KYUSHU LEASING SERVICE CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥15.52B
• Operating Income: ¥2.85B
• Net Income: ¥2.11B
• EPS: ¥92.76

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

FY2026 Q2 was resilient at the profit line despite a sharp revenue decline, with margins expanding and net income inching up year over year. Revenue fell 27.4% YoY to 155.21, but operating income declined a lesser 15.7% to 28.45 and ordinary income decreased 13.2% to 28.66. Net income rose 2.2% YoY to 20.95, aided by margin defense and modest non-operating gains. Operating margin stood at 18.3% (28.45/155.21), up versus the implied prior-year level of roughly 15.8%, indicating approximately 255 bps of expansion. Net margin reached 13.5%, up from an implied ~9.6% last year, a roughly 390 bps improvement. Gross margin printed at 28.7%, though prior-year gross margin is not disclosed. Non-operating income of 0.99 included 0.49 from investment securities gains and 0.33 from dividends, modestly supporting ordinary income. Earnings quality is weak this quarter: operating cash flow was -135.82 against net income of 20.95, yielding an OCF/NI ratio of -6.48x, reflecting heavy portfolio/working-capital consumption typical of lease asset growth. Financing cash inflow of 151.98 suggests debt-funded asset expansion aligned with the negative OCF. Leverage is high with D/E at 3.96x, but interest coverage remains robust at 48.2x owing to stable operating earnings and low interest burden. Balance sheet liquidity looks adequate on headline metrics (current ratio 277.7%), though leasing business models require careful duration matching between assets and funding. ROE calculated at 4.8% is modest, driven by a very low asset turnover (0.071) and high financial leverage (4.96x) rather than superior profitability. ROIC at 1.2% indicates subpar capital efficiency versus typical cost-of-capital benchmarks. The quarter benefitted from margin resilience and small non-operating gains, but sustainability depends on maintaining spreads amid potential funding cost pressure and asset quality. Forward-looking, watch funding costs, lease origination trends, and credit costs; with high leverage and negative OCF, the company’s growth is increasingly reliant on continued access to funding. Dividend sustainability appears tied to earnings rather than free cash flow this quarter, given portfolio growth consuming cash.

Profitability Analysis

ROE decomposition (DuPont): ROE 4.8% = Net Profit Margin 13.5% × Asset Turnover 0.071 × Financial Leverage 4.96x. The largest driver of YoY change is the net profit margin, which improved meaningfully as operating margin expanded (approx. +255 bps) despite revenue contracting 27.4%. Business rationale: disciplined SG&A (16.08) and stable lease spreads likely limited the decline in operating income versus revenue, while small non-operating gains and a 27.1% effective tax rate supported net income. Asset turnover remains very low (0.071), reflecting the capital-intensive nature of leasing and balance sheet expansion outpacing revenue. Financial leverage is elevated at ~5x assets/equity, amplifying ROE despite modest underlying returns. Sustainability: margin gains may be partly cyclical or mix-driven (e.g., fewer low-margin transactions, higher spreads), and could normalize if funding costs rise or competitive pricing intensifies; leverage-driven ROE is inherently fragile. Watch for any sign of SG&A growth outpacing revenue—currently, operating leverage appears positive given revenue fell more than operating income. Non-operating income (4.7% of profit context) includes investment securities gains that are not fully recurring.

Growth Assessment

Top-line contracted 27.4% YoY to 155.21, likely reflecting lower transaction volumes or mix changes in lease/finance revenues rather than broad-based demand collapse, given operating income fell only 15.7%. Operating margin improved to 18.3%, cushioning the revenue decline and enabling net income to grow 2.2% YoY. Non-operating tailwinds (0.99, including 0.49 securities gains) contributed to ordinary income resilience; these are partially non-recurring. The negative OCF (-135.82) paired with strong financing inflows (151.98) implies active balance sheet growth in lease assets; this can support future revenue but depresses near-term cash conversion. Profit quality is mixed: EBITDA margin of 22.2% and interest coverage of 48.2x are solid, but ROIC at 1.2% underscores low capital productivity. Near-term outlook hinges on maintaining interest spreads versus rising funding costs, origination pipelines in the Kyushu region and beyond, and stable credit costs. Without explicit segment data, we assume a focus on steady, collateralized leasing with limited R&D intensity and operating leverage from SG&A discipline. Overall, revenue recovery is uncertain, but margin management and funding access could sustain earnings at current levels if credit and spreads hold.

