AeroEdge (7409) FY2026 Q2 Earnings Report

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Executive Summary

This was a quarter of significant earnings growth, driven by higher revenue from the manufacturing business centered on aircraft engine components and high operating leverage. Revenue was ¥2.47B (¥1.69B in the previous year, YoY +46.0%), Operating Income was ¥740M (¥280M in the previous year, YoY +166.0%), Ordinary Income was ¥710M (¥240M in the previous year, YoY +199.6%), and Net Income was ¥490M (¥200M in the previous year, YoY +141.6%). SG&A expenses increased by only ¥10M against a ¥780M increase in revenue, and the Operating Income margin expanded significantly to 29.8% from 16.4% in the same period of the previous year. Q2 progress against the Full-Year forecast was 68.9% for Operating Income and 69.6% for Net Income, substantially exceeding the standard 50%.

Factors Affecting Earnings

【Revenue】Revenue increased 46.0% year on year to ¥2.47B. Although segment information is not disclosed, the expansion in demand for aircraft engine components appears to have been the primary driver. Progress against the Full-Year forecast of ¥5.05B was 49.0%, broadly in line with the standard Q2 progress rate.

【Profit and Loss】The cost-of-sales ratio improved from 53.7% in the previous year (¥909M/¥1,694M) to 49.1% (¥1,214M/¥2,473M), raising the gross margin to 50.9%. SG&A expenses were ¥520M, representing only a modest increase from ¥510M in the previous year and substantially below the rate of revenue growth. As a result, Operating Income was ¥740M (YoY +166.0%) and the Operating Income margin was 29.8% (+1,340pt from 16.4% in the previous year). Ordinary Income was ¥710M, as non-operating income and expenses were largely offset, while Net Income was ¥490M (YoY +141.6%) after recording ¥230M in income taxes and other taxes. Both revenue and earnings increased, with the earnings growth rate substantially exceeding the revenue growth rate due to the improvement in the cost ratio and control of SG&A expenses.

Key Financial Indicators

【Profitability】The Operating Income margin improved significantly to 29.8% from 16.4% in the same period of the previous year, while the Net Income margin also expanded to 19.7% from 11.9%. The difference between the gross margin of 50.9% and the SG&A ratio of 21.1% resulted in the high Operating Income margin.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥2.17B, or 4.45 times Net Income of ¥490M. However, as this includes ¥1.28B in subsidy income, estimated OCF excluding this item was ¥890M, approximately 1.82 times Net Income, indicating sound cash conversion even excluding subsidies.【Investment Efficiency】ROE (annualized) was high at 22.0%, supported by a combination of total asset turnover of 0.5 times and financial leverage of 2.2 times. Capital expenditures of ¥1.25B reached 6.45 times depreciation and amortization expense of ¥190M, indicating that capacity expansion investments are preceding earnings contribution.【Financial Soundness】The Equity Ratio was 45.1% (47.3% in the previous year), while the current ratio was high at 402.9%, indicating limited concern regarding short-term liquidity. Long-term borrowings increased 26.7% year on year to ¥3.98B, reflecting financing for capital expenditures.

Cash Flow Analysis

OCF increased significantly by 342.0% year on year to ¥2.17B, although this includes ¥1.28B in subsidy income; estimated OCF excluding this item was ¥890M. Investing Cash Flow was -¥1.27B, of which ¥1.25B consisted of capital expenditures, indicating that capacity expansion is progressing. Financing Cash Flow was ¥850M, primarily due to ¥1.30B in long-term borrowings, which exceeded repayments of ¥410M. Reported Free Cash Flow was positive at ¥900M, but estimated FCF excluding the receipt of subsidies is expected to be negative. Accordingly, funding capacity during this investment phase is supported not only by operating earnings but also by subsidies and debt financing. The ¥260M increase in accounts receivable was a use of working capital.

Quality of Earnings

Current-period earnings were largely attributable to improved recurring business profitability. The principal temporary factor was a foreign exchange gain of ¥10M included in non-operating income, although its impact on Operating Income was limited. Non-operating income of ¥20M and non-operating expenses of ¥40M were both small, and the difference between Ordinary Income and Net Income was primarily attributable to ¥230M in income taxes and other taxes, resulting in a tax burden factor of approximately 0.68. From an accrual perspective, OCF substantially exceeded Net Income, indicating stronger cash-generation capacity than accounting earnings. However, the primary reason for this difference was ¥1.28B in subsidy income; excluding this item, cash conversion was approximately 1.8 times Net Income. Accounts receivable increased 64.4% year on year, exceeding the rate of revenue growth, and attention should therefore be paid to the timing of revenue recognition and cash collection.

