PACIFIC METALS CO.,LTD. FY2027 Q1 Earnings Report

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Executive Summary

Revenue increased due to a recovery in market conditions for the core Nickel Business, but the operating loss continued, and the return to profitability at the ordinary income and net income levels depended on non-operating income, primarily equity-method investment gains. Revenue was ¥24.7B (¥18.6B in the same period of the previous year, +32.5% YoY), while the operating loss was ¥8.8B (a loss of ¥30.7B in the previous year, narrowing the loss by 71.2%). Ordinary income was ¥4.2B (a loss of ¥22.2B in the previous year), and net income attributable to owners of the parent was ¥3.2B (a loss of ¥22.3B in the previous year), with both turning profitable. However, the key factor was non-operating income of ¥13.1B (including ¥10.0B in equity-method investment gains), and earnings improvement in the core business remains in progress.

Factors Affecting Performance

【Revenue】Revenue increased to ¥24.7B (+32.5% YoY). The segment composition was the Nickel Business at ¥22.6B (91.4% of total, +33.2% YoY), the Gas Business at ¥1.7B (6.9% of total, -8.5% YoY), and Other at ¥0.6B (2.5% of total). The Nickel Business accounted for more than 90% of revenue. While the increase in revenue from the Nickel Business drove overall group revenue growth, the Gas Business recorded a decline from the previous year.

【Profit and Loss】Cost of sales of ¥28.9B exceeded revenue, resulting in gross profit of ¥-4.2B (gross margin of -16.8%). Although this was a substantial improvement from -138.7% in the previous year, it remained negative. SG&A expenses were ¥4.7B (18.9% of revenue), remaining at approximately the same level as the previous year, and the operating loss narrowed to ¥8.8B (a loss of ¥30.7B in the previous year). Ordinary income turned profitable at ¥4.2B due to non-operating income of ¥13.1B (including ¥10.0B in equity-method investment gains, ¥0.3B in interest income, and ¥0.1B in foreign exchange gains, among other items). After deducting extraordinary losses of ¥0.1B (losses on disposal of fixed assets, a temporary factor), income before taxes was ¥4.1B, and net income attributable to owners of the parent was ¥3.2B. In addition to higher revenue, the operating loss in the core business narrowed; however, the primary drivers of the return to profitability at the ordinary income and net income levels were non-operating income. The earnings structure was therefore characterized by higher revenue, a narrower operating loss, and a return to profitability at the ordinary income and net income levels.

Segment Analysis

There is a significant disparity in profitability among the segments. The Nickel Business recorded revenue of ¥22.6B (+33.2% YoY) and an operating loss of ¥7.9B (operating margin of -35.1%). Although the loss narrowed from the previous year's operating loss (estimated at approximately ¥11.9B, improving based on the prior-year Nickel Business loss disclosed in the notes), it remained the primary cause of the group's overall operating loss. The Gas Business secured operating income of ¥0.1B (operating margin of 7.6%, +44.4% YoY) despite revenue of ¥1.7B (-8.5% YoY), serving as a small but stable source of profitability. The Other segment (including real estate, retail electricity, and the manufacture and sale of calcium aluminate, among others) recorded an operating loss of ¥1.0B (operating margin of -170.5%) against revenue of ¥0.6B, indicating severe profitability challenges. The structure in which more than 90% of revenue depends on the Nickel Business indicates that a recovery in the segment's profitability is a prerequisite for improving the group's overall operating performance.

Key Financial Indicators

【Profitability】The operating margin was -35.7%, a substantial improvement from -164.5% in the previous year, but it remained negative. Meanwhile, the net profit margin turned positive at 13.0%, indicating that the improvement in profitability resulted from the contribution of non-operating income rather than the core business. 【Cash Flow Quality】Comprehensive income was ¥0.8B, below net income attributable to owners of the parent of ¥3.2B. Factors contributing to the gap included valuation differences on other securities of ¥-1.6B and the share of OCI of equity-method affiliates of ¥-0.6B, among others. 【Investment Efficiency】ROE was 0.5%. The low total asset turnover ratio constrained the improvement in the net profit margin, leaving issues in terms of asset efficiency. 【Financial Soundness】The equity ratio was 93.3%. Cash and deposits were ¥163.5B, while current liabilities remained limited to ¥13.5B, indicating a high level of short-term funding stability.

Cash Flow Analysis

As no statement of cash flows was disclosed, cash trends are assessed based on changes in the balance sheet. Cash and deposits decreased to ¥163.5B from ¥175.95B in the previous year, while investment securities increased to ¥270.95B from ¥263.85B, suggesting that a portion of cash on hand may have been allocated to securities investments. Although accounts receivable decreased to ¥28.4B from ¥37.63B in the previous year, inventories increased to ¥41.3B from ¥38.43B, exerting pressure on working capital through inventory accumulation. Accounts payable increased to ¥1.9B from ¥0.76B in the previous year, but the absolute amount was small and its impact on cash management was limited. Total assets decreased slightly to ¥664.0B from ¥673.3B in the previous year, and net assets declined to ¥619.6B from ¥631.9B. However, the equity ratio remained in the 93% range, and the strength of the capital base was maintained.

