NAGAOKA INTERNATIONAL (6239) FY2026 Q2 Earnings Report

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Executive Summary

In the current period, the Company’s core earnings power clearly deteriorated from the previous year period due to lower revenue and a significant decline in operating income. Revenue was ¥30.4B (-15.7% YoY), operating income was ¥1.2B (-75.0%), ordinary income was ¥1.4B (-72.3%), and net income was ¥1.3B (-62.6%). Selling, general and administrative expenses increased to ¥9.9B (+6.6% YoY) despite the decline in revenue, reducing fixed-cost absorption capacity and causing the operating margin to contract significantly to 4.0% (13.7% in the previous year). Extraordinary income of ¥0.6B, primarily gains on the sale of investment securities, supplemented net income; consequently, net income for the period includes temporary factors.

Factors Affecting Performance

【Revenue】Revenue was ¥30.4B, down -15.7% year on year (-¥5.6B). By segment, Energy generated revenue of ¥19.5B and Water generated revenue of ¥10.9B. Water posted an operating loss (-¥1.0B), and the slowdown in demand and project progress in both segments appears to have contributed to the decline in revenue.

【Profit and Loss】The gross margin declined to 36.6% from 39.5% in the previous year period, while selling, general and administrative expenses increased to ¥9.9B (+6.6% YoY). The simultaneous decline in revenue and increase in SG&A caused operating income to contract to ¥1.2B (-75.0%). In non-operating results, income of ¥0.2B, including a foreign exchange gain of ¥0.1B, supplemented ordinary income, which amounted to ¥1.4B (-72.3%). In addition, extraordinary income of ¥0.6B, primarily consisting of a ¥0.5B gain on the sale of investment securities, lifted profit before tax, resulting in net income of ¥1.3B (-62.6%). In conclusion, the Company experienced declines in both revenue and earnings.

Segment Analysis

The Energy segment is the core earnings contributor, generating revenue of ¥19.5B and operating income of ¥5.0B (operating margin of 25.8%). In contrast, Water generated revenue of ¥10.9B and recorded an operating loss of -¥1.0B (operating margin of -9.0%), weighing on consolidated earnings. There is also an adjustment of -¥2.75B in corporate expenses not allocated to either segment, which is another factor constraining consolidated operating income of ¥1.2B. Improving the profitability of the Water segment will be key to recovering the Company-wide operating margin.

Key Financial Metrics

【Profitability】The operating margin of 4.0% (13.7% in the previous year), net profit margin of 4.1% (9.3% in the previous year), and gross margin of 36.6% (39.5% in the previous year) all deteriorated. 【Cash Flow Quality】Operating cash flow (OCF) was ¥2.5B, approximately twice the ¥1.3B in net income, but the primary driver was a ¥10.1B decrease in trade receivables, rather than sustainable earning power from the core business. Free cash flow was positive at ¥2.1B. 【Investment Efficiency】Annualized ROE was 3.3%. Capital expenditures of ¥0.5B remained below depreciation and amortization of ¥0.7B, indicating continued underinvestment. 【Financial Soundness】The equity ratio improved to 81.9% (74.9% in the previous year). With total assets of ¥92.7B and net assets of ¥75.9B, the Company has a robust capital base. However, accounts receivable of ¥34.1B exceeded cash and deposits of ¥24.3B, indicating a high degree of reliance on receivables in the asset structure.

Cash Flow Analysis

Operating cash flow was ¥2.5B, up +49.2% year on year, generating more cash than net income of ¥1.3B. However, this increase was primarily attributable to the temporary release of working capital resulting from a ¥10.1B decrease in trade receivables. Trade payables decreased by ¥3.2B, while inventories increased by ¥1.2B. Investing cash flow was -¥0.5B, primarily reflecting capital expenditures of ¥0.5B. Financing cash flow was -¥3.6B and included dividend payments and share repurchases of ¥0.9B. As a result, free cash flow remained positive at ¥2.1B; however, given the weakness in operating income, it will be necessary from the second half onward to confirm the Company’s ability to generate stable cash flow without relying on receivables collection.

