ARAYA INDUSTRIAL (7305) FY2026 Q3 Earnings Report

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Executive Summary

Despite a 6.9% decline in revenue, operating income remained virtually flat, highlighting the relative resilience of profitability in these results. Revenue was ¥302.7B (down 6.9% YoY), operating income was ¥13.9B (down 0.8%), ordinary income was ¥17.6B (up 0.8%), and net income was ¥11.5B (down 8.8%). The primary factor was declining demand in the core steel pipe-related business. However, an improvement in the gross margin (20.5%, up +230bp YoY) and high profitability in the real estate and other leasing business supported operating income, while higher SG&A expenses, tax burdens, and extraordinary losses weighed on net income.

Factors Affecting Performance

【Revenue】Revenue was ¥302.7B, down 6.9% YoY, primarily due to declining demand in the core steel pipe-related business (revenue of ¥296.0B, down 7.0% YoY). Real estate and other leasing revenue expanded to ¥5.2B (up 13.1%), while bicycle-related revenue contracted to ¥1.2B (down 34.8%); however, the Company exited this business at the end of December 2025. Steel pipe-related business accounted for 97.8% of total revenue, creating a structure in which the performance of this business significantly affects overall results.

【Profit and Loss】Operating income was ¥13.9B (down 0.8% YoY), with the improvement in gross margin (20.5%, up approximately +230bp YoY) almost offsetting the increase in SG&A expenses (¥48.0B, up 6.6%). Ordinary income was ¥17.6B (up 0.8%), exceeding operating income due to non-operating income including dividend income of ¥3.1B and foreign exchange gains of ¥0.6B. Meanwhile, net income was ¥11.5B (down 8.8%), impacted by extraordinary losses, including loss on disposal of fixed assets of ¥1.1B, as well as an increase in the effective tax rate. Profits were largely maintained despite lower revenue, and the results can be characterized as a decline in revenue accompanied by a slight decline in profit.

Segment Analysis

The steel pipe-related business recorded revenue of ¥296.0B (down 7.0% YoY) and segment profit of ¥9.9B (down 8.3%), with its profit margin declining slightly to 3.3% from 3.4% a year earlier, making it the primary factor behind the Company-wide declines in revenue and profit. Real estate and other leasing recorded revenue of ¥5.2B (up 13.1%) and segment profit of ¥4.5B (up 14.2%), with an exceptionally high profit margin of 86.9%. Although small in scale, it served as a support for overall profit. Bicycle-related revenue was ¥1.2B (down 34.8%), but the business turned slightly profitable from a loss in the previous year. The Company exited import sales in this business at the end of December 2025. The streamlining of low-profitability businesses may contribute to reducing fixed-cost and inventory risks going forward.

Key Financial Indicators

【Profitability】The operating margin was 4.6%, improving from 4.3% in the same period of the previous year. However, the improvement in gross margin to 20.5% (up approximately +230bp YoY) was partially offset by an increase in the SG&A ratio to 15.9% (up approximately +200bp). The net margin was 3.7%, slightly down from 3.8% in the previous year.【Cash Flow Quality】Dividend income of ¥3.1B accounted for the majority of non-operating income of ¥4.5B and was the primary factor behind the gap between ordinary income and operating income (¥17.6B versus ¥13.9B). Extraordinary income and losses resulted in a net loss of ¥0.7B, mainly due to a loss on disposal of fixed assets of ¥1.1B.【Investment Efficiency】ROE (annualized) was 4.6%, while the equity ratio was 58.5%, indicating that profit levels remain relatively low compared with the capital base.【Financial Soundness】The equity ratio of 58.5% declined slightly from 59.8% in the previous year but remained at a high level. Short-term borrowings increased to ¥51.3B (up 37.9% YoY), and long-term borrowings increased to ¥25.9B (up 58.9%), bringing total interest-bearing debt to ¥77.2B.

Cash Flow Analysis

Because individual items in the cash flow statement are not included in the disclosed data, funding trends are analyzed based on changes in the balance sheet. Cash and deposits increased to ¥72.4B from ¥67.0B in the same period of the previous year, while short-term borrowings increased to ¥51.3B (up 37.9% YoY) and long-term borrowings increased to ¥25.9B (up 58.9%). The Company may have met funding needs associated with business expansion and the acquisition of investment securities (¥124.8B, up 34.2%) through borrowings. Goodwill of ¥1.6B was recognized in connection with the consolidation of Miyake Metal Co., Ltd. as a subsidiary, and a portion of the acquisition funding is also believed to have contributed to funding needs. Inventory was ¥68.4B, slightly down from ¥72.4B in the previous year, but inventory levels remain high, leaving room for working-capital reduction.