Quality of Earnings

The composition of ordinary income of ¥4.2B shows that non-operating income of ¥13.1B substantially exceeded ordinary income, with non-operating items rather than the core business serving as the main source of earnings. Equity-method investment gains of ¥10.0B were the largest component of non-operating income, accounting for approximately 76% of total non-operating income. Other components included interest income of ¥0.3B, dividend income of ¥0.1B, foreign exchange gains of ¥0.1B, and other income of ¥2.3B. Non-operating expenses were immaterial at ¥0.1B, and extraordinary losses of ¥0.1B (losses on disposal of fixed assets) were also small, meaning that temporary items did not materially distort final earnings. However, the operating loss continued at ¥8.8B. Accordingly, the sustainability of ordinary income and net income profitability depends on the continuity of non-operating items, including equity-method investment gains, which are susceptible to market conditions and the performance of affiliated companies.

Earnings Forecast and Guidance

Progress in Q1 differed considerably by indicator. Revenue was ¥24.7B, representing progress of 23.3% against the full-year forecast of ¥106.2B, approximately in line with the simple proportional benchmark of 25%. The operating loss was ¥8.8B, representing progress of only 14.3% against the full-year forecast operating loss of ¥61.9B, suggesting a plan premised on the continuation of a substantial operating loss in the second half and thereafter. Meanwhile, ordinary income was ¥4.2B, representing progress of 60.3% against the full-year forecast of ¥7.0B. Net income attributable to owners of the parent was ¥3.2B, already exceeding the full-year forecast of ¥1.3B. These results reflect the contribution of non-operating income, including equity-method investment gains. The full-year ordinary income forecast anticipates a substantial decline of -79.0% YoY. Given that progress in Q1 was ahead of schedule, the plan may conservatively incorporate a slowdown in non-operating income and the continuation of operating losses in the second half and thereafter. The earnings forecast was revised during the quarter.

Shareholder Returns

The dividend forecast is ¥130 per share, and there was no revision to the dividend forecast during the quarter. Comparing the dividend forecast of ¥130 with the company's full-year EPS forecast of ¥7.71 on a simple basis results in a payout ratio substantially exceeding 130%, indicating a structure in which the current-period earnings plan alone cannot fully fund the dividend. Nevertheless, given the strong financial base, including an equity ratio of 93.3% and cash and deposits of ¥163.5B, there is unlikely to be concern regarding short-term payment capacity itself. Dividend sustainability will depend on an increase in earnings driven by a recovery in the profitability of the core business, particularly the Nickel Business.

Risk Factors

1. Core business profitability risk: The Nickel Business continues to operate at a loss, with revenue of ¥22.6B (91.4% of total) and an operating loss of ¥7.9B (operating margin of -35.1%). The group's overall operating performance is therefore highly dependent on nickel market conditions and operating rates.

2. Earnings quality risk: Of ordinary income of ¥4.2B, non-operating income accounted for ¥13.1B (including ¥10.0B in equity-method investment gains). As operating income remains negative, the sustainability of net profitability depends on the performance of affiliated companies and fluctuations in market conditions.

3. Working capital retention risk: Inventories increased to ¥41.3B from ¥38.43B in the previous year, and inventory levels remain relatively high compared with the scale of revenue. If normalization of inventory and receivables turnover does not progress, cash generation may be affected.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

While the operating margin was substantially below the industry median, the net profit margin exceeded the industry median due to the contribution of non-operating income.

Growth and Capital Efficiency

The revenue growth rate was substantially above the industry median, indicating a relatively high rate of revenue growth within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings

1. While revenue growth and a narrowing operating loss progressed simultaneously, the return to profitability at the ordinary income and net income levels was achieved through non-operating income, primarily equity-method investment gains. The quality of earnings therefore requires close monitoring of the recovery in the core business's profitability.

2. Under the full-year plan, ordinary income and net income were ahead of schedule as of Q1, while progress in operating performance was limited relative to the full-year loss plan. The plan is conservatively structured on the assumption that the core business will remain loss-making in the second half and thereafter.

3. The ¥130 dividend forecast has been maintained against a financial base consisting of an equity ratio of 93.3% and cash and deposits of ¥163.5B. However, the payout ratio is high relative to the full-year earnings plan, creating a structure in which the source of shareholder returns depends more on capital strength than on a recovery in core business earnings.

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 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: ¥2,613–¥2,758 at ±1% for the cost of equity, and ¥2,658–¥2,701 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end were used (there is a timing difference from the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / 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 through analysis of 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 a professional as necessary.

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