DAIWA LTD. FY2026 Q2 Earnings Report

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Executive Summary

Although the company secured revenue growth, the decline in profit margins resulted in higher revenue but lower earnings, with rising costs putting pressure on profitability as the key point of focus. Revenue increased to ¥235.2B (+4.0% YoY), while Operating Income declined to ¥34.5B (-6.3%), Ordinary Income to ¥35.2B (-3.8%), and Net Income to ¥23.7B (-4.4%). The Operating Income margin was 14.7%, down approximately 1.6pt from 16.3% in the previous year, while the gross profit margin also contracted to 55.2% from 56.9%. Rising costs and SG&A expenses increasing at a pace exceeding revenue growth put pressure on margins.

Factors Affecting Performance

【Revenue】Revenue increased to ¥235.2B (+4.0% YoY), securing revenue growth at a level not seen for four periods. Contract liabilities (advance payments) amounted to ¥176.0B, equivalent to approximately 75% of revenue, indicating a certain degree of revenue visibility given the significant order backlog available for fulfillment.

【Profit and Loss】Operating Income declined to ¥34.5B (-6.3% YoY), Ordinary Income to ¥35.2B (-3.8%), and Net Income to ¥23.7B (-4.4%). Cost of sales increased to ¥105.4B (cost ratio: 44.8%, compared with 43.0% in the previous year), causing the gross profit margin to contract to 55.2% from 56.9%. In addition, SG&A expenses increased to ¥95.2B at a pace exceeding the revenue growth rate (+4.0%), resulting in a decline in the Operating Income margin to 14.7% from 16.3%. The gap between Ordinary Income and Net Income was primarily attributable to income taxes and other taxes of ¥11.5B (effective tax rate: 32.8%), while extraordinary losses were minimal at ¥0.03B, indicating limited structural concerns regarding earnings quality. In conclusion, the company achieved higher revenue but lower earnings.

Key Financial Metrics

【Profitability】The Operating Income margin of 14.7% (16.3% in the previous year) and Net Income margin of 10.1% (10.9% in the previous year) both declined year over year, while the gross profit margin also contracted to 55.2% from 56.9%. 【Cash Flow Quality】Operating Cash Flow (OCF) was ¥39.3B, approximately 1.66 times Net Income of ¥23.7B, indicating strong cash backing for earnings. Free Cash Flow (FCF) was ¥27.8B after capital expenditures of ¥11.6B, approximately 2.4 times depreciation and amortization of ¥4.8B. 【Investment Efficiency】ROE was 3.3% and remained subdued, primarily due to the decline in the Net Income margin. Total asset turnover remained low at approximately 0.246x, indicating room for improvement in capital efficiency. 【Financial Soundness】The Equity Ratio was 74.7% (75.4% in the previous year), while the current ratio was approximately 298%, an extremely high level, supported by ample liquidity including cash and deposits of ¥405.3B. The debt structure is conservative, and financial risk remains low.

Cash Flow Analysis

Operating Cash Flow (OCF) increased significantly by +199.7% YoY to ¥39.3B, representing cash generation approximately 1.66 times Net Income of ¥23.7B. Investing Cash Flow was -¥11.5B, primarily due to capital expenditures of ¥11.6B, representing proactive investment at approximately 2.4 times depreciation and amortization of ¥4.8B. Financing Cash Flow was -¥16.6B, with shareholder returns, including dividend payments and share repurchases of ¥4.3B, representing the primary use of funds. As a result, FCF was ¥27.8B, maintaining a structure in which investments and shareholder returns can generally be funded through internal funds. Meanwhile, in terms of working capital, trade receivables increased by ¥4.3B and inventories by ¥0.5B, tying up funds, but this was partially offset by a ¥6.2B increase in trade payables.

