KYOKUTO KAIHATSU KOGYO CO.,LTD. FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended March 2026, Revenue was ¥1613.3B (YoY +¥208.8B +14.9%), Operating Income was ¥88.8B (YoY +¥22.2B +33.4%), Ordinary Income was ¥94.8B (YoY +¥25.9B +37.5%), and Net Income attributable to owners of the parent was ¥36.9B (YoY -¥23.3B -36.6%). At the operating level, double-digit top-line growth was achieved driven by sustained demand in the Special-purpose Vehicle Business and recognition of large projects in the Environmental Business. Gross margin improved to 18.5% (YoY +0.9pt) and operating margin to 5.5% (YoY +0.8pt), clearly demonstrating operating leverage. Ordinary Income benefited from ¥9.0B of foreign exchange gains which expanded the increase, while Net Income declined significantly YoY due to ¥57.5B of investment securities sale gains being offset by ¥65.6B of special losses and a high effective tax rate of 57.5%.

Drivers of Performance

• Revenue: Revenue of ¥1613.3B (+14.9%) expanded on two pillars: Special-purpose Vehicle Business ¥1352.7B (+13.9%) and Environmental Business ¥180.8B (+27.4%). The Special-purpose Vehicle Business, supported by firm domestic and overseas demand, saw growth in dump trucks, tailgate lifters, garbage collection vehicles, etc., and as the core segment (83.8% of revenue) drove top-line expansion. The Environmental Business achieved high growth of +27.4% due to recognition of large recycling facility projects and expansion of operation/maintenance contracts, increasing its revenue mix to 11.2%. The Parking Business is relatively small but stable, estimated at ¥80.4B.

• Profitability: Cost of sales was ¥1314.9B (cost of sales ratio 81.5%) yielding gross profit ¥298.4B (gross margin 18.5%, YoY +0.9pt). SG&A was ¥209.6B (SG&A ratio 13.0%, YoY +0.1pt), including goodwill amortization of ¥8.7B, resulting in Operating Income ¥88.8B (operating margin 5.5%, YoY +0.8pt). By segment, Special-purpose Vehicle operating income ¥63.0B (margin 4.7%, +34.7%) and Environmental operating income ¥33.3B (margin 18.4%, +20.3%) lifted consolidated profit, with high profitability in Environmental improving the consolidated mix. Non-operating income was ¥17.2B (including ¥9.0B FX gains and ¥4.9B interest/dividend income) less non-operating expenses ¥11.2B (interest expense ¥5.0B, miscellaneous losses ¥6.2B) produced Ordinary Income ¥94.8B (+37.5%). Special gains ¥57.8B (investment securities sale gains ¥57.5B) and special losses ¥65.6B (investment securities valuation loss ¥2.0B, impairments ¥1.0B, etc.) resulted in net special losses of -¥7.8B. Pre-tax income of ¥87.0B less income taxes ¥50.0B (effective tax rate 57.5%) produced Net Income attributable to owners of the parent ¥36.9B (-36.6%). In conclusion: revenue and operating/ordinary profit increased, but Net Income declined due to net negative special items and a high tax burden.

Segment Analysis

• Special-purpose Vehicle Business: Revenue ¥1352.7B (+13.9%), Operating Income ¥63.0B (+34.7%), operating margin 4.7% with a YoY margin improvement of +1.0pt. Continued demand, price pass-through and mix improvement contributed, and as the core business (71.0% of consolidated operating income) it led revenue and profit growth.
• Environmental Business: Revenue ¥180.8B (+27.4%), Operating Income ¥33.3B (+20.3%), operating margin 18.4%, maintaining high profitability. Recognition of large recycling facility projects and the stock-like nature of operation/maintenance contracts contributed to sales and profit growth. It has grown to represent 37.5% of consolidated operating income, and its high absolute margin (18.4%) contributed to consolidated gross margin improvement.
• Parking Business: Estimated Revenue ¥80.4B (+6.2%), Operating Income ¥9.7B (+13.9%), operating margin 11.2% and remained stable.
• The margin gap between segments (Environmental 18.4% vs Special-purpose Vehicle 4.7%) is approximately 13.7pt, so expansion of the Environmental Business share is key to improving consolidated margins.

