AICHI STEEL (5482) FY2027 Q1 Earnings Report

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Executive Summary

Despite higher revenue, earnings declined due to rising costs and a higher tax burden, making the monetization of revenue growth a key challenge. Revenue expanded to ¥816.0B (+8.7% YoY), while operating income was ¥43.6B (-3.6% YoY) and net income attributable to owners of the parent was ¥31.7B (-11.1% YoY). Gross margin declined from 15.8% in the previous year to 13.8%, and reductions in SG&A expenses were insufficient to offset the deterioration in the cost ratio. The increase in the effective tax rate was also a factor weighing on net income.

Factors Affecting Earnings

【Revenue】Revenue was ¥816.0B, up +8.7% YoY, with all segments recording revenue growth. The Forging Company was the largest segment (¥361.4B, 44.3% composition ratio, +9.0%), while the Smart Company recorded the highest growth rate (¥63.4B, +20.7%). The Steel Company (¥280.6B, 34.4% composition ratio, +6.5%) and the Stainless Steel Company (¥105.2B, +7.5%) also recorded higher revenue.

【Profit and Loss】Operating income was ¥43.6B (-3.6% YoY), mainly due to an 11.2% increase in cost of sales and a 192bp decline in gross margin to 13.8%. By segment, profit at the Steel Company declined substantially to ¥9.4B (-46.1% YoY), apparently reflecting higher raw material costs and delays in passing through price increases. In contrast, the Forging Company (¥24.2B, +15.9%), Stainless Steel Company (¥3.8B, +152.6%), and Smart Company (¥5.9B, +44.4%) recorded higher profits. Profit before tax increased to ¥49.9B (+8.1%), supported by financial income of ¥6.2B and equity-method investment income of ¥1.5B; however, the effective tax rate increased from 14.6% in the previous year to 26.6%, and net income attributable to owners of the parent declined to ¥31.7B (-11.1%). In conclusion, revenue increased but earnings declined.

Segment Analysis

The Forging Company is the core business, accounting for 55.5% of consolidated operating income of ¥43.6B, with revenue of ¥361.4B (+9.0%), profit of ¥24.2B (+15.9%), and a profit margin of 6.7%, demonstrating the most stable profitability. The Steel Company recorded higher revenue of ¥280.6B (+6.5%), but profit declined 46.1% to ¥9.4B, and its profit margin fell substantially from 3.4% to 1.3%. The Stainless Steel Company recorded revenue of ¥105.2B (+7.5%) and a substantial 152.6% increase in profit to ¥3.8B, with its profit margin improving from 1.6% to 3.6%. The Smart Company recorded revenue of ¥63.4B (+20.7%) and profit of ¥5.9B (+44.4%), representing the highest growth rate among all segments and a profit margin of 9.3%. The deterioration in the Steel Company’s profitability is weighing on the company-wide margin and offsetting the profit growth effects of the Forging and Smart companies.

Key Financial Indicators

【Profitability】The operating margin was 5.3%, down from 6.0% in the same period of the previous year, while the net profit margin also contracted to approximately 4.5%. Gross margin was 13.8%, down 192bp from 15.8% in the previous year, indicating that revenue growth has not translated into margin improvement.【Cash Flow Quality】Operating cash flow (OCF) turned negative at -¥80.2B, resulting in a negative OCF/net income ratio relative to net income attributable to owners of the parent of ¥31.7B. The main factors were income taxes paid of ¥156.8B and increases in inventories and trade receivables, indicating that current-period earnings have not been converted into cash.【Investment Efficiency】ROE (annualized) was 5.9%, below the general benchmark of 8% for capital efficiency. Capital expenditures were ¥41.8B, maintaining a level roughly equivalent to depreciation and amortization (¥4,494M).【Financial Soundness】The equity ratio was 58.2%, a slight decline from 59.2% in the previous year, but remained at a high level. Meanwhile, short-term borrowings surged to ¥413.99B, up +69.6% YoY, increasing as a proportion of current liabilities. Cash and cash equivalents were ¥384.7B, indicating a pattern of covering deteriorating OCF through borrowings.

Cash Flow Analysis

Operating cash flow was -¥80.2B, a substantial deterioration from +¥185.9B in the same period of the previous year. Although cash flow before taxes and other adjustments remained positive at ¥74.3B, indicating that the business’s underlying cash-generation capacity at the operating level has not been lost, income taxes paid of ¥156.8B were the largest factor weighing on OCF. In addition, inventories increased by ¥42.7B and trade receivables by ¥19.9B, absorbing funds through working capital, while the ¥36.2B increase in trade payables partially offset the outflow. Investing cash flow was positive at ¥9.7B, as proceeds from the sale of investment securities of ¥56.4B exceeded capital expenditures of ¥41.8B. Financing cash flow was positive at ¥128.8B, including ¥260.0B raised through long-term borrowings and dividend payments of ¥47.5B. Free cash flow was -¥70.5B, indicating that dividends and capital expenditures were not fully funded by internally generated cash flow and that the company depended on borrowings and asset sales to supplement funding.

