Toho Zinc (5707) FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended March 2026, Toho Zinc delivered a significant recovery in operating income, ordinary income, and net income, driven by improvements in its cost structure and the absence of the extraordinary loss recorded in the previous fiscal year, despite a slight decline in revenue. Revenue was ¥1255.5B (-0.6% YoY), operating income was ¥67.2B (+19.5%), ordinary income was ¥56.8B (+53.9%), and net income was ¥47.8B, representing a return to profitability from the previous fiscal year’s ¥14.6B loss (+428.0%). The primary factor behind the profit increase was a ¥16.7B reduction in SG&A expenses. The absence in the current period of the impairment loss of approximately ¥76.8B recorded in the previous fiscal year was also a major factor behind the sharp increase in net income.

Factors Affecting Results

【Revenue】Revenue was ¥1255.5B, essentially flat at -0.6% YoY. By segment, Smelting expanded to ¥1031.3B (+39.8%), accounting for 82.1% of total revenue, while Metal Recycling contracted sharply to ¥75.2B (-75.9%) due to business restructuring. Electronic Components and Functional Materials also declined to ¥35.2B (-23.5%). Growth in Smelting was offset by declines in Metal Recycling and Electronic Components, resulting in a slight overall revenue decrease.

【Profitability】Operating income was ¥67.2B (+19.5%), and the operating margin was 5.4% (up +90bp from 4.5% in the previous period). Although the gross profit margin declined by approximately 40bp YoY to 10.1%, the 22.1% reduction in SG&A expenses from ¥75.7B to ¥59.0B more than offset this decline and became a factor supporting profit growth. Ordinary income was ¥56.8B (+53.9%), but interest expense of ¥12.1B was equivalent to 18.0% of operating income, indicating that non-operating expenses continue to weigh on profitability. Net income of ¥47.8B benefited substantially from the absence of the impairment loss recorded in the previous period, while the net impact of extraordinary gains and losses was limited to ¥0.4B. In conclusion, the company achieved higher profit through cost reductions and the disappearance of temporary factors despite largely flat revenue—effectively a pattern of profit growth amid a slight revenue decline.

Segment Analysis

Smelting generated revenue of ¥1031.3B (+39.8%) and profit of ¥37.9B (+6.2%), but its profit margin remained at 3.7%, indicating sluggish profit growth relative to revenue growth. Metal Recycling recorded revenue of ¥75.2B (-75.9%, reflecting a change in scope due to business restructuring) and profit of ¥14.5B (+216.5%). Its profit margin of 19.3% was the highest among all segments, demonstrating significant improvement in profitability following the restructuring. Environment and Recycling recorded revenue of ¥69.3B (+9.0%) but profit of ¥9.2B (-44.9%), representing profit decline despite revenue growth as higher costs weighed on earnings. Electronic Components and Functional Materials were affected by slowing demand, with revenue of ¥35.2B (-23.5%) and profit of ¥4.5B (-4.8%). In terms of revenue composition, Smelting accounted for 82.1%, highlighting the company’s high earnings dependence on this business.

Key Financial Metrics

【Profitability】The operating margin was 5.4% (4.5% in the previous period), the net profit margin was 3.8%, and the gross margin was 10.1% (down from approximately 10.5% in the previous period). The SG&A ratio declined to 4.7%, supporting profit growth, while profitability at the gross profit level did not improve.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥19.4B, representing just 0.41x net income of ¥47.8B, primarily due to a ¥61.2B increase in inventories. Free Cash Flow was positive at ¥9.5B.【Investment Efficiency】ROE was high at 35.0%, but this figure was supported by high leverage, as reflected in an equity ratio of 13.8%; it was not a high ROE driven solely by asset efficiency. Total asset turnover was approximately 1.27x.【Financial Soundness】The equity ratio was 13.8%, and long-term borrowings were ¥615.2B, indicating a high degree of reliance on debt. The current ratio was approximately 368%, calculated as current assets of ¥741.2B divided by current liabilities of ¥201.6B, indicating sound short-term liquidity. However, non-current liabilities of ¥651.0B accounted for the majority of total liabilities.

Cash Flow Analysis

OCF declined 32.8% YoY to ¥19.4B. Although the subtotal before changes in working capital was ¥37.2B, the ¥61.2B increase in inventories placed significant pressure on cash flow. This was partially offset by a ¥13.5B decrease in trade receivables and a ¥15.5B increase in trade payables. Investing Cash Flow was -¥9.9B. Capital expenditures of ¥13.6B were approximately in line with depreciation and amortization of ¥14.1B, suggesting a focus on maintenance investment. Although Free Cash Flow was positive at ¥9.5B, Financing Cash Flow showed a substantial outflow of -¥108.1B, primarily due to repayments of long-term borrowings totaling ¥110.5B. As a result, cash and deposits declined sharply from ¥209.8B in the previous period to ¥111.3B. The company’s ability to improve OCF will determine its future capacity to repay borrowings.

