CK SAN-ETSU Co.,Ltd. FY2026 FY Earnings Report

Financial Highlights

• Net Sales: ¥149.44B
• Operating Income: ¥14.16B
• Net Income: ¥505M
• EPS: ¥432.19

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

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AI Financial Analysis

Executive Summary

CK San-Etsu delivered a mixed FY2026: strong top-line and operating momentum, but bottom-line compressed by outsized non-operating losses and working capital drag. Revenue rose 19.4% YoY to 1,494.38, led by the BRASS segment (+23.0%). Gross profit expanded to 203.71 with gross margin improving by roughly 130bps to 13.6%. Operating income increased 38.0% YoY to 141.61, lifting the operating margin to 9.5% (+130bps YoY). Despite this, ordinary income fell 32.8% YoY to 56.36 due to a surge in non-operating expenses of 93.97, far exceeding non-operating income of 8.72. Net income attributable to owners declined 31.1% YoY to 35.87, equating to a net margin of 2.4% and ROE of 5.7%. Cash generation lagged earnings: operating cash flow was 29.65, only 0.83x net income, pressured by a 66.56 increase in inventories. Free cash flow was negative at -18.66 after 37.97 of capex, while the company also executed 12.66 in buybacks. Liquidity is ample by current and quick ratios (236% and 203%), yet on-balance cash remains low relative to short-term borrowings (Cash/STD 0.11x), elevating refinancing sensitivity. Leverage remains conservative with Debt/EBITDA at 0.79x and EBITDA interest coverage above 100x, but the interest burden ratio (EBT/EBIT 0.42) indicates non-operating items materially compressed pre-tax profit. Segmentally, BRASS is the core profit engine (80%+ of OP) with notable operating leverage, while FITTINGGALVANIZING margin remains structurally higher. Extraordinary gains totaled 3.36 (incl. 1.92 negative goodwill), equivalent to about 9% of net income, modest in influence. Working capital efficiency deteriorated: DIO reached 109 days and CCC 128 days, consistent with inventory build and WIP mix. For FY2027, management guides sales +20.5% to 1,800 but operating income down to 100, implying deliberate margin normalization versus FY2026’s 141.61 and a sharp rebound in ordinary income to 100 from 56.36. Dividend policy indicates prudence: DPS 90 in FY2026 (22.2% payout), with FY2027 guidance at 50. Overall, operational execution is solid, but earnings quality is tempered by non-operating headwinds and heavy working capital, and near-term focus should be on normalizing non-operating items and reducing inventory intensity.

Profitability Analysis

ROE decomposes to 5.7% = 2.4% net margin × 1.532 asset turnover × 1.56x leverage. The most notable change is the net margin compression versus the improvement in operating margin, driven by a spike in non-operating expenses that reduced ordinary income to 56.36 despite higher EBIT. Business-wise, BRASS volume/pricing improved and SG&A discipline allowed operating leverage (+130bps OPM), but derivative/other non-operating costs weighed on EBT (interest burden 0.42) and tax burden was moderate at 0.60. This shift is only partially structural: the operating uplift is supported by scale and product mix, whereas the non-operating drag appears episodic and less likely to recur at the same magnitude if derivative and other items normalize. Sustainability is better at the operating level given higher gross margins and cost absorption; however, net profitability will depend on controlling non-operating volatility. SG&A grew 20.4% YoY to 62.09, slightly above revenue growth of 19.4%, a mild caution for operating leverage if growth slows.

Growth Assessment

Revenue growth of 19.4% was broad-based, led by BRASS (+23.0%), with PRECISION up 6.6% and FITTINGGALVANIZING down 8.2%. Operating income growth of 38.0% outpaced sales, reflecting gross margin expansion and scale effects. Ordinary income contracted 32.8% due to elevated non-operating expenses, masking underlying operating strength. The order backdrop implied by higher receivables (+34.6% YoY) and inventory build suggests sustained activity levels, albeit at the cost of cash conversion. FY2027 guidance targets 1,800 sales (+20.5%), but operating income of 100 implies deliberate margin normalization vs. FY2026’s 9.5% OPM, and ordinary income of 100 signals expected normalization higher than the depressed FY2026 ordinary level. Execution priorities include inventory normalization, maintaining BRASS operating leverage, and protecting high-margin FITTINGGALVANIZING and PRECISION contributions.

Financial Health

Liquidity is strong on working capital metrics: current ratio 235.9% and quick ratio 203.2%, with working capital of 419.13. No warning on current ratio. Capital structure is conservative: Debt/EBITDA 0.79x, Debt/Capital 17.3%, and D/E 0.56x—well within investment-grade territory. However, maturity structure is skewed: short-term debt is 119.70 (91% of total debt) versus cash and deposits of 12.92 (Cash/STD 0.11x), indicating refinancing concentration risk. Current assets (727.58) comfortably exceed current liabilities (308.45), but the low cash buffer suggests reliance on revolving facilities to finance elevated inventories and receivables. Interest-bearing debt totals 131.47 with long-term loans up significantly YoY (11.77), partially alleviating tenor risk. No off-balance sheet obligations were noted in the provided data.

