Naikai Zosen (7018) FY2026 Q3 Earnings Report

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Executive Summary

Despite a decline in revenue, the Company achieved a significant increase in profit due to improved profitability. Cost control in shipbuilding projects and the reduction in the provision for losses on construction contracts led the recovery in earnings. Revenue was ¥329.9B (down -5.2% YoY), Operating Income was ¥23.1B (up +92.2%), Ordinary Income was ¥22.6B (up +126.2%), and Net Income was ¥15.7B (up +77.7%). Cost of sales contracted faster than the decline in revenue, improving the gross profit margin to 9.9%, which was the core factor behind the increase in profit.

Factors Affecting Business Performance

【Revenue】Revenue was ¥329.9B, down -5.2% YoY. The Company has a single Ship segment, which recorded revenue of ¥326.6B and Operating Income of ¥31.6B (9.7% margin), accounting for nearly all of the business. The decline in revenue is likely attributable to the timing of construction progress and deliveries, with progress toward the full-year forecast of ¥465.0B at 70.9%, a somewhat low level.

【Profit and Loss】Cost of sales declined to ¥297.2B (down -8.9% YoY), contracting faster than the decline in revenue. Gross profit was ¥32.8B, and the gross profit margin improved to 9.9% (up +3.8pt from 6.1% in the same period last year). SG&A expenses increased to ¥9.7B (up +4.5%), but the improvement in gross profit absorbed this increase, resulting in Operating Income of ¥23.1B (7.0% margin, up +3.6pt from 3.4% in the previous year). The foreign exchange loss of ¥0.8B recorded in the same period last year was eliminated in the current period, and Ordinary Income expanded to ¥22.6B (up +126.2%). Extraordinary income and losses amounted to a net loss of slightly less than ¥0.1B, with a negligible impact. After recording income taxes and other taxes of ¥6.8B, Net Income was ¥15.7B (up +77.7%). The provision for losses on construction contracts also decreased substantially from ¥12.4B in the same period last year to ¥2.6B, contributing to the increase in profit. The earnings profile is therefore characterized by higher profit despite lower revenue.

Segment Analysis

The Company has a single segment, Ship, which reported revenue of ¥326.6B, Operating Income of ¥31.6B, and a 9.7% margin. The difference from Company-wide Operating Income of ¥23.1B is attributable to the allocation of head office expenses and other costs, and the standalone profitability of the shipbuilding business is above the Company-wide average.

Key Financial Metrics

【Profitability】The Operating Income margin improved significantly to 7.0% (3.4% in the previous year), while the Net Income margin improved to 4.8% (2.5% in the previous year). Although the gross profit margin of 9.9% remains low in absolute terms, it improved by 3.8pt from 6.1% in the same period last year.【Cash Quality】Cash and deposits increased significantly to ¥149.7B from ¥47.0B in the same period last year, while accounts receivable declined 66.0% to ¥68.0B. Progress in collections was one factor contributing to the increase in cash.【Investment Efficiency】Annualized ROE was 16.8%, formed by the product of the Net Income margin, total asset turnover, and financial leverage, with financial leverage making a significant contribution.【Financial Soundness】The Equity Ratio improved to 31.4% (up +5.8pt from 25.6% in the previous year), but liabilities, including contract liabilities of ¥113.4B, represent a significant portion of total assets, and the current ratio was 112.4%, indicating limited financial flexibility.

Cash Flow Analysis

Cash and deposits totaled ¥149.7B, an increase of ¥102.7B from ¥47.0B in the same period last year. This increase is directionally consistent with the decline in accounts receivable to ¥68.0B (down -66.0% YoY) and is considered to reflect progress in collections. Meanwhile, contract liabilities (advance payments) declined by ¥25.3B to ¥113.4B from ¥138.7B in the same period last year. Since the decline in advance payments and the increase in cash occurred simultaneously, it would not be appropriate to attribute the increase in cash solely to earnings power. Work in progress increased significantly to ¥25.4B compared with the same period last year, indicating greater cash tied up in ongoing construction. Long-term borrowings declined by ¥11.8B to ¥14.5B, indicating a trend toward a reduced borrowing burden.