Key Financial Metrics

• Profitability: Operating margin 5.5% (up +0.8pt from 4.7%), gross margin 18.5% (up +0.9pt) demonstrating operating leverage, with Environmental Business high profitability (18.4%) improving the consolidated mix. ROE 3.2% (down from 5.0%) was mainly driven by a decline in net profit margin to 2.3% (from 3.1%); the high effective tax rate of 57.5% and net negative special items suppressed capital efficiency. ROIC 3.4% (Operating Income ¥88.8B ÷ Invested Capital ¥2,604B) remains low, and invested capital turnover 0.62x indicates large room to improve capital efficiency.
• Cash Quality: Operating Cash Flow (OCF) ¥33.7B versus Net Income ¥36.9B gives OCF/Net Income 0.91x; cash conversion (OCF/EBITDA) is 0.25x, indicating weakness; increases in working capital—accounts receivable -¥33.7B and inventories -¥30.6B—delayed cash conversion. Accrual ratio 0.2% (accrual ¥0.6B vs Net Income ¥36.9B) is limited.
• Investment Efficiency: Total asset turnover 0.79x (Revenue ¥1,613B ÷ average total assets ¥2,042B), fixed asset turnover 2.4x, indicating relatively low capital intensity. Order backlog ¥43.5B (contract assets) is 2.7% of revenue, typical for manufacturing.
• Financial Soundness: Equity Ratio 56.5% (down -5.3pt from 61.8%), current ratio 209% remains stable. Interest-bearing debt ¥386.2B (short-term borrowings ¥112.9B, long-term borrowings ¥273.2B, bonds ¥28.0B) yields Debt/EBITDA 2.81x and interest coverage (EBITDA/interest expense) 27.6x, indicating high interest resilience. Debt/Equity 0.34x is conservative, though long-term borrowings increased by ¥196.9B YoY, somewhat raising leverage.

Cash Flow Analysis

• Operating CF was ¥33.7B (down -35.4% from ¥52.2B prior year). Operating CF subtotal ¥74.8B less working capital increases (accounts receivable -¥33.7B, inventories -¥30.6B, trade payables +¥1.7B) and corporate tax payments -¥37.4B resulted in the OCF. With revenue expansion, DSO was 67 days and inventory increases (finished goods ¥35.2B, work-in-progress ¥166.8B, raw materials ¥118.9B totaling ¥320.9B, YoY +¥10.5B) absorbed cash, leaving cash conversion at 0.25x.
• Investing CF was -¥72.9B, driven by tangible fixed asset acquisitions -¥141.8B and investment securities acquisitions -¥0.66B, partially offset by proceeds from sales ¥72.8B.
• FCF (Operating CF + Investing CF) was -¥39.2B, i.e., negative, with aggressive capital expenditures and working capital increases absorbing cash.
• Financing CF was +¥65.5B, reflecting long-term borrowings raised ¥200.0B, repayment of short-term borrowings -¥79.2B, and dividend payments -¥58.8B, producing a net positive. Long-term borrowing funded investments and dividends.
• FCF-to-dividend coverage was -0.70x (FCF -¥39.2B ÷ dividends ¥58.8B), indicating dividends exceeded free cash flow and shareholder returns were funded with borrowings.

Quality of Earnings

• Recurring earnings: Gross profit ¥298.4B and Operating Income ¥88.8B; non-operating income ¥17.2B (1.1% of Revenue) mainly from FX gains ¥9.0B and interest/dividends ¥4.9B, showing some recurrence.
• Special items: Net special losses -¥7.8B (special gains ¥57.8B, special losses ¥65.6B), where one-off investment securities sale gains ¥57.5B were offset by valuation losses ¥2.0B and impairments ¥1.0B, reducing Net Income by about 21%. Effective tax rate 57.5% was influenced by taxation on sale and FX gains and non-deductibility of valuation losses; this is not deemed structural and is expected to normalize to around 40% in future periods.
• Accrual quality: OCF/Net Income 0.91x and accrual ratio 0.2% are acceptable, but weak OCF/EBITDA 0.25x is due to working capital buildup. DSO 67 days (>60 days) and high WIP ratio 52% (WIP ¥166.8B ÷ total inventory ¥320.9B) indicate production/installation-stage bottlenecks delaying cash conversion.
• Sustainable earnings: Operating-level improvements (Operating margin +0.8pt) underpin sustainability, but non-operating and special contributions are transitory. Tax rate normalization and working capital efficiency are prerequisites for stabilizing earnings quality.

Forecasts & Guidance

Full-year guidance: Revenue ¥1,800.0B (YoY +11.6%), Operating Income ¥85.0B (YoY -4.3%), Ordinary Income ¥79.0B (YoY -16.6%), Net Income attributable to owners of the parent ¥50.0B (YoY +35.5%), EPS ¥129.85. Revenue is expected to continue growing, but the plan is conservative on operating profit, assuming an operating margin decline to 4.7% (from actual 5.5%, -0.8pt) to factor in possible upside in raw material and labor costs, start-up costs, and continued working capital burdens. The larger decline in Ordinary Income reflects conservative FX assumptions and changes in assumed financial income/expenses. Net Income is expected to increase as special items normalize and tax rates stabilize. Progress toward the full-year target stands at: Revenue 89.6%, Operating Income 104.5%, Ordinary Income 120.0%, Net Income 73.9% — indicating the company is ahead on operating and ordinary profit pace, but Net Income lags due to volatility in special items and tax rates. Achieving guidance assumes a slowdown in the second half at the operating level (equivalent to Revenue ¥186.7B and Operating Income -¥3.8B) and a substantial recovery in Net Income in H2 (approx. ¥13.1B). Tax rate normalization and working capital conversion are key to meeting guidance.