Notable B/S Changes

Long-term Loans: +10.75 (+1053.9%) - Term extension improves tenor profile amid elevated short-term funding needs. Treasury Stock: -14.02 (+211.5% in absolute holding) - Active buybacks increased capital return, reducing equity. Cash & Deposits: -24.04 (-65.0%) - Cash buffer reduced by working capital, capex, and buybacks; heightens liquidity reliance on credit lines. Investment Securities: +7.53 (+42.8%) - Larger portfolio increases OCI sensitivity and provides optionality for disposals. Short-term Loans: +35.70 (+42.5%) - Higher reliance on short-term funding to finance WC and investments. Accounts Receivable: +54.56 (+34.6%) - Reflects volume growth and longer cash cycle; watch collections. Accounts Payable: +23.46 (+25.4%) - Supplier financing increased but lags receivables/inventory growth.

Cash Flow Quality

OCF of 29.65 equals 0.83x net income, a borderline earnings quality signal under the 0.8 threshold, driven primarily by a 66.56 inventory increase. Cash conversion (OCF/EBITDA) was weak at 0.18x, underscoring significant working capital absorption despite higher EBITDA (165.57). Free cash flow was -18.66 after capex of 37.97, which at 1.58x depreciation signals growth/modernization capex. There are no overt signs of working capital manipulation; movements align with volume growth (receivables +34.6%, payables +25.4%) and production build (WIP heavy). Sustainability hinges on inventory normalization and maintaining capex discipline relative to growth.

Dividend Sustainability

FY2026 DPS was 90, equating to a 22.2% payout ratio on reported earnings—comfortably sustainable on an earnings basis. Free cash flow coverage was -2.34x due to negative FCF, so dividends and buybacks were funded by balance sheet/credit lines rather than free cash. Including buybacks (12.66), the total return ratio versus net income is approximately 57%, still moderate on an earnings basis but not covered by FCF in FY2026. FY2027 guidance implies DPS 50, consistent with a conservative stance amid expected OPM normalization and a focus on balance sheet flexibility.

Risk Assessment

Business risks include End-market cyclicality in housing, appliances, and auto components concentrated in BRASS, Customer concentration: a single customer (Tosen Sangyo) contributes 197.42 in sales, Domestic concentration risk with >90% sales in Japan, Commodity price volatility impacting spreads and inventory valuation.

Financial risks include Refinancing risk from 91% short-term debt share and low cash/STD of 0.11x, Working capital intensity: DIO 109 days and CCC 128 days raise cash conversion risk, Non-operating volatility compressing EBT (interest burden ratio 0.42), Negative FCF (-18.66) amid high capex (CapEx/Depreciation 1.58x).

Key concerns include LOW_CASH_CONVERSION: OCF/EBITDA 0.18x reflects heavy inventory build; if demand moderates, cash strain could persist, HIGH_INTEREST_BURDEN: Interest burden 0.42 indicates material non-operating drag on earnings despite high accounting interest coverage, REFINANCING_RISK: Short-term debt concentration (91%) leaves earnings exposed to rate/rollover conditions, LIQUIDITY_STRESS: Cash/STD 0.11x necessitates continued access to credit lines, HIGH_INVENTORY_DAYS and HIGH_WIP_RATIO: DIO 109 days, WIP 42.1% heighten obsolescence and execution risk, LOW_GROSS_MARGIN: 13.6% underscores commodity-like economics; margin defense relies on mix and cost controls.

Investment Implications

Key takeaways include Operating execution strong: OPM 9.5% (+130bps) on 19.4% revenue growth, Ordinary/net profit depressed by large non-operating expenses; scope for normalization upside, Cash conversion weak due to inventory build; FCF negative despite solid EBITDA, Leverage conservative (Debt/EBITDA 0.79x), but tenor risk elevated (91% short-term), BRASS is the core earnings driver; concentration risk requires close monitoring of sector demand and spreads, FY2027 guide implies higher sales but lower OPM vs FY2026, signaling cautious margin planning.

Metrics to watch include Non-operating expenses trend and composition vs. FY2026’s 93.97, Inventory levels, DIO, and WIP ratio (target: DIO <90, WIP <40%), OCF/EBITDA recovery toward >0.7 and FCF turning positive, Short-term debt rollover profile and Cash/STD improvement toward >0.5x, BRASS segment margin sustainability and FITTINGGALVANIZING high-margin stability, Ordinary income trajectory vs FY2027 guidance (100).

Regarding relative positioning, Within Japan’s non-ferrous/processed metals space, CK San-Etsu demonstrates above-peer operating margin resilience but remains exposed to commodity-like gross margins and working capital intensity; balance sheet leverage is conservative, yet liquidity profile depends on short-term funding amid inventory-heavy operations.