Earnings Quality

The improvement in profit during the current period was primarily attributable to business-structure factors, namely the reduction in cost of sales and the reduction in the provision for losses on construction contracts, while the impact of extraordinary income and losses was negligible. Extraordinary income of ¥0.3B and extraordinary losses of ¥0.3B nearly offset each other, resulting in a limited impact on Net Income. Non-operating income was ¥0.6B, equivalent to only 0.2% of revenue, and dependence on dividend income of ¥0.3B and interest income of ¥0.1B was also limited. The foreign exchange loss of ¥0.8B recorded in the same period last year did not occur in the current period, which can be identified as a temporary factor that boosted the increase in Ordinary Income. Comprehensive income was ¥17.0B, and the difference from Net Income of ¥15.7B was primarily attributable to valuation differences on securities of ¥1.2B. The divergence between the two was not significant. Overall, the increase in profit during the current period consisted of both sustainable improvements in cost management and the temporary factor of the elimination of foreign exchange losses.

Earnings Forecast and Guidance

The full-year forecast is revenue of ¥465.0B (up +4.1% YoY), Operating Income of ¥26.0B (up +83.7%), and Ordinary Income of ¥24.5B (up +108.0%). Q3 cumulative progress rates were 70.9% for revenue, 88.7% for Operating Income, and 92.4% for Ordinary Income, with profit progress substantially exceeding the standard 75% level. While revenue progress is relatively low, profit progress is ahead of schedule; accordingly, the revenue required in Q4 is approximately ¥135B, and the required Operating Income is approximately ¥2.9B. The full-year plan itself assumes a substantial increase in profit from the previous year, and its achievement is premised on the continuation of the profitability improvements seen through the current period.

Shareholder Returns

The full-year dividend forecast is ¥100 per share. Based on the weighted-average number of shares outstanding during the period of 1,694,788 shares, total dividends are estimated at approximately ¥1.7B, resulting in a Payout Ratio of approximately 8.5% against the full-year Net Income forecast of ¥20.0B. The dividend per share in the same period last year was ¥40, and the full-year forecast calls for an increase from the previous year’s actual dividend. Retained earnings increased by ¥15.0B YoY to ¥106.7B, indicating continued accumulation of funds available for dividends.

Risk Factors

1. Risk of fluctuations in the profitability of shipbuilding projects: Although the gross profit margin improved to 9.9%, its absolute level remains low, and fluctuations in material and labor costs, delays in construction schedules, and design changes can readily affect the profitability of individual projects. The provision for losses on construction contracts declined to ¥2.6B, but the possibility of additional provisions remains.

2. Elevated work in progress: Work in progress increased significantly to ¥25.4B compared with the same period last year and accounts for a substantial portion of inventories. Although this reflects progress in long-term construction projects, delays in construction schedules or revisions to cost estimates could affect profit recognition and cash collection.

3. Fluctuations in financial metrics associated with the working capital structure: Due to the liability structure, including contract liabilities of ¥113.4B, total liabilities exceed net assets, and the current ratio is also 112.4%, indicating limited financial flexibility. Progress in deliveries to customers and fluctuations in advance payments will determine short-term funding requirements.

Industry Benchmark (Reference; Prepared by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Although profitability improved significantly from the previous year, it remains below the industry median.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, leaving the Company at a relative disadvantage within the industry in terms of top-line growth.

※Source: Prepared by the Company

Key Takeaways from the Financial Results

1. Despite the decline in revenue, the Operating Income margin improved by +3.6pt YoY, with the recovery in shipbuilding project profitability serving as the central factor in the change in performance. The reduction in the provision for losses on construction contracts supported this improvement.

2. Cumulative Operating Income and Ordinary Income reached 88.7% and 92.4%, respectively, of the full-year plan, progressing faster than the 70.9% revenue progress rate. Full-year results will depend on the trend in revenue recognition and the reproducibility of project profitability in Q4.

3. The long-term construction-oriented working capital structure, represented by work in progress of ¥25.4B and contract liabilities of ¥113.4B, will be a key area to monitor for future fluctuations in cash flow and earnings.

Theoretical Stock Price (Reference Value)

Sensitivity: ¥8,691–¥9,223 at ±1% for the cost of equity, and ¥8,911–¥9,011 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• Since net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual income model (Ohlson-type with an 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 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 summary 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, where necessary, after consulting with a professional advisor.

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