SUBARU CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

Although the Company secured revenue growth, this earnings period was characterized by a significant deterioration in operating income due to rising costs and higher SG&A expenses. Revenue increased to ¥12,508.6B (+3.0% YoY), maintaining a growth trend for the third consecutive period, while operating income fell sharply to ¥425.7B (-44.3%). The primary factor was deteriorating profitability in the Automotive segment, as the normalization of pricing and incentive conditions and the stickiness of costs pushed the gross margin down to 14.4% (17.8% in the previous year, -3.4pt). Financial income of ¥230.0B supported profit before tax and net income, and quarterly net income attributable to owners of the parent was ¥491.9B (-10.3% YoY), representing a more limited decline than at the operating income level.

Factors Affecting Earnings

【Revenue】Revenue increased to ¥12,508.6B (+3.0% YoY). The Automotive segment, which accounts for 96.8% of revenue, remained solid at ¥12,109.4B (+2.3%), while Aerospace grew to ¥387.2B (+34.4%); however, its contribution to consolidated revenue remained limited at 3.1%.

【Profit and Loss】Operating income declined significantly to ¥425.7B (-44.3% YoY). The gross profit margin decreased to 14.4% (17.8% in the previous year, -3.4pt), while SG&A expenses increased to ¥1,066.0B (+4.1%), outpacing the +3.0% revenue growth rate and causing operating leverage to turn negative. Financial income of ¥230.0B exceeded financial expenses of ¥41.6B, contributing ¥188.5B on a net basis. As a result, quarterly profit before tax was ¥614.2B (-21.7%), with the decline narrowing relative to operating income, and quarterly net income attributable to owners of the parent was ¥491.9B (-10.3%). The Company recorded higher revenue but lower profit.

Segment Analysis

The Automotive segment recorded revenue of ¥12,109.4B (+2.3% YoY), operating income of ¥401.0B (-45.9%), and an operating margin of 3.3% (6.3% in the previous year), indicating a significant deterioration in profitability and serving as the primary cause of the decline in the consolidated profit margin. The Aerospace segment recorded revenue of ¥387.2B (+34.4%), operating income of ¥6.2B (+82.5%), and a profit margin of 1.6%, representing an improvement; however, its share of consolidated revenue remained limited at 3.1%, resulting in a limited earnings impact. Given the high concentration of the segment mix, the structure whereby Automotive profitability determines consolidated performance remains unchanged.

Key Financial Indicators

【Profitability】The operating margin was 3.4%, down 2.9pt from 6.3% in the previous year, while the net margin, based on net income attributable to owners of the parent, was 3.9%, down 0.6pt from 4.5%. The gross margin was 14.4% (17.8% in the previous year, -3.4pt), while the SG&A ratio rose slightly to 8.5% (8.4% in the previous year, +0.1pt). The deterioration in the gross margin explains most of the decline in profitability.【Cash Quality】Operating Cash Flow (OCF) was ¥555.2B, providing 1.13x coverage of net income of ¥491.9B. However, the OCF-to-EBITDA ratio remained at 0.48x against estimated EBITDA of ¥1,153.9B, including ¥728.2B in depreciation and amortization and other items, indicating relatively low cash conversion efficiency.【Capital Efficiency】ROE was 1.8% (quarterly actual, before annualization), with the decline in the net margin and slower growth in total asset turnover acting as downward factors. Estimated ROIC based on interest-bearing debt and equity was in the low 1% range, indicating limited capital profitability.【Financial Soundness】The Equity Ratio improved slightly to 51.2% (50.6% in the previous year), while cash and cash equivalents remained substantial at ¥9,323.8B. Interest-bearing debt, comprising total debt related to financing of ¥3,645B, was limited to 13.1% of equity, indicating a conservative level of financial leverage.

Cash Flow Analysis

Operating Cash Flow was ¥555.2B, a significant 62.3% decline YoY. Although coverage of net income of ¥491.9B was maintained at 1.13x, the decrease in accounts payable (-¥552.3B) and increase in accounts receivable (-¥151.5B) created headwinds in working capital, offsetting the support from lower income tax payments (-¥75.3B, compared with -¥367.2B in the previous year). Investing Cash Flow was -¥317.5B, including capital expenditures of -¥558.6B, which were reduced from -¥660.2B in the previous year. Trading of securities was a factor affecting fluctuations in investing cash flow. Financing Cash Flow was -¥1,040.4B, primarily due to dividend payments of -¥412.4B and share repurchases of -¥270.4B. As a result, free cash flow was limited to ¥237.8B, below total shareholder returns of ¥682.8B, comprising dividends and share repurchases. Cash and cash equivalents therefore declined from ¥9,323.8B at the beginning of the period to ¥9,323.8B at period-end (actual: ¥932,381 million), indicating that part of the shareholder returns was funded by drawing down cash on hand.

