Shinsho Corporation FY2027 Q1 Earnings Report

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Executive Summary

In addition to higher revenue, the operating margin improved, resulting in higher revenue and higher earnings. Revenue was ¥1,768.9B (+19.8% year on year), Operating Income was ¥40.9B (+84.1%), Ordinary Income was ¥37.7B (+28.3%), and Net Income attributable to owners of the parent was ¥25.1B (+26.7%). The primary drivers of earnings growth were improved volume and price mix in the Non-Ferrous Metals and Raw Materials segments, together with improved operating leverage resulting from a decline in the SG&A ratio (4.6%→4.0%). At the Ordinary Income level, however, interest expenses of ¥4.3B and foreign exchange losses of ¥2.0B were recorded, resulting in a net negative balance of non-operating income and expenses. Consequently, growth in Ordinary Income and Net Income slowed relatively compared with the growth rate of Operating Income.

Factors Driving Performance Changes

【Revenue】Revenue was ¥1,768.9B, representing a 19.8% year-on-year increase. By segment, Non-Ferrous Metals (aluminum and copper) grew significantly to ¥628.1B (+43.0%), while Raw Materials (iron and recycling) increased to ¥264.0B (+36.0%). Steel was essentially flat at ¥638.2B (+0.2%). Machinery and Welding amounted to ¥238.3B (+15.9%), comprising Welding at ¥84.3B (+29.9%) and Machinery at ¥153.9B (+9.4%), with both maintaining positive growth. The principal drivers of company-wide revenue growth were improved volume and price mix in Non-Ferrous Metals and Raw Materials, which offset the sluggish growth in Steel.

【Profit and Loss】Operating Income was ¥40.9B (+84.1%). An improvement in the gross margin to 6.27% (+19bp from 6.08% in the previous year) combined with a decline in the SG&A ratio to 3.95% (-63bp from 4.58%) to lift the operating margin to 2.32% (+81bp from 1.51%). Ordinary Income was limited to ¥37.7B (+28.3%), decelerating relative to the growth in Operating Income. This was because non-operating expenses of ¥10.4B (including interest expenses of ¥4.3B and foreign exchange losses of ¥2.0B) exceeded non-operating income of ¥7.2B (primarily dividend income of ¥3.6B), resulting in a net negative balance of approximately ¥3.2B. Net Income attributable to owners of the parent was ¥25.1B (+26.7%). The difference from Ordinary Income was primarily attributable to income taxes of ¥12.3B (effective tax rate of 32.7%), and no temporary factors arising from extraordinary gains or losses were identified. Revenue and earnings both increased.

Segment Analysis

Total segment profit (after adjustments on an Ordinary Income basis) was ¥37.7B. Metals (Steel, Aluminum and Copper, and Raw Materials) generated ¥26.7B, accounting for approximately 71% of company-wide profit and representing the core business. However, the Metals segment’s profit margin remained low at 1.74% (¥26.7B/¥1,530.4B), and profit growth was limited to +11.8% relative to revenue growth. Meanwhile, combined profit from the Machinery and Welding segments was ¥11.5B (+82.8% year on year), comprising Welding at ¥4.8B (+471% year on year, profit margin of 5.69%) and Machinery at ¥6.7B (+22.7% year on year, profit margin of 4.32%). Both demonstrated profitability exceeding that of Metals. The sharp increase in Welding segment profit appears to have been driven by a rebound from the low profitability of the previous year, in addition to price pass-through and expansion of higher-value-added products. The rising proportion of highly profitable businesses in the portfolio is contributing structurally to the improvement in the company-wide profit margin.

Key Financial Indicators

【Profitability】The operating margin improved to 2.32% from 1.51% in the previous year (+81bp), while the net profit margin also improved to 1.42% from 1.34% (+8bp). ROE was 2.4% and can be decomposed into a net profit margin of 1.4%, total asset turnover of 0.44x, and financial leverage of 3.89x (total assets/equity). The company continues to employ a structure that offsets its thin profit margin with asset efficiency and high leverage. 【Cash Quality】Although the statement of cash flows has not been disclosed, accounts receivable increased to ¥1,981.7B (+7.9% year on year), while inventories declined to ¥759.1B (-3.6%). The expansion of credit balances accompanying revenue growth has contributed to funding requirements. 【Investment Efficiency】Total asset turnover was 0.435x (quarterly revenue/total assets at period-end), improving from the previous year as revenue growth outpaced asset growth. 【Financial Soundness】The Equity Ratio was 25.7%, the current ratio was 125.96%, and the quick ratio was 98.6%, indicating that short-term payment capacity is generally secured. Interest-bearing debt totaled ¥581.0B, comprising short-term borrowings of ¥416.4B and long-term borrowings of ¥164.6B. The ratio of equity of ¥1,043.6B to total liabilities of ¥3,020.8B (total liabilities/equity) was 2.89x, indicating that reliance on debt remains high.

Cash Flow Analysis

As the statement of cash flows has not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥165.9B, down ¥8.4B from ¥174.3B in the previous year. Meanwhile, accounts receivable increased to ¥1,981.7B (+¥144.7B year on year, +7.9%), confirming an accumulation of working capital accompanying revenue growth. Inventories declined to ¥759.1B (-¥28.6B), with inventory reduction serving as a factor mitigating funding requirements. Accounts payable increased to ¥1,722.8B (+¥109.4B, +6.8%), reflecting expanded procurement, while short-term borrowings increased to ¥416.4B (+¥67.4B, +19.3%), suggesting that funding requirements resulting from the increase in accounts receivable may have been covered through short-term external financing. Total assets expanded to ¥4,064.4B (+¥228.2B, +5.9%), with the expansion of working capital accompanying revenue growth appearing as increases on both the asset and liability sides.

