STARTS CORPORATION (8850) FY2027 Q1 Earnings Report

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Executive Summary

Despite higher revenue, operating income declined, indicating a slight slowdown in core earnings power; however, Ordinary Income and Net Income increased due to the boost from non-operating income. Revenue was ¥622.1B (+4.7% YoY), Operating Income was ¥80.0B (△4.2%), Ordinary Income was ¥84.7B (+3.3%), and Net Income was ¥56.4B (+7.6%). Although the operating margin declined as SG&A expenses increased faster than revenue, non-operating income, including foreign exchange gains, offset the decline and secured growth in final profit.

Factors Affecting Earnings

【Revenue】Revenue was ¥622.1B (+4.7% YoY). The Real Estate Management Business (revenue of ¥273.9B, +8.9%) led growth as the largest segment, while the Construction Business (¥201.3B, +5.6%) and Brokerage Business (¥26.4B, +21.9%) also achieved strong growth. Meanwhile, the Property Development Business declined sharply, with revenue of ¥9.4B (△75.1%), and the timing mismatch in property deliveries weighed on the Company-wide growth rate.

【Profit and Loss】Operating Income was ¥80.0B (△4.2%). Cost of sales was ¥416.1B, while SG&A expenses were ¥126.1B (+9.4% YoY); the increase in SG&A expenses exceeded revenue growth (+4.7%), putting pressure on margins. The Property Development Business also turned to an operating loss of ¥1.6B, contributing to an unfavorable business mix. Meanwhile, Ordinary Income increased to ¥84.7B (+3.3%), as non-operating income of ¥6.9B, including a foreign exchange gain of ¥3.0B and dividend income of ¥0.4B, exceeded non-operating expenses of ¥2.2B. Extraordinary items were limited, comprising extraordinary income of ¥0.7B and extraordinary losses of ¥0.8B, and Net Income of ¥56.4B (+7.6%) broadly reflected the underlying level of Ordinary Income. In conclusion, revenue increased while operating income declined, but final profit increased due to non-operating factors.

Segment Analysis

The Real Estate Management Business was the largest earnings contributor, generating Operating Income of ¥37.0B (equivalent to approximately 46% of Company-wide Operating Income), and demonstrated stable growth of +8.7–8.9% YoY in both revenue and profit. The Construction Business posted revenue of ¥201.3B (+5.6%) and Operating Income of ¥17.9B (+2.8%), achieving higher revenue and profit, although its 8.9% operating margin was somewhat low. The Brokerage Business had the highest operating margin among all segments at 40.3%, combining high profitability and strong growth, with revenue up +21.9% and profit up +36.1%. Conversely, the Property Development Business recorded revenue of ¥9.4B (△75.1%) and an operating loss of ¥1.6B, turning loss-making from profit of ¥3.7B in the prior year; volatility arising from timing differences in deliveries weighed on the Company-wide profit margin. The Publishing and Culture Business also reported lower profit, with Operating Income of ¥2.5B (△37.5%). The contrast between the stability of the highly recurring Management and Brokerage Businesses and the volatility of the Property Development Business is evident.

Key Financial Metrics

【Profitability】The operating margin was 12.9%, down from approximately 14.0% in the prior year, reflecting the impact of higher SG&A expenses. The Net Income margin improved slightly to 9.1% from 8.8%, with non-operating factors supporting profitability at the final stage. The gross margin was 33.1%, representing a modest decline from the prior year.【Cash Flow Quality】Operating Cash Flow (OCF) was limited to ¥18.4B, and its ratio to Net Income of ¥56.4B was a low 0.33x. Contributing factors included an increase in inventories (¥22.6B), a decrease in trade payables (¥29.9B), and corporate tax payments (¥67.5B).【Capital Efficiency】ROE was low at 2.9%, indicating room for improvement in capital efficiency. EPS increased steadily to ¥117.33 from ¥106.42 in the prior year (+10.3%), while BPS was ¥4,025.86, up from ¥3,986.78 in the prior year.【Financial Soundness】The Equity Ratio remained high at 55.7%, compared with 54.5% in the prior year, while current assets of ¥1,624.9B significantly exceeded current liabilities of ¥969.5B, ensuring favorable short-term liquidity.

