SATO SHO-JI CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

This was a period in which operating income and ordinary income increased on higher revenue, driven by improved profitability in the newly established Overseas Group Business, while net income declined due to the reversal of special gains and losses. Revenue increased to ¥78.13B (+11.1% YoY), operating income to ¥2.04B (+28.6%), and ordinary income to ¥2.33B (+24.5%), while net income attributable to owners of the parent remained at ¥1.58B (-8.7%). The primary drivers of the increase in income were growth in the Overseas Group Business and control of the SG&A ratio, while the primary factors behind the decline in net income were the reversal of special gains recorded in the previous year, including gains on sales of investment securities, and special losses recorded in the current period, including losses on disposal and sale of fixed assets.

Factors Affecting Business Performance

【Revenue】The Overseas Group Business (revenue of ¥14.97B, +46.2%) and Non-Ferrous Metals (¥9.54B, +42.6%) drove company-wide revenue growth. The largest segment, the Steel Business, accounted for 56.6% of the revenue mix, but was virtually flat at ¥46.73B, down -1.3% YoY. Electronic Materials also grew (¥6.95B, +22.5%), while the Sales Development Business declined (¥0.99B, -5.3%).

【Profit and Loss】Operating income was ¥2.04B (+28.6%), and the operating margin improved to 2.6% from 2.3% in the previous year, an improvement of +0.4pt. Although the gross margin remained low at 8.3%, controlling the SG&A ratio at 5.7% contributed to the improvement in profitability. Non-operating income of ¥0.48B, including ¥0.35B in dividend income, exceeded non-operating expenses of ¥0.19B, resulting in ordinary income of ¥2.33B (+24.5%). However, the Company recorded special losses of ¥0.09B, including losses on disposal and sale of fixed assets. In addition, due to the reversal of special gains of ¥0.54B recorded in the previous year, including gains on sales of investment securities, profit before tax declined to ¥2.24B (-7.0%), while net income attributable to owners of the parent decreased to ¥1.58B (-8.7%). Thus, revenue and income increased at the operating and ordinary income levels, while revenue increased but net income declined due to special gains and losses at the bottom-line level.

Segment Analysis

The newly established Overseas Group Business recorded revenue of ¥14.97B (+46.2%), operating income of ¥0.83B (+148.7%), and a 5.6% margin, posting the highest income growth rate among all segments and becoming the primary driver of company-wide income growth. The largest segment, the Steel Business, recorded revenue of ¥46.73B (56.6% of the revenue mix, -1.3%), operating income of ¥0.79B (-1.6%), and a 1.7% margin, indicating continued low margins. Non-Ferrous Metals recorded revenue of ¥9.54B (+42.6%), operating income of ¥0.08B (+53.1%), and a 0.8% margin. Electronic Materials recorded revenue of ¥6.95B (+22.5%), but operating income declined by -14.2% to ¥0.23B, resulting in a lower margin of 3.3%. LIFE Sales (¥2.61B, +13.4%, 4.1% margin), Sales Development (¥0.99B, -5.3%, 3.1% margin), and Machinery and Mechatronics (¥0.83B, +4.8%, operating loss of -¥0.03B) narrowed their losses. Segment margins ranked as follows: Overseas Group > Electronic Materials > LIFE Sales > Sales Development > Steel > Non-Ferrous Metals. The structure in which the low-margin Steel Business, which is large in scale, weighs on the company-wide margin therefore remains in place.

Key Financial Indicators

【Profitability】The operating margin improved to 2.6% from 2.3% in the previous year, an improvement of +0.4pt, while the net margin declined to 2.0% from 2.5%, a decrease of -0.4pt. ROE was 2.0%.【Cash Flow Quality】Cash and deposits stood at ¥5.41B, down from ¥5.98B at the end of the previous fiscal year, while operating working capital items remained elevated, with accounts receivable and notes receivable totaling ¥59.26B and inventories at ¥31.35B.【Investment Efficiency】Total asset turnover was 0.43x and financial leverage was 2.32x, indicating that ROE is constrained by the low net margin and low asset turnover.【Financial Soundness】The equity ratio was 43.0%, the current ratio was 133.3%, and the quick ratio was 101.1%. Of interest-bearing debt totaling ¥31.67B, short-term borrowings accounted for ¥31.13B, or 98.3%, and interest coverage was approximately 14.1x.