Financial Health

Liquidity appears strong on headline ratios: current ratio 277.7% and quick ratio 277.7%, with working capital of 1,052.84. No warning on current ratio (<1.0) is triggered. Leverage is high: D/E 3.96x, which exceeds the 2.0x warning threshold—explicit caution warranted for a leveraged finance model. Interest coverage is robust at 48.2x, indicating ample capacity to service interest under current earnings and rates. Maturity profile risk: current assets (1,645.30) exceed current liabilities (592.46), suggesting limited near-term liquidity strain, though leasing requires careful asset–liability duration matching; short-term loans (437.08) require ongoing rollover. Total liabilities are 1,744.16 against equity of 440.24; long-term loans are 849.12, highlighting reliance on debt markets/banks. Off-balance sheet obligations are not disclosed; any residual value guarantees or recourse structures are unknown. Equity ratio is not reported; calculated equity/asset ratio approximates 20.1% (440.24/2,184.41). Overall, solvency is adequate for a leasing model but sensitive to funding market conditions.

Cash Flow Quality

OCF/Net Income is -6.48x, a clear flag (<0.8), indicating poor cash conversion this quarter due to significant working capital and lease asset build. Free cash flow is not disclosed; given negative OCF and typical capex/portfolio investments, FCF likely negative in a growth phase. Financing cash inflow of 151.98 funded the asset expansion, consistent with the business model but increasing leverage reliance. No explicit signs of working capital manipulation are observable from the limited breakdown; the pattern aligns with portfolio growth in leasing receivables rather than revenue recognition issues. Sustained negative OCF would constrain internal funding for dividends and require continued access to external debt. Monitor trends in receivables/lease assets turnover, delinquency, and recoveries to assess underlying cash generation.

Dividend Sustainability

The calculated payout ratio is 65.7%, slightly above the typical <60% benchmark for comfort. With OCF deeply negative this quarter, dividend coverage by free cash flow is not demonstrable; dividends appear covered by accounting earnings but dependent on external funding amid portfolio growth. Absent disclosed DPS and total dividends, we assume a stable policy targeting earnings-based payout. Sustainability hinges on maintaining operating earnings, stable credit losses, and access to funding; a pause in balance sheet growth would improve cash coverage. If ROIC remains at 1.2% and leverage elevated, management may need to balance growth and shareholder returns to protect capital ratios.

Risk Assessment

Business Risks:

• Spread compression risk if funding costs rise faster than lease yields
• Credit cost escalation risk in an economic slowdown affecting lessee repayments
• Residual value risk on leased assets at contract maturity
• Regional concentration risk in Kyushu-area customers and industries
• Competitive pressure from banks and larger leasing peers impacting pricing

Financial Risks:

• High leverage (D/E 3.96x) elevates sensitivity to earnings or valuation shocks
• Refinancing and rollover risk on short-term borrowings (437.08)
• Negative operating cash flow requiring continued external funding
• Potential asset–liability duration mismatch inherent to leasing
• Market risk on investment securities, given gains supported ordinary income this quarter

Key Concerns:

• OCF/Net Income at -6.48x signals weak cash conversion
• ROIC at 1.2% is well below a 5–8% target range, implying low capital efficiency
• Asset turnover at 0.071 highlights heavy asset intensity and slower revenue generation per asset
• Ordinary income partly supported by non-operating gains (securities), which may be non-recurring
• Dependence on funding access to support portfolio growth amid rising rate environment

Investment Implications

Key Takeaways:

• Profitability held up with margin expansion despite a 27% revenue contraction
• Net income grew 2.2% YoY, aided by non-operating gains and lower revenue sensitivity
• Cash generation is weak this quarter; growth is debt-funded
• Leverage is high but interest coverage remains strong
• Capital efficiency (ROIC 1.2%) is a structural challenge and key improvement area

Metrics to Watch:

• Operating margin and spread trends versus funding costs
• Operating cash flow trajectory and receivables/lease asset growth
• Credit cost indicators (delinquencies, write-offs) and asset quality
• Funding mix, average cost of debt, and maturity ladder
• Payout ratio versus free cash flow and capital adequacy
• ROIC and ROE decomposition (margin vs turnover vs leverage)

Relative Positioning: Within Japanese leasing peers, the company exhibits disciplined operating margins and strong interest coverage but sits on the higher end of leverage with notably weak ROIC and cash conversion this quarter; performance resilience hinges on maintaining spreads and funding access.

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