KIMURA CHEMICAL PLANTS CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥12.46B
• Operating Income: ¥1.14B
• Net Income: ¥801M
• Earnings per Unit (EPU): ¥40.49

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Unit Information

Distribution Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: A soft quarter operationally with resilient topline but clear margin compression and weak cash conversion. Revenue grew 0.9% YoY to 124.56, but operating income fell 20.8% YoY to 11.37 and net income declined 20.4% to 8.01, indicating cost pressure and project mix headwinds. Gross profit was 27.35, implying a gross margin of 22.0%. Operating margin was 9.1% (11.37/124.56), and net margin was 6.4% (8.01/124.56). Based on provided YoY rates, prior-period operating income was about 14.36 and net income about 10.06, against estimated prior revenue of 123.45, implying operating margin compressed by roughly 249 bps (from ~11.6% to 9.1%) and net margin by ~172 bps (from ~8.2% to 6.4%). Ordinary income of 11.78 benefited modestly from non-operating income of 0.59 (notably dividend income of 0.43), offset by 0.18 non-operating expenses. Earnings quality is weak this quarter: operating cash flow was -12.33 versus positive net income of 8.01, with OCF/NI at -1.54x. Liquidity remains robust (current ratio 240.2%, cash and deposits 71.33 vs short-term loans 6.65), and leverage conservative (D/E 0.71x, interest coverage 189.5x). Asset turnover is low at 0.375, consistent with a project-based/engineered equipment model, and ROE calculates to 4.1% via DuPont (6.4% NPM × 0.375 AT × 1.71x leverage). ROIC is 5.3%, below common 7–8% targets, suggesting value creation is modest after capital costs. The negative OCF likely reflects working capital build (notably accounts receivable at 109.34); inventories are unreported, limiting full diagnosis. Capex was 4.41, and financing CF -1.24, pointing to cash needs funded by the balance sheet rather than cash generation this half. Dividend data are largely unreported, but the calculated payout ratio of 105.4% indicates potential strain if maintained amid negative OCF. Forward-looking, stability of project execution, cost pass-through, and working capital normalization will be key to restoring margins and cash conversion. Non-operating dividend income adds a small buffer but is not a substitute for operating improvement. Absent backlog details, visibility into 2H recovery is limited. Overall, the quarter underscores execution and cash discipline as priorities to lift ROIC and sustain shareholder returns.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.1% = Net Profit Margin 6.4% × Asset Turnover 0.375 × Financial Leverage 1.71x. The largest adverse change appears to be net margin compression: operating income fell 20.8% despite revenue up 0.9%, implying weaker gross profitability/project mix or cost inflation not fully passed through. Asset turnover likely changed little QoQ/YoY given revenue near flat and asset base sizable at 331.94, thus margins are the primary driver of ROE pressure. Business context: in engineered equipment/EPC-type businesses, timing/mix (lower-margin projects recognized) and materials/labor cost escalation can crimp margins; SG&A is 15.98 versus gross profit 27.35, so operating leverage worked against profits as gross margin slipped. Sustainability: margin compression could partially reverse if input costs ease, change orders are approved, or higher-margin orders are recognized; however, such reversals are inherently project/backlog dependent and not guaranteed. Watchpoints: SG&A growth versus revenue is unreported, but the >20% decline in operating income against flat sales suggests deleverage; any continued SG&A creep faster than revenue would be a concern. Ordinary income’s reliance on dividends (0.43) is modest but non-core; core operating margin recovery is needed for durable ROE improvement.

Growth Assessment

Topline grew 0.9% YoY to 124.56, indicating stable demand but limited expansion. Operating income fell 20.8% to 11.37, and net income dropped 20.4% to 8.01, signaling pressure from lower project profitability or cost inflation. Operating margin declined to 9.1% from an estimated ~11.6% a year ago (≈-249 bps), and net margin to 6.4% from ~8.2% (≈-172 bps). Gross margin stands at 22.0%, consistent with a custom equipment/project mix but below what is needed to offset fixed SG&A. Non-operating items modestly supported ordinary income (non-operating income ratio ~7.4%), primarily dividend income, which is not a core growth driver. Revenue sustainability depends on backlog quality and conversion; however, backlog data are unreported, limiting visibility. The negative operating cash flow suggests project timing/collection delays that may temper near-term growth execution despite booked revenue. Outlook: near-term profit growth hinges on mix normalization and better cost pass-through; incremental efficiency and procurement management are key. With ROIC at 5.3%, improving project returns is necessary to approach 7–8% benchmarks.

