SEIKA CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥51.84B
• Operating Income: ¥3.26B
• Net Income: ¥3.15B
• EPS: ¥86.71

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Segment Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

Verdict: Solid topline growth with resilient operating profit, but margin compression below the ordinary line and weak cash conversion led to a sharp decline in bottom-line YoY. Revenue rose 16.4% YoY to 518.35, underpinned by strong order execution in core trading businesses, while operating income increased 11.7% YoY to 32.64. Gross profit reached 128.93, implying a gross margin of 24.9%, consistent with a value-added trading/machinery solution mix. Operating margin stood at 6.3% (32.64/518.35), up in absolute yen but down versus revenue growth pace. Ordinary income was 37.60 (-11.8% YoY), indicating headwinds below the operating line as prior-year non-operating gains were stronger than this quarter's 5.11 of non-operating income. Net income fell 37.9% YoY to 31.22 despite profit before tax of 48.50, suggesting a tougher comparison due to prior-year one-offs and a higher effective tax rate of 34.9%. Operating margin compressed by approximately 26 bps YoY (from ~6.56% to 6.30%) as operating profit grew slower than sales. Ordinary margin compressed by about 233 bps YoY (from ~9.58% to 7.25%). Net margin compressed significantly by roughly 527 bps YoY (from ~11.29% to 6.02%), underscoring the absence of prior-year extraordinary tailwinds. Earnings quality is weak this period: operating cash flow was -8.83 against positive net income of 31.22, producing an OCF/NI ratio of -0.28x. Working capital intensity appears elevated with accounts receivable at 475.95 and inventories at 91.20, contributing to negative OCF. Liquidity remains sound (current ratio 142.2%, quick ratio 128.5%), and interest burden is negligible (interest expense 0.02, coverage 1,632x). Balance sheet strength is moderate with an equity ratio around 40.7% (495.60/1,218.88) and minimal interest-bearing debt; liabilities are mainly trade payables (390.39). ROE is 6.3% via DuPont (net margin 6.0% × asset turnover 0.425 × leverage 2.46x), and ROIC is 5.9%, below the 7–8% target range typical for trading companies. Non-operating income contributed 16.4% relative to operating income, a modest dependence that helps but cannot offset the tougher YoY base. Forward-looking, sustaining double-digit revenue growth with improved working capital discipline will be key to restoring cash conversion, while achieving ROIC >7% will require either better margin mix or faster asset turns.

Profitability Analysis

ROE decomposition (DuPont): ROE 6.3% = Net Profit Margin 6.0% × Asset Turnover 0.425 × Financial Leverage 2.46x. The largest change driver YoY is the net profit margin, which compressed by roughly 527 bps as bottom-line fell 37.9% despite higher sales, reflecting weaker non-operating/extraordinary support and a higher effective tax burden. Operating margin edged down about 26 bps (OI +11.7% vs revenue +16.4%), indicating slight negative operating leverage from SG&A growth near or above gross profit gains. Ordinary margin contracted ~233 bps as non-operating gains were insufficient versus a strong prior-year base. Business reasons: (1) less tailwind from non-operating items versus last year; (2) mix or pricing pressure limiting operating margin expansion; (3) higher tax rate at 34.9%. Sustainability: Operating profitability appears resilient but near-term margin expansion may be constrained without mix upgrades or SG&A discipline; the sharp net margin decline looks partially one-time due to prior-year extraordinary/non-operating effects. Watch for SG&A growth relative to revenue—current SG&A is 96.29 against gross profit of 128.93 (SG&A ratio ~18.6% to sales), leaving a relatively thin operating spread that is sensitive to volume and mix.

Growth Assessment

Topline growth of 16.4% (to 518.35) shows healthy demand and execution in core trading/machinery businesses. Operating income grew 11.7% to 32.64, lagging revenue growth, implying limited operating leverage in the period. Ordinary income fell 11.8% YoY to 37.60 due to lighter non-operating contributions versus a strong prior-year base. Net income dropped 37.9% to 31.22, reflecting the absence of prior extraordinary support and a higher tax rate. Revenue quality appears volume-driven with modest margin pressure; sustainability hinges on backlog conversion and project timing, given the high accounts receivable and inventory balances. The non-operating income ratio of 16.4% indicates some reliance on non-core items, but the profit base remains primarily operating. Outlook: To sustain growth, the company needs continued order intake and improved gross-to-operating conversion; focus areas include pricing power in machinery/solutions and tighter SG&A control. Achieving ROIC above 7% will require either better asset turnover (faster collections, lower WIP/inventory) or margin accretion from higher-value solutions.