Earnings Quality

Current-period profit before tax of ¥49.9B exceeded operating income of ¥43.6B due to the addition of financial income of ¥6.2B and equity-method investment income of ¥1.5B. The contribution of non-operating and equity-method factors to earnings growth should therefore be evaluated separately from the earning power of the core business. The effective tax rate increased from 14.6% in the previous year to 26.6%, and net income attributable to owners of the parent declined despite the increase in profit before tax. OCF of -¥80.2B diverged substantially from net income of ¥31.7B, with a temporary large payment of income taxes and increases in working capital (inventories and trade receivables) acting as accrual-related factors that hindered the conversion of earnings into cash. Comprehensive income was ¥52.5B, exceeding net income of ¥36.6B, supported by increases in valuation differences on available-for-sale securities and foreign currency translation adjustments; however, these should be distinguished as non-recurring sources of fluctuation.

Earnings Forecast and Guidance

The full-year forecast calls for revenue of ¥3,100.0B and operating income of ¥175.0B (+0.7% YoY). Progress during Q1 was 26.3% for revenue and 24.9% for operating income, broadly in line with the standard quarterly progress rate of 25%. There were no revisions to either the earnings forecast or dividend forecast during the quarter. Although operating income progress is on track with the plan, current-period results reflected lower gross margin and a higher tax burden, resulting in lower earnings; therefore, recovery in gross margin over the full year will be key to achieving the plan.

Shareholder Returns

The full-year dividend forecast is ¥150 per share, representing an increase from the previous year’s actual dividend of ¥69 (total of interim and year-end dividends). Based on forecast EPS of ¥176.51, the payout ratio is approximately 85.0%, above the general benchmark of 60%. Dividend payments during Q1 were ¥47.5B, exceeding current-period income of ¥31.7B; however, this reflects a difference in payment timing, and a simple comparison with current-period income is not appropriate. No share repurchases were conducted during Q1, and compared with the same period of the previous year (¥262.6B in share repurchases), the form of shareholder returns has shifted toward dividends.

Risk Factors

1. Deterioration in the Steel Company’s profitability: Against revenue of ¥280.6B (+6.5%), operating income declined 46.1% to ¥9.4B, and the profit margin fell from 3.4% to 1.3%. If higher raw material costs and delays in passing through price increases persist, the consolidated profit margin may continue to come under pressure.

2. Working capital tied up in operations: Inventories of ¥582.4B (+8.3% from the previous fiscal year-end) and trade receivables of ¥642.6B (+3.4% YoY) both increased, becoming the main factors behind negative OCF (-¥80.2B). Improving inventory and receivables turnover efficiency is a funding and liquidity challenge.

3. Increasing dependence on short-term funding: Short-term borrowings surged to ¥413.99B, up +69.6% YoY. Their ratio to total current liabilities of ¥990.6B has also increased, and if funding to cover negative OCF continues, the increase in funding costs during a period of rising interest rates will need to be monitored.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

The company’s profitability is below the manufacturing industry median, with both its operating margin and net profit margin positioned at the lower end of the industry range.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, placing the company’s revenue growth pace at a relatively high level within the industry.

※Source: Compiled by the company

Key Points from the Earnings Results

1. Revenue expanded +8.7% YoY, while operating income declined -3.6% and net income attributable to owners of the parent declined -11.1%, making the monetization of revenue growth a key point for future observation. The structure in which profit growth at the Forging and Smart companies has been insufficient to offset the substantial decline in profit at the Steel Company has been confirmed.

2. OCF turned negative at -¥80.2B, mainly due to income tax payments and an increase in working capital. The sustainability of the full-year dividend forecast of ¥150 (payout ratio of approximately 85%) will depend on achievement of the full-year earnings plan and the recovery of cash flow.

3. Progress toward full-year operating income was 24.9%, a standard level, and Q1 results alone do not indicate a substantial deviation from the full-year plan; however, trends in gross margin will be the focus going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,186–¥3,361 at cost of equity ±1%, and ¥3,259–¥3,280 at ω±0.1.

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 from the full-year forecast).

(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; this is not a forecast of the market share price or a recommendation of any specific investment action, nor does it predict 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. 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 a professional where necessary.

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