Cash Flow Analysis

Operating Cash Flow (OCF) was ¥18.4B, down △33.6% YoY, highlighting the gap with Net Income of ¥56.4B. Although the subtotal before changes in working capital was ¥86.4B, an increase in inventories (△¥22.6B), a decrease in trade payables (△¥29.9B), and payments for income taxes and other taxes (△¥67.5B) constrained funds and significantly reduced actual OCF. Investing Cash Flow was △¥26.2B, reflecting continuing capital expenditures, primarily ¥13.9B in capital investments. Financing Cash Flow was +¥24.3B, securing funds through factors including an increase in short-term borrowings (+69.4% YoY). As a result, free cash flow was △¥7.9B, indicating a cash outflow phase for the quarter; however, cash and deposits remained ample at ¥869.4B, and the impact on short-term liquidity is considered limited.

Earnings Quality

Extraordinary items for the current period were limited, comprising extraordinary income of ¥0.7B and extraordinary losses of ¥0.8B; Net Income therefore largely reflected the underlying level of Ordinary Income. The difference between Ordinary Income and Operating Income was +¥4.7B, resulting from non-operating income of ¥6.9B, including a foreign exchange gain of ¥3.0B, dividend income of ¥0.4B, and interest income, exceeding non-operating expenses of ¥2.2B, primarily consisting of ¥1.9B in interest expenses. Non-operating income was limited to 1.1% of revenue, indicating some reliance on one-off foreign exchange factors, but overall the Company maintained an earnings structure close to its operating performance. On the other hand, OCF remained at approximately 0.33x Net Income, and the divergence between earnings growth on the income statement and actual cash flow generation should be noted when evaluating earnings quality. Comprehensive Income was ¥55.7B, almost in line with Net Income of ¥56.4B, and no significant divergence arose from valuation differences on other securities or foreign currency translation adjustments.

Earnings Forecast and Guidance

Progress toward the full-year forecast was 21.5% for Revenue (¥622.1B/¥2,900.0B), 20.0% for Operating Income (¥80.0B/¥400.0B), 21.7% for Ordinary Income (¥84.7B/¥390.0B), and 21.4% for Net Income (¥56.4B/¥260.0B). All were below the standard Q1 progress benchmark of 25%, likely reflecting the tendency for deliveries in the Property Development Business to be concentrated in the second half of the fiscal year, as well as the impact of higher SG&A expenses. Neither the earnings forecast nor the dividend forecast was revised during the current quarter.

Shareholder Returns

The full-year dividend forecast is ¥150 per share, a level higher than the prior fiscal year's actual interim dividend of ¥65. The Payout Ratio against forecast EPS of ¥548.95 is approximately 27.3%, within a sustainable range. No share buybacks were confirmed during the current quarter, and it is appropriate to evaluate shareholder returns based on dividends. Given the substantial cash and deposits of ¥869.4B, the Company has secured a financial foundation supporting continued dividend payments.

Risk Factors

1. Volatility in the Property Development Business: Revenue declined sharply to ¥9.4B (△75.1% YoY), and operating profit turned into a loss of ¥1.6B. The timing mismatch in deliveries is a factor contributing to earnings volatility, making delivery progress in the second half of the fiscal year a key area of focus.

2. Weak Operating Cash Flow: OCF was ¥18.4B, only 0.33x Net Income of ¥56.4B. The primary factors were an increase in inventories (¥22.6B) and a decrease in trade payables (¥29.9B), requiring confirmation of an improvement in cash conversion.

3. Declining Operating Leverage Due to Higher SG&A Expenses: SG&A expenses increased at approximately +9.4% YoY, exceeding the revenue growth rate of +4.7%. If this trend continues, it could lead to a structural decline in the operating margin.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and Net Income margin are clearly above the industry median, positioning the Company among the more profitable companies in the industry.

Growth and Capital Efficiency

The revenue growth rate is broadly in line with the industry median, placing the Company in the middle range of the industry in terms of growth.

※Source: Compiled by the Company

Key Points from the Results

1. The core, highly recurring Real Estate Management and Brokerage Businesses continued to deliver stable growth. In particular, the Brokerage Business maintained high profitability, with an operating margin of 40.3%, while timing differences in deliveries in the Property Development Business increased quarterly earnings volatility.

2. OCF remaining at 0.33x Net Income indicates a short-term divergence between earnings growth on the income statement and cash-generating capacity. The primary factors were an increase in inventories and a decrease in trade payables, making inventory turnover and collection trends in the second half of the fiscal year important points for evaluating earnings quality.

3. Full-year progress was approximately 20–22% across the various metrics, slightly below the standard quarterly progress benchmark of 25%. The robust financial foundation, including an Equity Ratio of 55.7% and cash of ¥869.4B, provides a degree of stability regardless of delivery progress in the second half of the fiscal year.