Financial Health

Liquidity is adequate: current ratio 142.2% and quick ratio 128.5%, both above minimum safety thresholds. No warning on leverage: although the reported D/E ratio (total liabilities/equity) is 1.46x, interest-bearing debt is de minimis (short-term loans 0.12 and long-term loans 0.15), and interest coverage is 1,632x. Equity ratio is approximately 40.7% (495.60/1,218.88), indicating a balanced capital structure for a trading business. Maturity mismatch risk is moderate: current liabilities of 666.67 are dominated by accounts payable (390.39); current assets of 948.20 (including cash 134.01 and receivables 475.95) cover short-term obligations, but cash conversion depends on collecting receivables promptly. Off-balance sheet obligations are not disclosed in the provided data. No explicit covenant risks are apparent from the minimal interest-bearing debt.

Cash Flow Quality

Earnings quality is weak this period: OCF/Net Income = -0.28x (threshold <0.8 is concerning), driven likely by working capital outflows (high receivables/inventories vs payables). With capex of 3.86 and OCF of -8.83, implied free cash flow is approximately -12.69, insufficient to fund dividends or buybacks organically in the period. Financing cash flow was -17.69, reflecting shareholder returns (dividends not disclosed) and minor buybacks (-0.02), suggesting cash was drawn down to fund both WC and returns. No signs of aggressive working capital manipulation are explicit, but the scale of receivables (475.95) relative to sales implies sensitivity to customer payment timing; monitor DSO and inventory turns. Sustained negative OCF would challenge dividend coverage and constrain growth investments absent portfolio rebalancing or working capital normalization.

Dividend Sustainability

Reported annual DPS is unreported; however, the calculated payout ratio is shown at 260.5%, which, if reflective of policy or interim payments, would not be covered by earnings or cash flow this period. With implied FCF around -12.69, FCF coverage of dividends is likely weak in the half year. Given ROE of 6.3% and ROIC of 5.9%, maintaining high payout would risk underfunding growth or balance sheet resilience if cash conversion remains negative. Policy outlook: Expect management to balance shareholder returns with the need to restore OCF; normalization of working capital is a prerequisite for sustainable payouts. Absent explicit guidance, treat the current payout metric as provisional and sensitive to full-year results and WC trends.

Risk Assessment

Business Risks:

• Project timing and backlog conversion risk affecting quarterly revenue and margins
• Pricing/mix pressure in machinery and solutions limiting operating leverage
• Dependence on customer payment timing given large receivables

Financial Risks:

• Negative OCF versus positive earnings (OCF/NI -0.28x) indicating cash conversion risk
• Working capital build (high AR and inventories) creating liquidity drag
• Potential dividend coverage shortfall if FCF remains negative

Key Concerns:

• Material YoY compression at net level due to weaker non-operating/one-off support
• ROIC at 5.9% below the 7–8% benchmark for trading companies
• Tax rate at 34.9% dampening net profitability

Investment Implications

Key Takeaways:

• Strong revenue growth (+16.4%) with modest operating margin compression (~26 bps)
• Ordinary and net margins compressed significantly due to weaker non-operating/extraordinary effects and higher taxes
• OCF negative despite positive earnings; cash conversion is the primary short-term overhang
• Balance sheet resilient with low interest-bearing debt and ~41% equity ratio
• ROIC at 5.9% below management-type targets implies need for better asset turns or margin mix

Metrics to Watch:

• DSO/working capital turns and OCF recovery in H2
• Operating margin progression vs SG&A discipline
• Ordinary income composition (recurring vs one-offs in non-operating/extraordinary)
• ROIC trajectory toward >7%
• Dividend announcements vs FCF coverage

Relative Positioning: Within Japanese mid-cap trading-oriented machinery firms, the company shows healthy topline momentum and conservative financial risk (minimal interest-bearing debt) but trails peers that consistently deliver ROIC >7% and positive cash conversion; improving working capital efficiency is the key differentiator needed to close the gap.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
• Not Investment Advice: This analysis is for general informational purposes only and does not constitute investment advice under applicable securities laws. It is not a recommendation to buy or sell any specific securities
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