Earnings Quality

The increase in profit for the current period was influenced by both a recurring factor—SG&A expense reductions—and a temporary factor—the absence of the large impairment loss recorded in the previous period. The high net income growth rate of +428.0% YoY reflects a rebound from the loss-making trend in the previous period, which included temporary losses such as impairment losses, and is therefore difficult to interpret as a normalized earnings growth rate. Extraordinary income of ¥2.1B and extraordinary losses of ¥1.7B resulted in a small net impact of ¥0.4B, limiting their effect on net income. Meanwhile, interest expense of ¥12.1B accounted for the majority of total non-operating expenses of ¥19.8B and continues to weigh on ordinary income as a recurring cost burden. From an accrual perspective, OCF was only 0.41x net income, and the buildup of inventories weakened the conversion of earnings into cash; this is an important consideration in evaluating earnings quality.

Earnings Forecast and Guidance

For the next fiscal year ending March 2027, the company forecasts revenue of ¥1785.0B (+42.2%), operating income of ¥67.0B (-0.3%), and ordinary income of ¥45.0B (-20.7%). While substantial revenue growth is expected, operating income is projected to remain nearly flat and ordinary income is expected to decline. The forecast operating margin is 3.8%, approximately 160bp below the current-period result of 5.4%. The plan for lower margins despite substantial revenue growth can be interpreted as a conservative outlook that incorporates changes in the business mix and the continued burden of interest expenses.

Shareholder Returns

Both the interim and year-end dividends for the current period were ¥0, resulting in annual dividends of ¥0 and a payout ratio of 0%. No share repurchases were confirmed, and there is currently no basis for discussing the Total Return Ratio. Retained earnings were negative at -¥277.0B. Although this improved from -¥324.3B in the previous period due to current-period net income of ¥47.8B, accumulated losses have not been eliminated. The continuation of a zero-dividend policy is consistent with a capital allocation policy that prioritizes reducing long-term borrowings of ¥615.2B.

Risk Factors

1. High-leverage financial structure: The company has an equity ratio of 13.8% and long-term borrowings of ¥615.2B. The ratio of liabilities of ¥852.6B to net assets of ¥136.7B is high. This structure is highly sensitive to financial constraints arising from interest-rate fluctuations or weaker-than-expected business performance.

2. Weak cash conversion and inventory burden: OCF was only 0.41x net income, primarily due to the ¥61.2B increase in inventories. Work-in-process inventories amounted to ¥231.9B, accounting for more than half of total inventories, making inventory recovery speed a working capital efficiency challenge.

3. Earnings concentration in the Smelting Business: Smelting accounts for 82.1% of revenue, while its segment profit margin is low at 3.7%. As a result, fluctuations in metal market conditions, raw material prices, and operating conditions have a significant impact on consolidated results.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin are below the manufacturing industry median, indicating that profitability is relatively low within the industry.

Growth and Capital Efficiency

Revenue growth was below the industry median, indicating weaker growth compared with peer companies that are on a revenue growth trajectory.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. The operating margin improved by +90bp YoY, but the primary driver was SG&A expense reductions, while the gross margin actually declined. The results reflect both the benefits of cost management and ongoing challenges on the cost-of-goods-sold side.

2. The +428.0% YoY increase in net income reflects the temporary factor of the impairment loss recorded in the previous period falling out of the comparison base. It would not be appropriate to regard the current period’s pace of profit growth as the future growth rate.

3. Metal Recycling had the highest profit margin among all segments at 19.3%, reflecting the effects of restructuring. However, its revenue scale remains small at ¥75.2B, and the company is expected to remain dependent for the time being on the low-profitability Smelting Business, which accounts for 82.1% of revenue.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥930–¥989 at Cost of Equity ±1%, and ¥954–¥967 at ω±0.1.

Note:

• Net income is significantly compressed relative to operating income due to tax burden, acquisition-related expenses, minority interests, and other factors (net income ÷ operating income 51%). This value reflects that compression at face value; if these factors are temporary, normalized earnings power may be higher than this figure.

(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 stock price or a recommendation of any specific investment action, and does not forecast or guarantee future stock 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 responsibility, after consulting a professional as necessary.

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