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 five-year fade). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥4,461–¥4,726 at ±1% for the cost of equity, and ¥4,577–¥4,611 at ±0.1 for ω.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast 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 available earnings data. Investment decisions should be made at your own responsibility, after consulting with professionals as necessary.

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AI Financial Analysis

Executive Summary

FY2027 Q1 was a mixed quarter: revenue expanded and profit attributable to owners increased, but operating profit and operating margin declined as SG&A growth outpaced sales. Revenue rose 4.7% YoY to ¥62.21bn. Gross profit increased 3.7% YoY to ¥20.61bn. Operating income declined 4.2% YoY to ¥8.00bn despite the higher revenue base. Operating margin compressed by 120bp to 12.8% from 14.0% in the prior-year quarter. Gross margin edged down by 32bp to 33.1%, indicating modest pressure at the gross-profit level. SG&A expense rose 9.5% YoY to ¥12.61bn, materially faster than revenue growth, and was the principal reason for the operating-margin compression. Ordinary income nevertheless rose 3.3% to ¥8.47bn, supported by a favorable swing in non-operating items, notably ¥0.30bn of foreign-exchange gains. Profit attributable to owners increased 8.4% to ¥5.56bn, equivalent to EPS of ¥117.33. The tax burden was relatively high, with an effective tax rate of 33.3% and a five-factor DuPont tax burden of 0.657. Q1 annualized ROE was 11.3%, a good level under the stated benchmarks, supported by a 8.9% net margin, annualized asset turnover of 0.707x, and financial leverage of 1.79x. The core real estate management business remained the largest contributor to segment profit, generating ¥3.70bn, or about 45% of aggregate segment profit before eliminations. Construction, real estate management, and brokerage businesses drove revenue growth, while condominium sales contracted sharply and posted a segment loss. Cash conversion was weak: operating cash flow was ¥1.84bn, only 0.33x net income, and free cash flow was negative ¥0.79bn. The cash-flow shortfall principally reflects working-capital and tax cash outflows rather than an elevated accruals ratio, which remained low at 1.1%. The full-year plan implies a Q1 revenue progress rate of 21.5%, operating-profit progress of 20.0%, ordinary-profit progress of 21.7%, and owners' net-profit progress of 21.4%, all moderately below the 25% seasonal reference point but not by more than 10 percentage points. Full-year guidance remains unchanged, leaving execution in the construction, brokerage, condominium-sales, and rental-management businesses central to achieving the plan.

Profitability Analysis

Annualized Q1 DuPont ROE was 11.3%, decomposed into an 8.9% net profit margin, 0.707x annualized asset turnover, and 1.79x financial leverage. The main near-term change in earnings quality was margin pressure rather than balance-sheet leverage: operating margin fell 120bp YoY to 12.8%, while gross margin declined 32bp to 33.1%. SG&A increased 9.5% YoY versus 4.7% revenue growth, creating negative operating leverage and accounting for the decline in operating income. EBITDA was ¥9.81bn and the EBITDA margin was 15.8%, providing a broader measure of underlying earnings capacity before depreciation and amortization. Net margin of 8.9% remained in the good 5-10% range, and ordinary income growth exceeded operating-income growth because non-operating income rose to ¥0.69bn, including ¥0.30bn of FX gains. The interest burden was 1.058, reflecting that non-operating income more than offset net interest cost, while EBIT interest coverage was a strong 41.0x. The real estate management business is the core business by operating-income contribution, with external revenue of ¥26.39bn, up 9.0% YoY, and segment profit of ¥3.70bn, up 8.7%; its segment margin was broadly stable at 14.0%. Construction revenue increased 13.4% to ¥18.53bn, while segment profit grew only 2.8% to ¥1.79bn, reducing its segment margin to 9.6% from 10.6%. Real-estate brokerage was the strongest profit-growth area: rental brokerage revenue rose 8.6% and profit 10.4%, while sales brokerage revenue increased 20.9% and profit 36.1%, lifting the latter's margin to 40.9% from 36.3%. Hotel and leisure revenue grew 5.2%, but segment profit fell 6.0%, with margin declining to 14.1% from 15.8%. Condominium sales revenue fell 74.9% to ¥0.94bn and shifted to a ¥0.16bn segment loss from a ¥0.37bn profit, making project timing and inventory monetization key determinants of consolidated margin recovery. Goodwill was only ¥0.08bn, or 0.01x EBITDA, so JGAAP goodwill amortization and goodwill-related comparability do not materially distort profitability.

