Zenken (7371) FY2026 Q2 Earnings Report

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Executive Summary

The quarter concluded with higher profits despite no revenue growth, with improved profitability as the primary focus of the earnings results. Revenue was ¥27.2B (down -0.8% year on year), remaining virtually flat, while Operating Income was ¥2.0B (up +34.6%), Ordinary Income was ¥2.4B (up +40.9%), and Net Income was ¥2.0B (up +19.5%), with all three profit figures increasing. The main driver of the profit growth was an improvement in the gross profit margin resulting from lower cost of sales. A key feature was the improvement in profitability despite stagnant top-line growth.

Factors Affecting Performance

【Revenue】Revenue was ¥27.2B, essentially flat at -0.8% year on year. By segment, Marketing was the largest at ¥17.4B (64.0% of total), followed by OverseasHumanResources at ¥7.5B (27.6%) and RealEstate at ¥2.3B (8.5%). Although total revenue declined slightly, the breakdown of increases and decreases by segment cannot be identified from the disclosed information.

【Profit and Loss】Gross profit was ¥16.4B, with a gross profit margin of 60.2%, an improvement year on year. The primary factor was the reduction in cost of sales to ¥10.8B (¥12.1B in the prior year). Selling, general and administrative expenses increased by +3.7% year on year to ¥14.4B, but the benefit of the gross profit improvement exceeded this increase, resulting in Operating Income rising to ¥2.0B (+34.6%). The RealEstate segment had a notably high segment profit margin of 72.7%, while Marketing was 20.5% and OverseasHumanResources remained at 8.2%. Ordinary Income reached ¥2.4B (+40.9%), partly due to ¥0.4B in non-operating income. The prior year included ¥0.6B in extraordinary income, whereas the current period had virtually no extraordinary gains or losses. Consequently, Net Income growth (+19.5%) was somewhat slower than Ordinary Income growth (+40.9%). Overall, the results represent lower revenue and higher profits.

Segment Analysis

The Marketing segment was the earnings pillar, generating revenue of ¥17.4B and Operating Income of ¥3.6B, and made the largest contribution to consolidated Operating Income. Although RealEstate was small in scale, with revenue of ¥2.3B, it had an extremely profitable structure, with an Operating Income margin of 72.7%, making a significant contribution in terms of profitability. OverseasHumanResources had a certain scale, with revenue of ¥7.5B, but its profit margin remained at 8.2%, leaving its profitability inferior to that of the other segments.

Key Financial Indicators

【Profitability】The Operating Income margin improved to 7.4% (5.5% in the prior year), while the gross profit margin remained high at 60.2%. Annualized ROE remained at 3.1%, with the low asset turnover ratio weighing on capital efficiency.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥2.8B, exceeding Net Income of ¥2.0B, and the OCF/Net Income ratio was approximately 1.4x, indicating good cash conversion of earnings.【Investment Efficiency】Capital expenditures of ¥0.1B were below depreciation and amortization of ¥0.4B. The restrained level of renewal investment should be noted as a potential risk of future equipment aging.【Financial Soundness】The Equity Ratio was extremely high at 85.3%. Against cash and deposits of ¥45.1B, long-term borrowings were only ¥3.8B, indicating a conservative and stable financial foundation.

Cash Flow Analysis

OCF was ¥2.8B, a slight decrease of -10.3% year on year, but remained above Net Income of ¥2.0B, indicating good cash conversion of earnings. Investing Cash Flow was positive at ¥1.5B, apparently because cash recoveries, including the collection of loans receivable, exceeded capital expenditures of ¥0.1B. Financing Cash Flow was -¥2.3B, primarily due to dividend payments and other factors. As a result, free cash flow (OCF + Investing Cash Flow) was ¥4.3B, and cash and deposits increased from the prior year to ¥45.1B. The fact that capital expenditures remained below depreciation and amortization of ¥0.4B suggests restrained renewal investment.

Quality of Earnings

Non-operating income for the current period was ¥0.4B, primarily consisting of recurring income such as interest and dividend income, while virtually no non-operating expenses were incurred. Extraordinary gains and losses were virtually zero in the current period, compared with extraordinary income of ¥0.6B in the prior year. The divergence between Ordinary Income growth of +40.9% and Net Income growth of +19.5% resulted from the reversal of this temporary factor. Inventories increased +46.7% year on year (¥0.7B→¥1.0B), acting as a factor depressing cash flow. However, OCF remained above Net Income, and from an accruals perspective, the quality of earnings can be assessed as generally sound.

Earnings Forecast and Guidance

The full-year earnings forecast calls for Revenue of ¥58.0B (+4.8% year on year), Operating Income of ¥5.0B (+29.4%), and Ordinary Income of ¥4.9B (+22.4%). The Q1 results (Revenue of ¥27.2B and Operating Income of ¥2.0B) represent progress rates of approximately 46.9% and approximately 40.2%, respectively, against the full-year forecasts. The plan appears to be weighted toward the second half, with both revenue and profit expected to be concentrated in the latter half. The planned return to revenue and profit growth is consistent with the current period’s profit-growth trend.

Shareholder Returns

According to the company’s forecast, annual dividends of ¥26.00 are planned, resulting in a Payout Ratio of approximately 91.6% against forecast EPS of ¥28.39. Based on the current-period results, the Payout Ratio calculated from interim Net Income is approximately 81.8%, a high level, against dividends per share of ¥13.00. No share repurchases have been disclosed, and shareholder returns are centered on dividends. Given cash and deposits of ¥45.1B and the level of free cash flow, funding for dividends appears secure for the time being. However, the high Payout Ratio should be monitored in terms of sensitivity to future earnings fluctuations.

Risk Factors

1. Low capital efficiency: Annualized ROE remains at 3.1%. The high Equity Ratio of 85.3%, with total assets of ¥146.6B and net assets of ¥125.1B, creates a structure in which asset turnover is depressed.

2. Increase in inventories: Inventories increased +46.7% year on year (¥0.7B→¥1.0B), requiring continued monitoring from the perspectives of demand trends and inventory valuation.

3. Restrained capital expenditures: Capital expenditures of ¥0.1B were below depreciation and amortization of ¥0.4B, and delays in renewal investment could affect medium- to long-term competitiveness.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Profitability is below the industry median and is relatively low within the industry.

Growth and Capital Efficiency

Revenue growth is substantially below the industry median, placing the company among the slower-growth companies in the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The improvement in the Operating Income margin year on year despite flat Revenue indicates improved profitability resulting from cost control and changes in the business mix. The key point to monitor going forward is whether the company transitions to growth accompanied by revenue expansion.

2. ROE of 3.1% also reflects the conservative capital structure represented by an Equity Ratio of 85.3%. The trade-off between high financial soundness and capital efficiency is evident in the earnings figures.

3. The sharp increase in inventories and restrained capital expenditures are both changes that can be identified from the cash flow statement. Inventory trends and the timing of resumed investment will be areas of focus in future earnings results.

Theoretical Share Price (Reference Value)

Sensitivity: ¥800–¥844 at Cost of Equity ±1%, and ¥816–¥825 at ω±0.1.

Notes:

• Because forecast ROE is below the Cost of Equity, the theoretical value will be 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 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 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 professionals as necessary.

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