Quality of Earnings

Profit for the current period was substantially supported by non-operating financial income. Net financial income of ¥188.5B, calculated by deducting financial expenses of ¥41.6B from financial income of ¥230.0B, boosted profit before tax of ¥614.2B, resulting in a profit-before-tax-to-EBIT ratio of 1.44x against EBIT of ¥425.7B. Non-operating income, comprising financial income and other income totaling ¥342.8B, represented 2.7% of revenue and remained within a recurring range. No temporary items specifically identified as extraordinary gains or losses were apparent from the disclosures. The fact that OCF of ¥555.2B exceeded net income of ¥491.9B, providing 1.13x coverage, indicates soundness from an accruals perspective. However, working capital changes, including the decrease in accounts payable, reduced the contribution, leaving challenges regarding the recovery capacity of operating income itself.

Earnings Forecast and Guidance

Against the full-year Company plan of revenue of ¥52,000B, operating income of ¥1,500.0B, net income of ¥1,300B, and EPS of ¥179.59, Q1 progress rates were 24.1% for revenue, 28.4% for operating income, and 37.8% for net income. Revenue progress was broadly in line with the simple average of 25%, while net income progress significantly exceeded the average, largely due to the contribution from financial income of ¥230.0B. The full-year operating income plan calls for a substantial 273.9% increase YoY, with improvement in Automotive segment profitability in the second half being a prerequisite for achieving the plan.

Shareholder Returns

The full-year dividend forecast is ¥116.00 per share, implying a payout ratio of approximately 64.6% based on forecast EPS of ¥179.59. Share repurchases during the quarter amounted to ¥270.4B, and total shareholder returns, including dividend payments of ¥412.4B, amounted to ¥682.8B. Quarterly free cash flow was limited to ¥237.8B, resulting in FCF coverage of total shareholder returns of 0.35x and indicating that part of the shareholder returns was funded from cash on hand. Given the financial base of an Equity Ratio of 51.2% and cash of ¥9,323.8B, the Company has secured the ability to continue shareholder returns in the short term; however, monitoring remains necessary in comparison with the level of free cash flow. Neither the dividend forecast nor the share repurchase plan had been revised as of the current quarter.

Risk Factors

1. Business concentration risk: The Automotive segment accounts for 96.8% of revenue, and the decline in its operating margin to 3.3% (6.3% in the previous year) directly resulted in the deterioration of the consolidated profit margin. The business portfolio is concentrated in a single segment, and the profitability trend of that segment determines overall earnings.

2. Profitability deterioration risk: The gross margin declined to 14.4% from 17.8% in the previous year, a decrease of 3.4pt, while the SG&A ratio rose 0.1pt to 8.5%. SG&A expenses increased 4.1%, exceeding revenue growth of +3.0%, causing operating leverage to turn negative. This remains an area for monitoring with respect to cost and pricing conditions.

3. Cash generation and reliance on financial income risk: OCF was limited to ¥555.2B, down 62.3% YoY, with working capital changes, including the decrease in accounts payable (-¥552.3B), acting as a downward factor. In addition, profit before tax benefited substantially from financial income of ¥230.0B, and the sustainability of this income may fluctuate with changes in interest rate and foreign exchange conditions.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net margin are below the industry median, indicating that profitability is inferior to the manufacturing industry average.

Growth and Capital Efficiency

The revenue growth rate is also below the industry median, indicating relatively moderate top-line growth.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The higher-revenue-but-lower-profit structure is clear, with the 3.4pt decline in gross margin and the relative increase in SG&A expenses being the primary causes of the 44.3% decline in operating income. Improvement in Automotive segment profitability will be the key focus going forward.

2. Net income was substantially supported by financial income of ¥230.0B, with profit before tax reaching 1.44x operating income. The high net income progress rate of 37.8% against the full-year plan warrants caution, given the high reliance on non-operating factors.

3. The financial base is solid, with an Equity Ratio of 51.2% and cash of ¥9,323.8B. However, free cash flow of ¥237.8B was below total shareholder returns of ¥682.8B, making normalization of working capital, including accounts payable and accounts receivable, key to restoring cash-generating capacity.

Theoretical Share Price (Reference Value)

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

Sensitivity: ¥3,436–¥3,633 at ±1% for the cost of equity, and ¥3,519–¥3,541 at ±0.1 for ω.

Notes:

• Because net income progress against the full-year forecast (38%) exceeds the standard level (25%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies with progress ahead of schedule tend to outperform forecasts; however, the adjustment may be excessive for businesses with strong seasonality).
• Because 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 time difference relative to the full-year forecast.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee future share 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 responsibility, after consulting with a professional as necessary.

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