Earnings Quality

The ¥12.6B difference between Ordinary Income of ¥37.7B and Net Income attributable to owners of the parent of ¥25.1B is almost entirely explained by income taxes of ¥12.3B (effective tax rate of 32.7%). No temporary upward or downward factors arising from extraordinary gains or losses were identified. Non-operating income of ¥7.2B was primarily composed of dividend income of ¥3.6B. Equity-method investment gains also contributed ¥1.7B, but non-operating expenses of ¥10.4B (including interest expenses of ¥4.3B and foreign exchange losses of ¥2.0B) exceeded these amounts, resulting in a net negative balance of approximately ¥3.2B. Accordingly, the increase in Ordinary Income was largely attributable to improvement in Operating Income from the core business, indicating favorable earnings quality in terms of its core-business-driven nature. Meanwhile, comprehensive income of ¥46.6B significantly exceeded consolidated Net Income of ¥25.4B. The difference was primarily attributable to an increase in unrealized gains arising from market factors, including a valuation difference on available-for-sale securities of +¥17.0B and foreign currency translation adjustments of +¥2.8B. This should be distinguished from realized income and expenses for the period. The increase in accounts receivable (+7.9%) represents accounting earnings that will be accompanied by future collections; therefore, from an accrual perspective, it is advisable to continue monitoring working capital trends.

Earnings Forecasts and Guidance

The Q1 progress rates against the full-year plan were 25.1% for Revenue, 30.3% for Operating Income, 30.2% for Ordinary Income, and 26.4% for Net Income (on an attributable-to-owners-of-the-parent basis). All profit figures exceeded the simple progress benchmark of 25%. The full-year plan calls for Revenue of ¥7,060.0B (+16.1% year on year), Operating Income of ¥135.0B (+16.6%), and Ordinary Income of ¥125.0B (+13.4%). Q1 earnings growth rates (Operating Income +84.1%, Ordinary Income +28.3%) are progressing at a pace exceeding the growth rates assumed in the full-year plan. During the current quarter, the Company revised its earnings and dividend forecasts, confirming an update to its outlook reflecting the latest supply-and-demand environment.

Shareholder Returns

The annual dividend forecast is ¥138.00, a substantial increase from the previous year’s actual dividend of ¥53.00. Notes indicate that the forecast includes an ordinary dividend of ¥56.00 and a commemorative dividend of ¥13.00 for each of the interim and year-end dividends. The commemorative dividend is temporary rather than a recurring dividend increase and should be viewed accordingly. The Payout Ratio against forecast EPS of ¥359.48 is 138/359.48=38.4%, which does not represent excessive shareholder returns relative to the earnings level. No data on share repurchases has been disclosed; accordingly, this report evaluates shareholder returns based solely on the Payout Ratio.

Risk Factors

1. Reliance on financing accompanying working capital expansion: Accounts receivable increased to ¥1,981.7B (+7.9% year on year) alongside revenue growth, while short-term borrowings also increased to ¥416.4B (+19.3%). This indicates that the accumulation of working capital during a period of revenue growth continues to be funded through short-term external financing.

2. Foreign exchange and interest rate volatility risk: During Q1, foreign exchange losses of ¥2.0B and interest expenses of ¥4.3B were recorded, reducing non-operating income and expenses by approximately ¥3.2B. With interest-bearing debt of ¥581.0B, fluctuations in interest rates and foreign exchange rates may increase sensitivity to Ordinary Income.

3. Limited resilience to changes in the external environment due to the low-margin structure: The operating margin of 2.32% and gross margin of 6.27% are low in absolute terms, while the profit margin of the core Metals segment is only 1.74%. Changes in raw material prices and supply-and-demand conditions therefore have a relatively significant impact on profit margins.

Industry Benchmark (Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net profit margin are below the industry median, indicating that profitability is relatively low within the industry.

Growth and Capital Efficiency

The revenue growth rate significantly exceeds the industry median, demonstrating a high pace of revenue growth within the industry.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. The operating margin improved to 2.32% (+81bp from 1.51% in the previous year), confirming the emergence of operating leverage from improved gross margins and a lower SG&A ratio. The increasing contribution of highly profitable segments such as Welding (profit margin of 5.69%) and Machinery (4.32%) was a factor behind this improvement.

2. Q1 progress against the full-year plan was 30.3% for Operating Income and 30.2% for Ordinary Income, exceeding the simple progress benchmark of 25% and confirming accelerated progress on the profit front.

3. Accounts receivable (+7.9%) and short-term borrowings (+19.3%) expanded alongside revenue growth. The increase in working capital and the evolution of its financing methods will remain important items to monitor in future earnings results.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,804–¥4,024 at Cost of Equity ±1%, and ¥3,910–¥3,913 at ω±0.1.

Notes:

• As forecast ROE is below the Cost of Equity, the theoretical value is below Book Value per Share.
• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest rate reference month: 2026-07 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings report 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 professionals as necessary.

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