Earnings Quality

Of the current period’s profit before tax of ¥2.0B, extraordinary income of ¥0.6B, primarily comprising a ¥0.5B gain on the sale of investment securities, represented a temporary contribution equivalent to slightly more than approximately 40% of net income of ¥1.3B. Of non-operating income of ¥0.2B, the foreign exchange gain was ¥0.1B, also including a non-recurring element dependent on market fluctuations. On an operating income basis, the core earnings power has contracted significantly from the previous year, and net income is highly dependent on extraordinary income. Comprehensive income was ¥3.4B, exceeding net income of ¥1.3B, primarily due to a foreign currency translation adjustment of +¥2.6B. This represents an accounting increase resulting from translation differences on overseas assets and does not indicate an improvement in the profitability of business activities themselves.

Earnings Forecast and Guidance

The full-year company forecast calls for revenue of ¥100.0B (+12.1% YoY), operating income of ¥17.0B (+11.9%), and ordinary income of ¥17.0B (+12.6%). Progress against the first-half results was 30.4% for revenue, 7.2% for operating income, 8.3% for ordinary income, and 11.4% for net income, all substantially below the standard first-half progress rate of 50%. Assuming the unchanged forecast, the Company must generate revenue of ¥69.6B and operating income of ¥15.8B in the second half, implying a second-half operating margin of approximately 22.7%. This requires a substantial improvement from the first-half operating margin of 4.0%.

Shareholder Returns

The full-year dividend forecast is ¥35.0 per share, implying a payout ratio of approximately 22.2% against full-year forecast EPS of ¥157.68. The interim dividend for the first half was ¥0, indicating a policy of paying dividends in a single year-end installment. According to the first-half cash flow statement, total returns of ¥3.4B were recorded, comprising dividend payments of ¥2.4B and share repurchases of ¥0.9B, exceeding first-half free cash flow of ¥2.1B. The financial base of cash and deposits of ¥24.3B, interest-bearing debt of ¥1.9B, and an equity ratio of 81.9% supports this level of shareholder returns.

Risk Factors

1. Decline in core earnings power: While revenue declined -15.7% year on year, SG&A increased +6.6%, causing the operating margin to contract by 970bp to 4.0% (13.7% in the previous year). If revenue recovery and cost absorption do not progress in the second half, achieving the full-year forecast will be challenging.

2. Delayed progress toward the full-year forecast: First-half progress toward the full-year operating income forecast of ¥17.0B was only 7.2%, requiring an operating margin of approximately 22.7% in the second half. As this requires a significant improvement over the first-half results, the gap between the forecast and actual results warrants attention.

3. Working capital and cash flow quality: The increase in first-half OCF was primarily attributable to the ¥10.1B decrease in trade receivables and does not necessarily reflect the core business’s cash-generating capacity. Future trends in receivables collection and the stability of OCF will be key areas of focus.

Industry Benchmark (For Reference; Company Research)

Industry Benchmark (manufacturing)

Profitability and Returns

The Company’s profitability is below the industry median, with its operating margin ranking particularly low within the industry.

Growth and Capital Efficiency

The Company’s revenue growth rate is substantially below the industry median, representing a decline in revenue while many peer companies remain on a growth trajectory.

※Source: Company research

Key Takeaways from the Earnings Results

1. While core profitability deteriorated significantly due to the combination of lower revenue, a lower gross margin, and higher SG&A, OCF and free cash flow remained positive, and the Company’s financial resilience was maintained against the backdrop of an equity ratio of 81.9%.

2. Progress toward full-year earnings in the first half was exceptionally low (7.2% for operating income), making the extent to which core operating margins improve substantially in the second half the central point of observation for evaluating performance.

3. As net income includes the temporary factor of a ¥0.5B gain on the sale of investment securities, it will be important to confirm the recovery capacity of core operating income excluding this gain when evaluating the quality of future earnings.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,209–¥1,281 at cost of equity ±1%, and ¥1,241–¥1,250 at ω±0.1.

Notes:

• Goodwill amortization of ¥0.7 per share is added back to earnings (as a non-cash expense and for comparability with IFRS companies).
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat on the high side.

(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, and does not predict or guarantee future share 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 discretion and responsibility, after consulting a professional as necessary.

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