PACIFIC METALS (5541) FY2026 FY Earnings Report

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Executive Summary

The key takeaway from the current full-year results is that, while the core nickel business continued to generate an operating loss due to reduced sales, the Company secured a final profit through an expansion in equity-method investment income. Revenue was ¥94.1B (¥131.8B in the prior year, YoY -28.5%), while the operating loss narrowed to ¥-49.7B (¥-73.7B in the prior year). Ordinary income was ¥33.2B (¥-16.2B in the prior year), and net income was ¥26.0B (¥-16.8B in the prior year), with both turning profitable. This return to profitability depended on a ¥78.8B increase in equity-method investment income (+45.5% year on year), and it should be noted that profitability improvement remains a work in progress on an operating income basis.

Factors Driving Performance Changes

【Revenue】Revenue was ¥94.1B, a year-on-year decline of -28.5%. The core Nickel Business declined significantly to ¥86.6B (92.0% of total revenue, -30.0% year on year), driving the overall revenue decline. The Gas Business posted a modest increase in revenue to ¥7.1B (7.6% of total revenue, +1.9% year on year), but its small scale was insufficient to offset the decline in the Nickel Business. By region, domestic revenue was ¥90.7B (96.3% of total revenue), down ¥20.5B year on year, while sales to Taiwan declined substantially to ¥3.4B from ¥12.9B in the prior year. Among major customers, sales to Nippon Steel Corporation were ¥69.7B, accounting for 74.0% of total Company revenue, indicating a high degree of customer concentration.

【Profit and Loss】The operating loss was ¥49.7B, an improvement of ¥23.97B from the ¥73.7B loss in the prior year; however, the operating margin remained at -52.8%, an extremely significant loss level. The gross margin was also -33.4% (compared with -39.4% in the prior year), as the Company was unable to absorb fixed costs due to lower sales volumes and reduced operating capacity. The Nickel Business recorded an impairment loss of ¥2.65B. Meanwhile, equity-method investment income of ¥78.8B was recorded, resulting in ordinary income of ¥33.2B and net income of ¥26.0B. Equity-method investment income reached 242.0% of profit before tax of ¥32.5B, indicating that the source of consolidated earnings is strongly dependent on investment earnings rather than the Company’s own businesses. In conclusion, although the operating loss narrowed amid declining revenue, the primary reason for the return to profitability was equity-method investment income; in substance, the Company remains characterized by declining revenue and a continuing operating loss.

Segment Analysis

The Nickel Business generated revenue of ¥86.6B (-30.0% year on year) and an operating loss of ¥48.2B (an improvement from the ¥-72.5B loss in the prior year), with a margin of -55.7%, and remains the primary driver of consolidated profit and loss. The Gas Business generated revenue of ¥7.1B (+1.9% year on year) and operating income of ¥0.1B (+13.0x year on year), turning profitable; however, it accounted for only 7.6% of consolidated revenue, limiting its impact on earnings. Other Businesses (real estate, retail electricity, and calcium aluminate) generated revenue of ¥0.4B and an operating loss of ¥1.7B, making only a limited contribution to earnings. By region, domestic revenue accounted for 96.3% of total revenue, while sales to Taiwan declined substantially from ¥12.9B in the prior year to ¥3.4B, indicating a continuing decline in the export ratio.

Key Financial Indicators

【Profitability】The operating margin was -52.8% (an improvement of 3.1pt from -55.9% in the prior year), but remained deeply negative, while the gross margin was also -33.4%, indicating that the recovery in manufacturing profitability remains incomplete. The net margin appears high at 27.7%, but this was attributable to the contribution from ¥78.8B in equity-method investment income and does not represent the earnings power of the Company’s own businesses.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥24.2B, equivalent to 0.93x net income of ¥26.0B and broadly in line with it; however, OCF included ¥82.0B in dividends received and other distributions from equity-method investees, meaning that the cash-generation capacity of the Company’s own businesses alone was limited.【Investment Efficiency】ROE was 4.1%, improving from the prior year’s loss (approximately -2.5%), but the primary driver of the improvement was the increase in equity-method income rather than an improvement in the core businesses. Investment securities accounted for ¥263.9B (39.2% of total assets) out of total assets of ¥673.3B, weighing down asset turnover.【Financial Soundness】The Equity Ratio was 93.9%, and the current ratio was equivalent to 3,063.9%, both extremely high; the D/E ratio was also low, indicating a strong financial foundation. Meanwhile, cash and deposits amounted to ¥175.9B, a decline of ¥62.8B from the prior year, with share repurchases and dividend payments being the primary sources of cash outflow.