Earnings Quality

The earnings composition is centered on recurring business activities, with the impact of one-time factors extremely limited. Extraordinary losses were negligible at ¥0.03B, resulting in virtually no distortion of Net Income. Non-operating income was limited to ¥2.0B (0.9% of revenue), primarily comprising interest income of ¥1.3B, indicating low dependence on non-core factors. OCF exceeded Net Income (approximately 1.66 times), supporting a strong cash basis for earnings. The gap between Ordinary Income of ¥35.2B and Net Income of ¥23.7B was primarily attributable to income taxes and other taxes of ¥11.5B (effective tax rate: 32.8%) and does not impair accounting quality.

Earnings Forecast and Guidance

Progress against the full-year forecast was 235.2/494.0B for revenue, or 47.6%; 34.5/84.0B for Operating Income, or 41.1%; 35.2/83.0B for Ordinary Income, or 42.5%; and 23.7/56.0B for Net Income, or 42.3%. Compared with the 50% benchmark generally expected at the end of the first half, revenue was broadly within the acceptable range, but each profit measure was approximately 7–9pt behind schedule. The contraction in gross profit and Operating Income margins, together with the pace of SG&A growth, was a contributing factor. Improvement in operating capacity utilization and progress in cost control during the second half will be prerequisites for achieving the full-year forecast.

Shareholder Returns

The interim dividend was ¥35, comprising an ordinary dividend of ¥30 and a commemorative dividend of ¥5, an increase from ¥25 in the same period of the previous year. The full-year dividend forecast is ¥65, and the dividend forecast was revised during the current quarter. Calculated based on total dividends relative to Net Income of ¥23.7B, the Payout Ratio is at a relatively high level; when total shareholder returns including share repurchases of ¥4.3B are considered, the ratio relative to Net Income is even higher. FCF of ¥27.8B is generally sufficient to cover these shareholder returns, although the inclusion of the commemorative dividend warrants attention.

Risk Factors

1. Risk of continued margin deterioration: The gross profit margin declined to 55.2% (56.9% in the previous year), and the Operating Income margin declined to 14.7% (16.3% in the previous year). If this trend continues, the delay in full-year profit progress (41–42%) could widen further.

2. Deterioration in working capital efficiency: Trade receivables of ¥4.3B and inventories of ¥0.5B each acted to tie up funds. If inventory and receivables remain outstanding for longer, FCF volatility could increase.

3. Level of shareholder returns: The interim dividend was ¥35, comprising an ordinary dividend plus a commemorative dividend, and share repurchases of ¥4.3B were also conducted, resulting in a relatively high level of returns relative to Net Income. Although these were generally covered by FCF of ¥27.8B, the remaining capacity in the event of weaker performance warrants attention.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the Operating Income margin and Net Income margin exceeded the industry median, placing the company’s profitability at a relatively high level within the industry.

Growth and Capital Efficiency

The revenue growth rate was below the industry median, placing the company at a relative disadvantage within the industry in terms of revenue growth.

※Source: Compiled by the Company

Key Points in the Earnings Results

1. While the company secured revenue growth, both the gross profit margin and Operating Income margin contracted from the previous year. The trend in margins will be a key monitoring point, specifically whether the higher-revenue, lower-earnings structure continues into the second half.

2. Contract liabilities of ¥176.0B are equivalent to approximately 75% of revenue, indicating high forward revenue visibility due to the advance-payment structure. However, the increasing amount of working capital tied up by trade receivables and inventories should be monitored from a funding-efficiency perspective.

3. The interim dividend was increased to ¥35, including a commemorative dividend, and the full-year dividend forecast was revised to ¥65. Reviewing the extent to which shareholder returns are covered by FCF, taking into account the one-time nature of the commemorative dividend, would be useful.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥1,362–¥1,439 at ±1% for the cost of equity, and ¥1,398–¥1,401 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 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 at a somewhat higher level.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data and is not a forecast of the market stock price or a recommendation of any specific investment action, nor does it predict 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 with professionals as necessary.

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