Cash Flow Analysis

Because cash flow statement items have not been disclosed, fund movements are assessed based on changes in balance sheet items. Cash and deposits were ¥5.41B, a decrease of ¥0.56B from ¥5.98B at the end of the previous fiscal year. Interest-bearing debt totaled ¥31.67B, a reduction of ¥4.83B from ¥36.50B at the end of the previous fiscal year. Long-term borrowings declined significantly to ¥0.54B from ¥1.31B in the previous period, a reduction of -58.3%, while short-term borrowings decreased to ¥31.13B from ¥35.19B, down -11.6%. Inventories increased to ¥31.35B from ¥30.18B, up +3.9%, while accounts payable increased to ¥52.78B from ¥49.37B, up +6.9%, indicating that the increase in trade payables absorbed part of the working capital burden. Retained earnings increased to ¥61.93B from ¥61.26B, up +1.1%, confirming the retention of current-period earnings. Overall, cash on hand declined slightly while interest-bearing debt was reduced, making working capital management, in light of inventory and trade receivables levels, a key factor in capital efficiency.

Quality of Earnings

Recurring earnings power was generated by operating income of ¥2.04B and non-operating income of ¥0.48B, including dividend income of ¥0.35B. Non-operating income was limited to 0.6% of revenue, indicating that the majority of earnings originated from the core business. As for temporary factors, the Company recorded special losses of ¥0.09B, including losses on disposal and sale of fixed assets, while the same period of the previous year included special gains of ¥0.54B, primarily gains on sales of investment securities. This reversal was the main cause of the year-on-year declines in profit before tax and net income. The gap between ordinary income of ¥2.33B and net income attributable to owners of the parent of ¥1.58B was primarily attributable to special gains and losses and income taxes of ¥0.66B. Excluding the impact of special gains and losses, the core business remained on an earnings growth trend. However, accounts receivable and notes receivable of ¥59.26B and inventories of ¥31.35B indicate elevated working capital balances, creating a potential timing gap between earnings recognition and cash collection, which should be considered when evaluating earnings quality.

Earnings Forecast and Guidance

As of Q1, the full-year progress rates were 24.0% for revenue (forecast of ¥325.00B), 19.8% for operating income (forecast of ¥10.30B), 22.2% for ordinary income (forecast of ¥10.50B), and 19.5% for net income attributable to owners of the parent (forecast of ¥8.10B). Compared with the simple progress benchmark of 25%, revenue was broadly on track, while all income metrics were below the benchmark, with delays particularly evident in operating income and net income. The delay in net income was primarily due to the temporary downward impact of the recognition of special losses, while progress at the operating and ordinary income levels was relatively solid. It has been confirmed that the Company revised its earnings forecast and dividend forecast during the current quarter, updating the assumptions underlying its full-year outlook.

Shareholder Returns

The full-year dividend forecast is ¥105 per share. The payout ratio based on forecast EPS of ¥391.04 is approximately 26.9% (¥105 ÷ ¥391.04), representing a conservative shareholder return plan relative to the earnings level. Compared with the previous fiscal year’s actual dividend of ¥38 per share, the forecast implies a substantial dividend increase. No information on share repurchases is available, and shareholder returns are centered on dividends.

Risk Factors

1. Dependence on the Steel Business for Revenue: The Steel Business accounts for 56.6% of the revenue mix, while its operating margin is low among all segments at 1.7%. Accordingly, fluctuations in demand and market conditions in this business could have a significant impact on company-wide earnings.

2. Dependence on Short-Term Funding: Short-term borrowings account for ¥31.13B, or 98.3%, of total interest-bearing debt of ¥31.67B. Relative to cash and deposits of ¥5.41B, the cash-to-short-term borrowings ratio remains approximately 17.4%.

3. Working Capital Tie-Up: Major current asset items remain elevated, with accounts receivable and notes receivable of ¥59.26B and inventories of ¥31.35B. If assets accumulate faster than revenue increases, this could delay cash generation.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (trading)

Profitability and Returns

Both the operating margin and net margin were below the industry median, placing the Company relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate significantly exceeded the industry median, demonstrating strong growth within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings

1. The newly established Overseas Group Business drove company-wide earnings growth, recording operating income of ¥0.83B (+148.7%) and a margin of 5.6%. As the first quarter following the segment reclassification, its high contribution to earnings has been confirmed.

2. While the operating margin improved by +0.4pt YoY to 2.6%, net income attributable to owners of the parent declined by -8.7% due to the reversal of special gains and losses. Thus, the direction of earnings growth diverged between the ordinary income and net income levels.

3. Interest-bearing debt declined by -13.2% from the end of the previous fiscal year, but short-term borrowings accounted for 98.3% of the total. The evolution of the funding structure will therefore remain an important point to monitor.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on 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: ¥3,796–¥4,020 at ±1% for the cost of equity, and ¥3,903–¥3,910 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value 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. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with professionals as necessary.

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