NIPPON SHARYO,LTD. FY2027 Q1 Earnings Report

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Executive Summary

The Company posted higher revenue and earnings for the quarter, with Operating Income and Net Income increasing significantly despite only modest revenue growth, driven by an improved gross margin and disciplined selling, general and administrative expenses. Revenue was ¥236.5B (+1.8% YoY), Operating Income was ¥29.2B (+86.0%), Ordinary Income was ¥31.4B (+78.6%), and Net Income was ¥26.6B (+101.2%). The Operating Margin improved to 12.4%, up +5.6pt from 6.8% in the previous year, while the gross margin also improved to 20.8%, up +5.0pt from 15.8%. Progress against the Full-Year plan was 22.1% for Revenue, compared with 33.2% for Operating Income and 35.5% for Net Income, indicating that earnings are ahead of revenue on a progress basis.

Factors Affecting Results

【Revenue】Revenue was ¥236.5B, a modest increase of +1.8% YoY. By segment, the Construction Machinery Business grew to ¥55.9B (23.7% of total, +42.8%) and the Engineering Business increased to ¥12.1B (5.1% of total, +61.0%). Meanwhile, the core Railway Vehicles Business declined to ¥117.8B (49.8% of total, -12.7%) due to shipment timing, while the Transportation Equipment and Steel Structures Business was essentially flat at ¥50.4B (21.3% of total, -0.2%).

【Profit and Loss】Cost of sales decreased by -4.1% YoY to ¥187.4B, expanding Gross Profit to ¥49.1B (gross margin 20.8%, +5.0pt from 15.8% in the previous year). SG&A expenses were essentially flat at ¥19.9B, while the SG&A ratio declined to 8.4% (previous year: 9.1%). Consequently, Operating Income rose substantially to ¥29.2B (Operating Margin 12.4%, +5.6pt from 6.8% in the previous year). Non-operating income and expenses were a net positive of +¥2.2B, mainly reflecting dividend income of ¥2.1B and interest income of ¥0.4B, bringing Ordinary Income to ¥31.4B (Ordinary Income Margin 13.3%). Although the Company recorded an extraordinary loss of ¥0.8B (loss on disposal and sale of fixed assets), the impact was limited, and Net Income doubled from the previous year to ¥26.6B (Net Margin 11.3%, compared with 5.7% in the previous year). Although top-line growth was moderate, significant earnings growth was achieved through operating leverage from improved cost ratios and expense control, resulting in higher revenue and earnings.

Segment Analysis

The Railway Vehicles Business made the largest contribution to Operating Income at ¥18.7B (+108.0% YoY, profit margin 15.9%), followed by the Construction Machinery Business at ¥9.8B (+28.2% YoY, profit margin 17.6%). The Transportation Equipment and Steel Structures Business posted a slight decline in earnings to ¥5.2B (-12.7% YoY, profit margin 10.2%), while the Engineering Business turned profitable, recording ¥0.5B (previous year: -¥0.6B, profit margin 3.8%). Railway Vehicles Business earnings doubled despite lower revenue, apparently reflecting improved project profitability. The gap in profit margins between segments exceeded 14pt, at 17.6% for Construction Machinery versus 3.8% for Engineering, suggesting that project mix has a significant impact on overall profitability.

Key Financial Indicators

【Profitability】The Operating Margin improved to 12.4%, up +5.6pt from 6.8% in the previous year. The Ordinary Income Margin also expanded to 13.3% (previous year: 7.6%), while the Net Margin increased to 11.3% (previous year: 5.7%). ROE remained at 3.2%, as growth in total assets (+0.5% YoY) relative to the pace of earnings growth and low asset turnover constrained improvement in capital efficiency.【Cash Flow Quality】Accounts receivable decreased by -29.8% YoY to ¥235.6B, indicating progress in collections. Meanwhile, work in process stood at ¥310.0B and represented the majority of inventory, reflecting the long production lead times characteristic of the order-based Railway Vehicles and Construction Machinery businesses.【Investment Efficiency】Revenue growth remained moderate relative to total assets of ¥1,533.1B, leaving room for improvement in asset efficiency.【Financial Soundness】The Equity Ratio was 55.1% (+1.2pt from 53.9% in the previous year). With current assets of ¥881.5B versus current liabilities of ¥456.3B, the current ratio was approximately 193%, providing a substantial liquidity buffer. Interest expense was also limited at ¥0.5B against long-term borrowings of ¥136.8B, indicating a stable financial foundation.

