SOMAR CORPORATION FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥15.32B
• Operating Income: ¥1.29B
• Net Income: ¥861M
• EPS: ¥444.07

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: A mixed quarter with resilient top line and strong liquidity, but margin compression and heavier non-operating drag drove double-digit declines in ordinary and net income. Revenue grew 1.0% YoY to 153.23, while operating income fell 5.5% YoY to 12.95 and ordinary income declined 15.1% to 12.62. Net income dropped 28.4% YoY to 8.60, with EPS at 444.07 JPY. Gross profit was 34.14, implying a gross margin of 22.3%. Operating margin stood at 8.46% (12.95/153.23), and net margin was 5.6% (8.60/153.23). Based on YoY changes, operating margin compressed by about 57 bps (prior-year ~9.03%), while net margin compressed approximately 231 bps (prior-year ~7.92%). Non-operating items were a net negative (income 1.00 vs expenses 1.34), adding pressure below the operating line despite dividend income (0.42) and interest income (0.27). The effective tax rate was 30.8%, further exacerbating the decline from ordinary to net profit. Cash generation was a bright spot: operating cash flow reached 15.47, 1.80x net income, indicating solid earnings quality. Liquidity remains exceptionally strong with a current ratio of 488% and cash and deposits of 105.47, while leverage is moderate (D/E 0.58x) with predominantly long-term debt (60.00). ROE printed at 4.2% on DuPont metrics (NPM 5.6% × AT 0.473 × leverage 1.58x), below mid-to-high single-digit targets typical for specialty chemicals. ROIC was 5.6%, below the 7–8% target range, pointing to room for capital efficiency improvement. Comprehensive income of 5.01 lagged net income, suggesting valuation losses (likely on investment securities) weighed on OCI. With capex at 6.10, OCF comfortably covered investment needs, implying positive FCF on an OCF–capex proxy basis. Forward-looking, the key swing factors are gross margin recovery and stabilization of non-operating items; even modest improvement here could restore ordinary profit leverage. The balance sheet capacity provides flexibility to sustain investment and dividends while navigating input cost and demand variability.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.2% = Net Profit Margin 5.6% × Asset Turnover 0.473 × Financial Leverage 1.58x. The most material change YoY is the margin component: operating income declined 5.5% with revenue +1.0%, implying operating margin compressed ~57 bps; net margin contracted ~231 bps, reflecting a heavier non-operating drag and a 30.8% effective tax rate. Business drivers likely include: (1) gross margin pressure from input cost pass-through timing or product mix; (2) SG&A intensity (13.8% of sales) not delevering on modest growth; and (3) net non-operating expenses (1.34) exceeding non-operating income (1.00). The asset turnover of 0.473 remains a structural drag typical of inventory- and receivables-heavy specialty chemicals/trading models; with only +1% revenue growth and sizable assets (323.72), AT likely trended flat. Leverage (1.58x) is moderate and stable; the firm does not rely on high gearing to drive ROE. Sustainability: margin compression could be cyclical and partially reversible if input costs normalize and pricing catches up; non-operating losses may include FX or security-related items that can swing. Concern flags: ordinary profit (-15.1%) fell faster than operating profit (-5.5%), and net profit (-28.4%) fell further, indicating negative operating leverage and below-the-line headwinds; SG&A growth appears to have outpaced revenue (implied), which warrants cost control scrutiny.

Growth Assessment

Top-line growth was modest at +1.0% YoY to 153.23, suggesting stable demand but limited volume/price expansion. Operating profit declined 5.5% despite revenue growth, indicating margin pressure from cost inflation, pricing lags, or adverse mix. Ordinary profit fell 15.1% due to a net non-operating loss (+1.00 income vs -1.34 expenses), and net income decreased 28.4% on both non-operating pressure and a 30.8% effective tax rate. EBITDA was 15.55 (10.1% margin), providing a buffer but not enough to offset below-the-line headwinds. Revenue sustainability is moderate: diversified specialty chemical applications typically dampen volatility, but limited growth implies reliance on margin management rather than volume. Profit quality is mixed: operating profit is supported by core activities, yet net profits are more volatile due to non-operating items and taxes. Near-term outlook hinges on restoring gross margin and managing SG&A; even flat revenue with improved mix and pass-through could lift operating margin. Non-operating normalization (e.g., FX, securities valuation) could support ordinary profit recovery.