Shareholder Returns

Annual dividend is ¥140 (interim ¥70, year-end ¥70), with a payout ratio of 152.2% (total dividends ¥58.8B ÷ Net Income ¥36.9B), substantially exceeding Net Income. FCF coverage is -0.70x (FCF -¥39.2B ÷ dividends ¥58.8B), indicating dividends exceeded cash generation and were supplemented by borrowings. The dividend policy appears to aim for a balance between profit-linked and stable dividends, but current-period returns exceeded Net Income and cash generation, reducing sustainability. Next-year guidance plans to reduce dividends to ¥60 (implying a payout ratio of approximately 46% on EPS ¥129.85), signaling an intent to restore payouts to levels consistent with cash flow. Sustainability going forward depends on recovery of FCF generation (working capital efficiency and realization of returns from capital expenditures), and balancing dividend stability with growth investment will be a key issue.

Risk Factors

1. Working Capital Expansion Risk: DSO 67 days and inventories ¥320.9B (YoY +¥10.5B) have reduced cash conversion (OCF/EBITDA 0.25x), increasing cash tie-up and interest costs. A high WIP ratio of 52% indicates elongated production/installation processes, carrying risks of delivery delays and additional costs. If collection of receivables and inventory reduction lag, continued FCF deficits and increased reliance on borrowings may result.

2. Rising Leverage and Interest Risk: Interest-bearing debt ¥386.2B (YoY +¥118.8B) increased leverage with Debt/EBITDA 2.81x as CapEx and M&A were financed by long-term borrowings. Interest expense rose to ¥5.0B (from ¥1.8B prior year, +176.4%), increasing interest burden. Further rate hikes or additional investments could push Debt/EBITDA above 3.0x and raise interest burden relative to OCF, reducing financial flexibility.

3. Volatility of Non-recurring Items & Tax Rate Risk: This period’s net special losses -¥7.8B (sale gains ¥57.5B, valuation losses/impairments ¥65.6B) and effective tax rate 57.5% materially depressed Net Income, resulting in ROE 3.2% and muted capital efficiency. Recurrence of investment securities valuation losses or impairments and sustained high tax rates would enlarge Net Income volatility and undermine dividend capacity and ROE stability.

Industry Benchmark (Reference — Company Estimates)

Profitability & Returns

Operating margin is 2.2pt below the industry median 7.8%, and Net Profit Margin is 1.4pt below the median 5.2%. While operating-level trends are improving, high tax rates and special items compress Net Profit Margin, placing the company in the lower-middle of the industry.

Growth & Capital Efficiency

Revenue growth 14.9% outpaces the industry median 3.7% by 11.2pt, demonstrating top-tier growth driven by double-digit expansion in the Special-purpose Vehicle and Environmental businesses.

※ Source: Company compilation

Key Items to Watch in the Earnings

1. Continued operating improvement and Environmental business mix effects: The improvement trend in operating margin 5.5% (YoY +0.8pt) and gross margin 18.5% (YoY +0.9pt) was realized through sustained demand in Special-purpose Vehicles, price pass-through and maintenance of high profitability in the Environmental Business (18.4% margin). The increase of the Environmental Business share to 11.2% of revenue and its 37.5% contribution to operating income are structural drivers of mix improvement; backlog digestion and expansion of stock-like revenues (operation/maintenance) could further support consolidated margin expansion. If working capital efficiency (DSO/DIO reduction) and realization of returns on CapEx proceed, operating-level improvements could translate into cash generation and improved capital efficiency.

2. Recovery in cash flow quality and confirmation of dividend sustainability: FCF -¥39.2B (Operating CF ¥33.7B, Investing CF -¥72.9B) and working capital accumulation (accounts receivable -¥33.7B, inventories -¥30.6B) resulted in weak cash conversion 0.25x, and dividends ¥58.8B were funded by borrowings. Next-year dividend reduction to ¥60 (payout ratio approx. 46%) is aimed at restoring payouts to within cash generation. Going forward, recovery of FCF via improved receivables/inventory collection and smoothing of investment pace is a prerequisite for dividend sustainability and leverage management; progress reducing Debt/EBITDA from 2.81x and improving Operating CF/EBITDA to >0.5x are key items to watch.

3. Tax rate normalization and stabilization of Net Income quality: Effective tax rate 57.5% and net special losses -¥7.8B depressed Net Income to ¥36.9B (-36.6%) and ROE to 3.2%. Next-year guidance assumes Net Income ¥50.0B (+35.5%), premised on tax rate normalization (back toward ~40%) and normalization of special items. The risk of recurring investment securities valuation losses/impairments and tax volatility are central to Net Income quality and ROE improvement; maintaining Ordinary Income baseline strength at ¥94.8B while reducing volatility from non-recurring items is important for stabilizing earnings quality.

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This report is an AI-generated earnings analysis based on XBRL financial statement data. It is not a recommendation to invest in any specific security. Industry benchmarks are reference information compiled by the company from public financial statements. Investment decisions are your responsibility; please consult a professional advisor as needed.