Cash Flow Analysis

As the Company did not disclose a cash flow statement for the quarter, funding trends are assessed based on changes in the balance sheet. Cash and deposits decreased by -37.5% to ¥31.8B from ¥50.9B in the same period of the previous year, while accounts receivable declined significantly to ¥235.6B (-29.8% YoY), suggesting progress in collections. On the other hand, short-term loans receivable increased by +110.6% YoY to ¥185.9B, indicating that some of the collected funds may have been allocated to short-term lending activities. Work in process remained elevated at ¥310.0B, and the working capital burden associated with the order-based production of Railway Vehicles and Construction Machinery continues. Interest-bearing debt was broadly unchanged from the previous year, centered on long-term borrowings of ¥136.8B. Together with the high Equity Ratio of 55.1%, this indicates that the Company retains sufficient financial flexibility.

Quality of Earnings

The increase in earnings was primarily attributable to recurring improvements in core business profitability, while the impact of one-time items was limited. An extraordinary loss of ¥0.8B (loss on disposal and sale of fixed assets) was partially offset by extraordinary income of ¥0.0B, resulting in net extraordinary losses of -¥0.8B, equivalent to approximately -2.9% of Net Income. Non-operating income was ¥2.96B (1.3% of Revenue), consisting mainly of stable sources such as dividend income of ¥2.1B and interest income of ¥0.4B, indicating limited dependence on non-recurring income. In the same period of the previous year, a gain on sale of investment securities of ¥2.0B was recorded as extraordinary income. Despite the absence of this one-time gain in the current period, the expansion in core business earnings more than offset its effect and drove higher earnings, indicating an improvement in earnings quality compared with the previous year.

Earnings Forecast and Guidance

Progress against the Full-Year plan was 22.1% for Revenue (¥236.5B/¥1,070.0B), 33.2% for Operating Income (¥29.2B/¥88.0B), and 35.5% for Net Income (¥26.6B/¥75.0B), with earnings progressing ahead of the standard 25% pace. However, the Full-Year plan itself anticipates declines of -24.2% in Operating Income and -22.4% in Ordinary Income, differing in direction from the substantial Q1 increase in Operating Income (+86.0%). Deducting Q1 results from the Full-Year plan suggests that the plan conservatively assumes a decline of approximately 40% YoY in Operating Income over the remaining 3 quarters. No revisions were made to the earnings forecast or dividend forecast during the quarter.

Shareholder Returns

The Company forecasts an annual dividend of 25 yen and plans to increase the dividend from the previous fiscal year's actual annual dividend of 20 yen. Based on forecast EPS of 519.78 yen, the Payout Ratio is approximately 4.8% (25 yen/519.78 yen), which remains conservative. Together with the Company's financial position, including an Equity Ratio of 55.1% and a current ratio of approximately 193%, the Company appears to have substantial capacity to maintain dividend payments. No revision was made to the dividend forecast during the quarter.

Risk Factors

1. Working capital accumulation: Work in process of ¥310.0B accounts for a substantial portion of assets, and the long production lead times associated with the order-based Railway Vehicles and Construction Machinery businesses delay cash conversion. Although accounts receivable decreased by -29.8% YoY and collections are progressing, the high inventory level remains a point of concern from a funding efficiency perspective.

2. Increase in short-term loans receivable: Short-term loans receivable increased to ¥185.9B (+110.6% YoY), with some of the collected accounts receivable and other funds allocated to short-term lending. The collection schedule and transparency regarding the use of funds will be key monitoring points.

3. Profitability disparity between segments and dependence on shipment timing: There is a substantial gap between the 17.6% profit margin in Construction Machinery and the 3.8% margin in Engineering. The core Railway Vehicles Business is also susceptible to shipment and acceptance timing, with revenue declining -12.7% YoY. The Full-Year plan's assumption of lower earnings in the second half also suggests a risk that project progress may not be evenly distributed over time.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Growth and Capital Efficiency

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The improvement in the gross margin to 20.8% (+5.0pt YoY) and the Operating Margin to 12.4% (+5.6pt YoY) was clear. Together with SG&A expense control, the resulting operating leverage was the primary driver of earnings growth.

2. Although progress against the Full-Year plan was 33.2% for Operating Income and 35.5% for Net Income, exceeding the standard 25% pace, the Full-Year plan itself assumes a decline in Operating Income (-24.2%). The shipment and acceptance pace in the second half will therefore determine Full-Year results.

3. Accounts receivable declined by -29.8% YoY, indicating progress in collections. However, the levels of work in process at ¥310.0B and short-term loans receivable at ¥185.9B (+110.6%) make the allocation of funds and working capital management key areas of focus going forward.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly available data using a residual income model (Ohlson-type model with an explicit 5-year fade period). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: 5,707 yen–6,054 yen at ±1% for the cost of equity, and 5,876 yen–5,877 yen at ±0.1 for ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference 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 / interest rate reference month: 2026-06 / This value 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 flash report 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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