Financial Health

Liquidity is very strong: current ratio 488.1% and quick ratio 399.8%, with cash and deposits of 105.47 versus current liabilities of 49.15. No warning triggers: current ratio >> 1.0 and D/E 0.58x (< 1.5 benchmark). Maturity profile is conservative: short-term loans are 0.72, while long-term loans are 60.00; current assets of 239.89 comfortably cover short-term obligations, indicating low maturity mismatch risk. Interest coverage is robust at 94.8x, reflecting low interest burden (interest expense 0.14). Total liabilities are 118.93 against total equity 204.79, supporting solvency. No off-balance sheet obligations are reported in the provided data. Investment securities stand at 26.91, which introduces market valuation exposure (seen in weaker comprehensive income). Overall, the balance sheet offers ample flexibility to absorb shocks and fund capex/dividends.

Cash Flow Quality

OCF was 15.47 versus net income of 8.60, yielding an OCF/NI ratio of 1.80x, which indicates high earnings quality. With capex of 6.10, an OCF–capex proxy suggests positive FCF of approximately 9.37; however, full FCF cannot be confirmed as investing CF is unreported. Working capital details by movement are unavailable, but period-end levels (AR 68.35, inventories 43.41, AP 34.32) look proportionate to sales, and the strong OCF suggests no adverse WC build this half. No signs of aggressive working capital manipulation are evident from the limited data (e.g., OCF comfortably exceeds NI, and interest coverage is high). Financing CF was 8.80, implying some net inflows (details not disclosed), but given strong cash, there is no immediate refinancing stress. Overall, CF quality is solid, with internally generated cash covering capex and likely dividends.

Dividend Sustainability

The calculated payout ratio is 22.8%, which is comfortably below the 60% benchmark for sustainability. With OCF at 15.47 and a proxy FCF of ~9.37, dividend coverage appears ample even if dividends modestly increase; estimated dividends at 22.8% of NI would be about 1.96, covered ~7.9x by OCF and ~4.8x by proxy FCF. The balance sheet’s cash position (105.47) and low near-term debt service further support capacity to maintain dividends through cycles. While DPS is unreported, cash flow and leverage suggest room to sustain policy, contingent on maintaining operating margins and avoiding sustained non-operating losses. We note the lack of reported dividends paid and DPS, so conclusions rely on the calculated payout ratio and typical policy patterns.

Risk Assessment

Business Risks:

• Gross margin pressure from raw material cost volatility and pass-through timing
• Demand softness or mix shift in key end-markets (e.g., electronics/auto-related specialty chemicals)
• Negative operating leverage if SG&A growth outpaces low-single-digit sales growth
• Dependence on non-operating items (FX, securities) that can swing ordinary profit

Financial Risks:

• Valuation risk on investment securities (26.91) evidenced by weak comprehensive income
• Interest rate exposure on 60.00 long-term loans (rate terms undisclosed)
• Currency fluctuation risk if procurement/sales are mismatched by currency

Key Concerns:

• Ordinary income down 15.1% YoY and net income down 28.4% despite revenue growth
• Operating margin compressed ~57 bps; net margin compressed ~231 bps
• Comprehensive income (5.01) significantly below net income, implying OCI losses
• ROE at 4.2% and ROIC at 5.6% below typical targets, signaling efficiency headroom

Investment Implications

Key Takeaways:

• Top line stable but profitability under pressure from margin compression and non-operating losses
• OCF robustness (1.80x NI) and strong liquidity de-risk near-term operations and dividends
• ROE/ROIC below target ranges; improving mix, pricing, and cost discipline are needed to re-accelerate returns
• Balance sheet capacity (cash-rich, modest leverage) provides flexibility to invest through the cycle

Metrics to Watch:

• Gross margin trend and SG&A-to-sales ratio (currently ~13.8%)
• Non-operating income/expense volatility (FX, dividends, securities gains/losses)
• Inventory and receivables turnover impacting asset turnover (0.473)
• ROIC progression toward 7–8% target
• Comprehensive income vs net income gap (OCI sensitivity to market moves)

Relative Positioning: Within Japan specialty chemical peers, Somar shows stronger liquidity and lower leverage than average, but weaker profitability momentum this half due to margin compression and below-the-line headwinds; the franchise appears defensively positioned on balance sheet, with execution on pricing/mix and cost control key to closing the ROIC/ROE 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
• At Your Own Risk: Investment decisions should be made at your own discretion and risk. We assume no liability for any losses incurred based on this analysis