Earnings Forecast and Guidance

The Full-Year company forecast is Revenue of ¥5.05B (YoY +40.2%), Operating Income of ¥1.07B (YoY +63.3%), Ordinary Income of ¥1.01B (YoY +78.7%), and Net Income of ¥700M (YoY -4.7%). Q2 cumulative progress was 49.0% for Revenue, 68.9% for Operating Income, 70.7% for Ordinary Income, and 69.6% for Net Income, with the profit items substantially exceeding the standard 50% progress level. Compared with the H1 actual Operating Income margin of 29.8%, the Full-Year forecast Operating Income margin is approximately 21.2%, implying a planned margin decline of approximately 860pt in the second half. Meanwhile, Net Income is forecast to decline 4.7% YoY, requiring confirmation of the assumptions regarding the tax burden and non-operating items in the second half.

Shareholder Returns

The Q2 dividend was ¥0 per share, and the company’s Full-Year dividend forecast is also ¥0, resulting in a Payout Ratio of 0%. Under the no-dividend policy, Current Net Income of ¥490M was retained in full, and retained earnings increased 23.1% to ¥2.59B. With the company in a capacity expansion phase in which capital expenditures have reached 6.45 times depreciation and amortization, internal funds are being prioritized for capital expenditures and debt management.

Risk Factors

1. Inventory and work-in-process accumulation risk: Work in process of ¥260M accounts for approximately 52.1% of total inventories of ¥490M, a level exceeding general cautionary thresholds. Monitoring is required for potential prolongation of production processes, delays in acceptance inspections, accumulation, and inventory valuation losses.

2. Rising reliance on borrowings: Long-term borrowings increased 26.7% year on year to ¥3.98B. Debt/EBITDA is relatively high based on Q2 cumulative EBITDA, although the level is more moderate when viewed based on annualized EBITDA. Interest coverage is currently high, and concern regarding debt-servicing capacity is limited.

3. Reliance on subsidies for cash flow: OCF of ¥2.17B and FCF of ¥900M include ¥1.28B in subsidy income, and cash-generation capacity would be relatively smaller excluding this item. When assessing recurring cash-generation capacity, metrics excluding subsidies should also be used.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

The company is significantly above the industry median and ranks highly within the industry in terms of profitability.

Growth and Capital Efficiency

The Revenue growth rate also substantially exceeds the industry median, placing the company among the industry leaders in terms of growth.

Source: Compiled by the Company

Key Points from the Earnings Results

1. Revenue increased +46.0%, while Operating Income increased +166.0%, expanding the Operating Income margin to 29.8%, up +1,340pt year on year. The emergence of operating leverage is evident, as the growth in SG&A expenses was substantially below revenue growth.

2. The Operating Income progress rate against the Full-Year forecast is high at 68.9%. However, the Full-Year forecast Operating Income margin (approximately 21.2%) is below the H1 actual margin (29.8%), indicating that the forecast assumes a margin decline in the second half. This is a notable feature identifiable from the earnings data.

3. Capital expenditures of ¥1.25B (6.45 times depreciation and amortization) and a ¥730M increase in construction in progress indicate that capacity expansion investments are being actively accelerated. The timing of the investment commencement and the subsequent maintenance of the gross margin and SG&A ratio will determine the future earnings structure.

Theoretical Share Price (Reference Value)

Sensitivity: ¥438–¥465 for a ±1% change in the cost of equity, and ¥449–¥454 for a ±0.1 change in ω.

Notes:

• Net assets as of the quarter-end are used (there is a timing difference from the Full-Year forecast).
• As net assets include non-controlling interests, the theoretical values may be calculated somewhat higher.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / Mechanically calculated values based solely on publicly disclosed data; these do not constitute forecasts of the market share price or recommendations for any specific investment action, nor do they predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI through analysis of 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 advisor as necessary.

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