Cash Flow Analysis

OCF was ¥24.2B, down -19.6% year on year, and free cash flow after deducting capital expenditures of ¥4.7B was positive at ¥6.8B. OCF included ¥82.0B in interest and dividends received from equity-method investees; excluding this amount, the Company’s own operating activities had weak cash-generation capacity due to the operating loss. Investing Cash Flow was ¥-17.4B, primarily due to the acquisition of investment securities and related activities. Financing Cash Flow was a significant outflow of ¥-73.0B, mainly due to share repurchases of ¥36.4B and dividend payments of ¥36.6B. As a result, cash and cash equivalents declined to ¥183.9B from approximately ¥244.0B in the prior year, indicating that shareholder returns and investment activities represented an allocation of funds exceeding cash generation from operating activities.

Earnings Quality

It should be noted that the majority of current-period net income of ¥26.0B was generated not by recurring operating profit and loss, but by the non-operating factor of ¥78.8B in equity-method investment income. Non-operating income reached ¥84.0B, the overwhelming majority of which comprised equity-method investment income; dividends received of ¥0.9B and foreign exchange gains of ¥0.8B were relatively small. In extraordinary gains and losses, a gain on the sale of investment securities of ¥2.1B was recorded as an extraordinary gain, while extraordinary losses of ¥2.8B, including a ¥2.6B impairment loss in the Nickel Business, were recorded, resulting in a net downward impact of ¥0.7B. OCF of ¥24.2B was broadly in line with net income, but its composition depended heavily on ¥82.0B in dividends received from equity-method investees, limiting the core businesses’ cash-generation capacity in the presence of an operating loss. Accordingly, the quality of earnings and cash flow in the current period was highly dependent on earnings from investees, and evaluating sustainability requires confirmation of the performance and dividend policies of those investees.

Earnings Forecast and Guidance

The Company’s forecast for the next period calls for revenue of ¥104.8B (+11.4% year on year), an operating loss of ¥60.1B, ordinary income of ¥7.0B (-78.8% year on year), and forecast EPS of ¥9.09. Although revenue is expected to increase, the operating loss is planned to expand from ¥49.7B in the current period, indicating that a recovery in revenue alone is not expected to directly lead to improved profitability. The forecast for a substantial decline in ordinary income and net income appears to incorporate a contraction in equity-method investment income, which supported earnings in the current period, suggesting that the current period’s high net margin may not be replicated in the next period.

Shareholder Returns

The annual dividend consists of an interim dividend of ¥60 and a year-end dividend of ¥75, for a total of ¥135, with a high Payout Ratio of 92.4%. Cash dividend payments of ¥36.6B substantially exceeded free cash flow of ¥6.8B, indicating insufficient dividend coverage from FCF alone. In addition, total shareholder returns, including ¥36.4B in share repurchases, substantially exceeded current-period net income of ¥26.0B, resulting in a Total Return Ratio at a high level above the Payout Ratio. In the next-period forecast, the Company plans a dividend of ¥130 against net income attributable to owners of the parent of ¥1.6B. The sustainability of dividends based on earnings and FCF therefore requires monitoring, taking into account asset capacity such as cash and deposits of ¥175.9B and investment securities of ¥263.9B.

Risk Factors

1. Dependence on the Nickel Business and market volatility: The Nickel Business accounts for 92.0% of revenue and has an operating loss of ¥48.2B and a margin of -55.7%. The consolidated profit and loss structure is directly affected by fluctuations in the ferronickel market, raw material, fuel, and electricity costs, and operating capacity.

2. Customer concentration risk: Sales to Nippon Steel Corporation account for 74.0% of total Company revenue, while the top two customers account for 85.1%. Changes in the procurement policies or production plans of major customers could have a significant impact on revenue.

3. Dependence on equity-method investment income: Equity-method investment income of ¥78.8B is equivalent to 242.0% of profit before tax of ¥32.5B and accounts for the majority of consolidated earnings. Changes in resource prices, supply and demand, and dividend policies at investees could cause significant fluctuations in ordinary income and OCF.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Return

The operating margin is significantly below the industry median, while the net margin exceeds the industry median due to the contribution from equity-method investment income.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, with the magnitude of the revenue decline standing out even within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Although the operating loss improved from the prior year, the operating margin of -52.8% indicates that improvement in the core earnings structure remains incomplete. The recovery of sales volume, selling prices, and operating capacity in the Nickel Business will be the key focus going forward.

2. The transition to current-period net income of ¥26.0B and ROE of 4.1% was primarily attributable to the increase in equity-method investment income of ¥78.8B, and it should be noted that this does not reflect the earnings power of the Company’s own businesses. Ordinary income is expected to decline substantially in the next-period forecast, indicating low reproducibility of the current-period earnings level.

3. Against the backdrop of a strong financial foundation, including an Equity Ratio of 93.9% and cash and deposits of ¥175.9B, the Company implemented high levels of shareholder returns, with a Payout Ratio of 92.4% and share repurchases of ¥36.4B. The continuation of shareholder returns while the core business remains loss-making warrants monitoring from the perspective of the pace of decline in the cash buffer.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,658–¥2,805 at ±1% for the cost of equity, and ¥2,704–¥2,747 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.

(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 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 responsibility, after consulting a professional as necessary.

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