3.8%, indicating that the core business was loss-making, while the Net Income margin was significantly higher at 36.1%, reflecting dependence on extraordinary income and therefore low sustainability. ROE was 9.9%; however, because Net Income includes the gain on negative goodwill, caution is required when interpreting this figure as an indicator of underlying performance. 【Cash Flow Quality】The Company was in an operating loss position, and the cash backing for earnings was weak. 【Investment Efficiency】With Total Assets of ¥1224.7B and Revenue of ¥169.4B, asset efficiency remained at a low level. 【Financial Soundness】The Equity Ratio was 50.6%, indicating a stable capital structure. However, short-term borrowings of ¥277.9B accounted for the majority of interest-bearing debt, and the short-term funding position requires attention when compared with Cash and Deposits of ¥152.8B.

Cash Flow Analysis

Given that Operating Income was negative at ¥-6.4B, the Company’s ability to generate cash from earnings during the quarter was considered weak at the core-business level. Inventories had accumulated substantially at ¥215.9B (including the stated amounts of ¥127.8B in raw materials, ¥102.3B in work-in-process, and ¥215.9B in finished products), and working capital, together with Accounts Receivable and Notes Receivable of ¥134.5B, was a factor tying up funds. Cash and Deposits were ¥152.8B; compared with Short-Term Borrowings of ¥277.9B, the speed of inventory turnover and receivables collection will be important variables in short-term liquidity management. No significant burden from capital expenditures was evident within the scope of the disclosed information.

Earnings Quality

The quality of earnings for the quarter was highly dependent on one-time factors. The Company was loss-making at the operating level, while recurring earning power was supported to a certain extent by non-operating income, including foreign exchange gains of ¥1.7B and interest and dividend income. There was a substantial divergence between Net Income of ¥61.2B and an Ordinary Loss of ¥2.3B, primarily due to the non-recurring extraordinary income of ¥66.0B from the gain on negative goodwill associated with the share transfer. Comprehensive Income was ¥76.1B, exceeding Net Income of ¥61.2B, with contributions including ¥10.7B in foreign currency translation adjustments and ¥4.2B in valuation differences on other securities. These factors also differ from the earning power of the core business. Overall, the majority of the Net Income in this quarter consisted of temporary accounting gains; therefore, trends in Operating Income and Ordinary Income should be emphasized when assessing the profitability of the core business.

Earnings Forecast and Guidance

Progress against the full-year plan was ¥169.4B/¥810.0B for Revenue, or 20.9%, while Operating Income was ¥-6.4B/¥12.7B, resulting in negative progress. Compared with the standard Q1 progress benchmark of 25%, both Revenue and Operating Income were behind schedule. Meanwhile, Net Income was ¥61.2B/¥72.3B (the Company’s forecast Net Income), representing progress of 84.5%, substantially ahead of plan. However, this was due to a temporary boost from extraordinary income, and the accumulation of approximately ¥19B in Operating Income from the core business over the remaining 3 quarters is a prerequisite for achieving the plan.

Shareholder Returns

As the Company was established through a joint share transfer on April 1, 2026, no dividend data for the previous fiscal year is available. The year-end dividend is expected to be announced in conjunction with the disclosure of the medium-term management plan scheduled for November.

Risk Factors

1. Inventory and Working Capital Accumulation Risk: Inventories were substantial at ¥215.9B (including ¥127.8B in raw materials and ¥102.3B in work-in-process), and working capital was increasingly tied up when combined with Accounts Receivable and Notes Receivable of ¥134.5B. Attention should be paid to the risk of inventory valuation losses and obsolescence.

2. Short-Term Funding and Refinancing Risk: Cash and Deposits were ¥152.8B against Short-Term Borrowings of ¥277.9B, requiring attention to the short-term funding structure. If the operating loss continues, the Company’s ability to withstand interest payment burdens will become an issue.

3. Risk of Declining Core-Business Earning Power: The SG&A ratio of 26.8% exceeded the gross margin of 23.0%, resulting in an operating loss. All segments were loss-making, and the ability to pass through prices and review the cost structure will be prerequisites for returning the core business to profitability.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The Operating Margin was substantially below the industry median, indicating that the profitability of the core business lagged the industry. Meanwhile, the Net Income Margin was substantially above the industry median due to the impact of extraordinary income.

Source: Compiled by the Company

Key Points in the Earnings Results

1. The majority of the quarter’s Net Income of ¥61.2B was attributable to the one-time extraordinary income of ¥66.0B from the gain on negative goodwill associated with the share transfer. When evaluating the earning power of the core business, the actual Operating Loss of ¥6.4B and Ordinary Loss of ¥2.3B should be emphasized.

2. All segments (Japan, Europe and the Americas, and Asia) recorded operating losses, indicating that insufficient fixed-cost absorption is a common issue across all regions. Although Asia had a relatively smaller loss margin, profitability improvements are required in all regions.

3. Progress against the full-year plan was below the standard pace for both Revenue and Operating Income, while Net Income was substantially ahead solely due to temporary factors. In the coming quarters, improvement in core-business Operating Income and normalization of inventory and working capital will be key points to monitor in assessing achievement of the plan.

Theoretical Share Price (Reference Value)

Sensitivity: ¥688–¥727 at ±1% for the Cost of Equity, and ¥701–¥711 at ±0.1 for ω.

Notes:

• Normalized EPS calculated from Ordinary Income and other figures is used to exclude the impact of temporary profit and loss items (the Company’s forecast EPS is ¥104.2).
• Because progress in Net Income against the full-year forecast (85%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose progress is ahead of schedule tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• 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 (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 share price or a recommendation of any specific investment action, and 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 summary 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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