Kyoei Security Service (7058) FY2026 Q3 Earnings Report

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Executive Summary

Against a backdrop of double-digit revenue growth and an improved earnings structure, both Operating Income and Net Income more than doubled year on year, resulting in a significant earnings increase. Revenue was ¥8.73B (+14.4% YoY), Operating Income was ¥0.91B (+102.8%), Ordinary Income was ¥0.94B (+102.6%), and Net Income attributable to owners of the parent was ¥0.53B (+127.6%). The primary factors behind the earnings growth were the emergence of operating leverage through an improved gross profit margin and reduced SG&A expenses. Progress against the full-year company forecast was generally steady at 69.8% for Operating Income and 74.0% for Net Income, while Revenue progress remained at 58.2%.

Factors Affecting Performance

【Revenue】Revenue increased 14.4% year on year to ¥8.73B. The company operates as a single Security Services Business segment, and business expansion, including contributions from two newly consolidated subsidiaries, was the driver of revenue growth. Progress against the full-year forecast of ¥15.0B was 58.2%, below the standard 75% progress level; therefore, the activation of projects in Q4 will be the key to achieving the plan.

【Earnings】Gross profit was ¥2.18B, and the gross profit margin improved to 24.9% from 23.5% in the same period of the previous year. SG&A expenses decreased 5.9% year on year to ¥1.27B, and the SG&A ratio declined substantially to 14.5% from 17.6% in the same period of the previous year. As a result, Operating Income was ¥0.91B, with a margin of 10.4% versus 5.9% in the previous year, and the improvement in earnings was maintained through Ordinary Income of ¥0.94B and Net Income of ¥0.53B. However, the effective tax rate was high at 41.2%, with the tax burden partially limiting Net Income growth. Non-operating extraordinary items comprised a gain on the sale of investment securities of ¥0.01B against extraordinary losses of ¥0.04B, resulting in a net loss factor of slightly less than ¥0.04B after offsetting; however, the core driver of earnings growth was the expansion of Operating Income, supporting the conclusion that the company achieved both revenue and earnings growth.

Segment Analysis

The Group operates through a single business segment, the Security Services Business, and disclosure of segment information has therefore been omitted. Accordingly, the increase in consolidated earnings reflects improved profitability of the Security Services Business alone.

Key Financial Indicators

【Profitability】The Operating Income margin was 10.4%, improving by approximately 4.5pt from 5.9% in the same period of the previous year, while the Net Income margin was 6.1%, improving by approximately 3.1pt from 3.0% in the same period of the previous year. Both the improvement in the gross profit margin (24.9% versus 24.5% in the previous year) and the decline in the SG&A ratio (14.5% versus 17.6% in the previous year) contributed.【Cash Flow Quality】Extraordinary items resulted in a net loss of ¥0.04B after offsetting, and the increase in Net Income was based on expansion of core operating profit rather than reliance on non-recurring income. The effective tax rate of 41.2% was high, with the tax burden partially offsetting the positive effect on profit after tax.【Investment Efficiency】ROE was 14.3% (annualized), supported by the combination of the Net Income margin, total asset turnover, and financial leverage, rather than excessive reliance on debt.【Financial Soundness】The Equity Ratio was 66.5%, down from 71.3% in the same period of the previous year. Liquidity was sufficient, with current assets of ¥3.60B against current liabilities of ¥1.73B. Long-term borrowings increased 99.4% year on year to ¥0.69B, while goodwill and intangible fixed assets also increased by approximately 94%, indicating changes in the asset composition reflecting the acquisition of newly consolidated subsidiaries.

Cash Flow Analysis

Although a separate cash flow statement has not been disclosed, movements in funds associated with business expansion can be inferred from changes in the balance sheet. Cash and deposits were ¥2.07B, slightly down from ¥2.19B in the same period of the previous year. In addition to financing through long-term borrowings of ¥0.69B (+99.4% YoY), the total increase of approximately ¥0.69B in goodwill and intangible fixed assets appears to have been invested in the acquisition of two newly consolidated subsidiaries. Retained earnings increased 10.8% year on year to ¥4.08B, indicating that the earnings growth during the current period has accumulated as retained internal funds. Overall, the company appears to be allocating funds generated by operating activities and external funds obtained through borrowings to investment activities involving business acquisitions.