Earnings Quality

Ordinary income of ¥17.6B exceeded operating income of ¥13.9B by ¥3.7B. The primary factors behind this difference were non-operating income unrelated to the core business, namely dividend income of ¥3.1B and foreign exchange gains of ¥0.6B. Accordingly, attention is required when interpreting the difference from operating income, which reflects the underlying earning power of the business. Extraordinary income of ¥0.5B, including a gain on sale of investment securities of ¥0.3B, was more than offset by extraordinary losses of ¥1.1B, primarily consisting of a loss on disposal of fixed assets, resulting in a net negative impact of ¥0.7B. Comprehensive income was ¥30.7B, substantially exceeding net income of ¥11.5B, mainly due to a ¥21.0B increase in valuation difference on available-for-sale securities. Because this valuation difference depends on fluctuations in the market prices of investment securities, the divergence between net income and comprehensive income can be interpreted as reflecting the impact of asset-price movements rather than the underlying state of operating performance.

Earnings Forecast and Guidance

The full-year Company plan calls for revenue of ¥400.0B (down 6.6% YoY), operating income of ¥18.0B (up 9.7%), and ordinary income of ¥21.0B (up 10.2%). Q3 cumulative progress rates were 75.7% for revenue, 77.2% for operating income, 83.9% for ordinary income, and 74.8% for net income attributable to owners of the parent. Progress at the operating and ordinary income levels is therefore above the standard progress rate of 75%. However, the excess progress for ordinary income includes the contribution of non-operating income such as dividend income, so operating income accumulation should be emphasized when assessing the potential for full-year upside.

Shareholder Returns

The Q2 dividend was ¥100 per share, and the full-year dividend forecast is ¥300 per share. Assuming full-year net income of ¥15.0B and an average number of shares outstanding during the period of 4.767M shares, the projected payout ratio is approximately 95.3%, a high level based on dividends alone. If the full-year earnings plan is not achieved, the payout ratio may rise further. Treasury shares were ¥50.9B (approximately 15.3% of net assets). However, because data on share repurchases during the current period are unavailable, the Total Return Ratio, including share repurchases, is not assessed.

Risk Factors

1. Declining demand in the core business: The steel pipe-related business recorded revenue of ¥296.0B and segment profit of ¥9.9B, down 7.0% and 8.3% YoY, respectively, and the structure in which it determines overall performance remains in place. Steel material prices, demand trends, and the sustainability of price pass-through will be key points of focus.

2. Persistently high inventory levels: Inventory was ¥68.4B, of which finished goods inventory accounted for ¥68.4B. Inventory turnover indicators have remained above general industry levels, warranting attention to the risk of valuation losses if demand slows.

3. Reliance on short-term funding: Short-term borrowings increased to ¥51.3B (up 37.9% YoY), indicating a high degree of reliance on current liabilities within the debt structure. Although short-term payment capacity is secured, with a current ratio of 181.2% and a quick ratio of 139.7%, changes in the funding structure require continued monitoring.

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 relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate is substantially below the industry median, with the Company’s revenue decline standing out even within the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. While the gross margin improved in a declining-revenue environment (20.5%, up approximately +230bp YoY), the SG&A ratio increased to 15.9% (up approximately +200bp), with the two factors almost offsetting each other and maintaining the operating margin at 4.6%. From the perspective of fixed-cost absorption, the effect of operating leverage when revenue recovers will be an area to monitor.

2. The increase in ordinary income (up 0.8% YoY) benefited from non-operating factors such as dividend income of ¥3.1B and foreign exchange gains of ¥0.6B, while operating income alone declined slightly by 0.8% YoY. Operating income trends are a useful reference when assessing the earning power of the core business.

3. The Company exited its low-profitability finished-bicycle import sales business at the end of December 2025 and consolidated Miyake Metal Co., Ltd. as a subsidiary in the steel pipe-related business, recognizing goodwill of ¥1.6B. Business portfolio restructuring and expansion are proceeding in parallel, and the contribution of the acquired business to earnings will be a key point for monitoring structural changes going forward.

Theoretical Share Price (Reference Value)

Sensitivity: ¥5,826–¥6,136 at ±1% for the cost of equity, and ¥5,950–¥5,996 at ±0.1 for ω.

Notes:

• 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 timing difference from 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 solely from publicly disclosed data; this is not a forecast of the market share price or a recommendation of any specific investment action, and does not predict or guarantee future share prices.)

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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. 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 where necessary.

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