Financial Health

Liquidity is strong: current ratio 240.2% and quick ratio 240.2% (no inventories reported), with cash and deposits 71.33 versus current liabilities 90.88 and short-term loans 6.65. Solvency is conservative: total debt approximates 22.35 (short-term 6.65 + long-term 15.70), implying D/E 0.71x and Debt/EBITDA 1.74x, and interest coverage is very strong at 189.5x. No explicit warning thresholds breached (Current Ratio well >1.0; D/E <2.0). Maturity mismatch risk is low given substantial cash and accounts receivable (109.34) relative to short-term obligations. Off-balance sheet obligations are not disclosed; no guarantees/commitments were reported in the provided data. Equity stands at 193.68, providing ample buffer for volatility.

Cash Flow Quality

OCF/Net Income is -1.54x (<0.8), indicating poor earnings-to-cash conversion this half. Operating CF of -12.33 versus net income of 8.01 suggests significant working capital outflows (likely receivable buildup and/or unreported inventories/WIP increases typical in project businesses). Free cash flow cannot be fully computed due to unreported investing CF, but with capex of 4.41 and negative OCF, FCF is likely negative in H1. Financing CF of -1.24 indicates some net repayments or dividend outflows despite negative OCF, drawing on cash reserves. No clear signs of manipulation are evident from available data, but the scale of receivables (109.34 against revenue 124.56) points to elongated collection cycles and project milestone timing. Sustained negative OCF would pressure balance sheet despite current liquidity headroom.

Dividend Sustainability

Dividend specifics are unreported, but the calculated payout ratio of 105.4% exceeds the typical sustainable threshold (<60%), implying potential strain if continued. Given negative operating cash flow in H1 and likely negative FCF after capex, cash coverage of dividends appears weak for the period. Balance sheet liquidity can bridge near-term payouts, but sustainability depends on OCF normalization in 2H. Policy visibility is limited without DPS guidance; conservative stance would hinge on cash generation from backlog conversion and margin recovery.

Risk Assessment

Business Risks:

• Project execution risk leading to cost overruns and margin erosion
• Input cost inflation and procurement risk impacting gross margin
• Timing risk of revenue recognition and milestone collections
• Customer concentration/order timing typical in engineered equipment
• Supply chain delays affecting delivery schedules and cash conversion

Financial Risks:

• Negative operating cash flow and working capital build driving liquidity usage
• Receivables collection risk given high AR relative to revenue
• Potential dividend strain with payout above 100% amid negative OCF
• ROIC at 5.3% below 7–8% targets, risking value dilution if not improved

Key Concerns:

• Margin compression: operating margin down ~249 bps YoY; net margin down ~172 bps
• OCF/NI at -1.54x signals poor cash conversion
• Visibility limitations: backlog, inventories, and SG&A details unreported
• Reliance on non-operating dividend income (0.43) for a portion of ordinary income

Investment Implications

Key Takeaways:

• Topline stable (+0.9% YoY) but profit contracted sharply (-20% YoY) on margin compression
• Earnings quality weak with OCF negative despite positive NI
• Balance sheet resilient (current ratio 240%, D/E 0.71x) cushioning near-term volatility
• ROE modest at 4.1% and ROIC 5.3%—below typical targets for value creation
• Non-operating income provides only minor support; core operating recovery is necessary

Metrics to Watch:

• Backlog size and mix; order intake and book-to-bill
• Gross and operating margin trajectory; cost pass-through effectiveness
• Working capital metrics (DSO, unreported inventories/WIP turns) and OCF normalization
• Capex discipline versus growth needs; Debt/EBITDA and interest coverage
• Dividend policy updates and payout alignment with FCF

Relative Positioning: Within Japanese engineered equipment/plant construction peers, the company shows conservative leverage and ample liquidity but underwhelming profitability and cash conversion this half. Margin compression and sub-target ROIC place it mid-to-lower tier on returns, offset by a strong balance sheet that provides flexibility for execution recovery.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
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