Quality of Earnings

The earnings increase during the current period was primarily driven by expansion of Operating Income from the core business, and the quality of earnings appears sound. The contribution from non-operating items was limited to ¥0.03B, comprising non-operating income of ¥0.04B less non-operating expenses of ¥0.01B, and therefore had a limited impact on Ordinary Income. Extraordinary items included an extraordinary loss of ¥0.04B, including losses on disposal of fixed assets, against a gain of ¥0.01B on the sale of investment securities, resulting in a net loss of slightly less than ¥0.04B and causing non-recurring factors to depress earnings. In other words, earnings growth through the Ordinary Income stage did not depend on non-recurring items, and the growth in Net Income was maintained even after the extraordinary loss, indicating high earnings quality. On the other hand, the high effective tax rate of 41.2% reduced the conversion efficiency of growth in profit before tax into profit after tax, warranting attention to the sustainability of the tax burden.

Earnings Forecasts and Guidance

During the quarter, revisions were made to the earnings forecast and dividend forecast. The revised full-year forecasts are Revenue of ¥15.0B, Operating Income of ¥1.30B, Ordinary Income of ¥1.30B, EPS of ¥494, and a dividend of ¥120. Progress for the cumulative Q3 period was 58.2% for Revenue, 69.8% for Operating Income, 72.1% for Ordinary Income, and 74.0% for Net Income. While the earnings-related indicators were close to the standard 75% progress level, Revenue progress was below this level. This difference indicates that achieving the full-year plan will require relatively high-margin revenue accumulation in Q4.

Shareholder Returns

The Q2 dividend was ¥0 per share, while the full-year company dividend forecast is ¥120 per share, revised during the current quarter. The forecast Payout Ratio based on forecast EPS of ¥494 is approximately 24.3%, and the dividend burden relative to earnings remains limited even compared with cumulative Q3 EPS of ¥365.77. Given the absence of a Q2 dividend, the annual dividend may be premised on concentration in the year-end dividend. The financial base, comprising cash and deposits of ¥2.07B and an Equity Ratio of 66.5%, is sufficient to support payment of the forecast dividend.

Risk Factors

1. Single-segment concentration risk: The company operates through a single segment consisting solely of the Security Services Business, meaning that changes in project activation and personnel allocation directly affect consolidated performance. The current Revenue progress rate of 58.2% indicates high sensitivity to changes in the business environment during Q4.

2. High personnel expenses and effective tax rate: Salaries and allowances increased to ¥0.351B from ¥0.329B in the same period of the previous year, and rising costs to secure personnel may affect the sustainability of the improvement in the SG&A ratio. In addition, the effective tax rate of 41.2% is high, and a sustained tax burden could constrain growth in profit after tax.

3. Integration risk associated with increases in goodwill and intangible assets: Following the acquisition of two newly consolidated subsidiaries, goodwill increased to ¥0.708B (+94.1% YoY), while intangible fixed assets increased to ¥0.710B (+94.2%). Goodwill to net assets was 14.3%, which is not at a level of concern; however, impairment losses could arise if the earnings of the acquired entities fall below expectations.

Industry Benchmark (For Reference; Company Analysis)

Industry Benchmark (it_telecom)

Profitability and Returns

The Operating Income margin exceeds the industry median, while the Net Income margin is approximately in line with the industry median. The high effective tax rate is a factor contributing to convergence toward the lower level.

Growth and Capital Efficiency

The Revenue growth rate exceeds the industry median and is positioned in the upper range of the IQR.

※Source: Compiled by the Company

Key Points from the Results

1. Operating Income increased +102.8% against Revenue growth of +14.4% year on year, demonstrating a pronounced effect from improved profitability and operating leverage. The simultaneous improvement in the gross profit margin (approximately +1.4pt) and decline in the SG&A ratio (approximately -3.1pt) suggest a structural improvement in the cost structure.

2. Full-year progress for the earnings-related indicators (69.8%–74.0%) exceeds Revenue progress (58.2%). Considering the levels of Revenue and Operating Income margin required in Q4, the earnings plan has a certain degree of latitude, while progress toward the Revenue plan warrants monitoring.

3. The high tax burden represented by an effective tax rate of 41.2% and the approximately 94% increase in goodwill and intangible fixed assets associated with the acquisition of newly consolidated subsidiaries are two structural areas requiring continued monitoring in future results: the conversion efficiency of profit after tax and the progress of M&A integration.

Theoretical Share Price (Reference Value)

Sensitivity: ¥3,747–¥3,968 at ±1% for the cost of equity, and ¥3,845–¥3,871 at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a time gap relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(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; it is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee the future share price.)

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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 a professional as necessary.

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