Growth Assessment

Revenue growth was broad-based across construction, real estate management, both brokerage operations, hotel and leisure, senior-support and childcare, publishing and culture, and financial and consulting activities. Construction added ¥2.20bn of external revenue YoY, and real estate management added ¥2.19bn, making them the largest incremental sales contributors. Real estate management also contains ¥10.75bn of other revenue, mainly real-estate rent, up from ¥9.41bn, providing a recurring revenue element within the largest profit segment. Sales brokerage's ¥0.45bn revenue increase and ¥0.28bn profit increase demonstrate particularly strong operating momentum, although brokerage activity is generally more transaction-cycle sensitive than recurring management income. Senior-support and childcare revenue rose 8.2% and segment profit rose 17.2%, albeit from a smaller profit base. The principal offset was condominium sales, where revenue declined ¥2.81bn YoY and segment profitability turned negative; this indicates a more uneven development-sales recognition profile. The company forecasts FY2027 revenue of ¥290.0bn, up 15.1% YoY, and operating income of ¥40.0bn, up 10.3% YoY. Q1 revenue progress of 21.5% and operating-income progress of 20.0% sit below a 25% linear annual benchmark, requiring a stronger contribution in the remaining quarters. Given the forecast's higher full-year growth rate than Q1's actual revenue growth, the planned acceleration appears to depend on project completion timing and continued expansion in the core management, construction, and brokerage businesses. The unchanged forecast suggests management has not revised its full-year operating assumptions following Q1.

Financial Health

Liquidity is sound, with a current ratio of 167.6%, a quick ratio of 167.6%, and working capital of ¥65.53bn. Cash and deposits of ¥86.94bn covered short-term loans of ¥11.69bn by 7.43x, materially limiting immediate refinancing risk. Total interest-bearing debt was ¥56.61bn, comprising ¥11.69bn of short-term loans and ¥44.92bn of long-term loans; the short-term debt ratio was 20.7%, indicating that the debt profile is weighted toward longer-dated funding. Reported debt-to-equity was 0.79x and debt-to-capital was 22.4%, both consistent with a manageable capital structure. Interest protection is robust, with EBITDA interest coverage of 50.3x and EBIT interest coverage of 41.0x. The key leverage alert is debt/EBITDA of 5.77x, above the 4.0x high-yield benchmark. Its root cause is the company's sizable property and operating-asset base relative to Q1 annualized EBITDA, rather than high current interest expense. This leverage level is more understandable for an asset-heavy real-estate, property-management, construction, and hospitality group than for an asset-light business, but it raises sensitivity to property-market conditions and EBITDA volatility. The impact on the financial profile is mitigated by high cash, strong current liquidity, modest debt-to-capital, and very high interest coverage, but deleveraging capacity should be assessed against cash generation rather than accounting earnings. Short-term loans increased ¥4.79bn, or 69.4% YoY, to ¥11.69bn, while long-term loans increased modestly by ¥0.47bn to ¥44.92bn. The rise in short-term borrowing coincided with positive financing cash flow and weak Q1 operating cash generation, making working-capital normalization important. Contract liabilities were ¥14.96bn, which supports funding visibility for contracted activities. Asset composition is property-intensive, with PPE of ¥146.50bn, including ¥74.79bn of land, representing a substantial asset-value and market-cycle exposure. Goodwill declined by ¥0.06bn, or 44.5%, to ¥0.08bn and is immaterial to equity, eliminating meaningful acquisition-premium or goodwill-impairment dependence.

Notable B/S Changes

Short-term loans: +¥4.79bn (+69.4%) to ¥11.69bn - short-term funding increased materially; ample cash coverage of 7.43x mitigates immediate liquidity risk, but the movement should be monitored alongside weak Q1 operating cash flow. Goodwill: -¥0.06bn (-44.5%) to ¥0.08bn - goodwill is immaterial at 0.0% of equity and 0.01x EBITDA, leaving negligible acquisition-premium and impairment exposure. Real estate for sale: +¥6.82bn (+42.4%) to ¥22.90bn - finished property inventory increased materially, increasing the importance of development-sales timing and inventory monetization. Real estate for sale in progress: -¥5.10bn (-20.3%) to ¥19.98bn - the reduction partly offsets the increase in finished inventory and may indicate project completions or inventory reclassification.

Cash Flow Quality

Cash-flow quality was the primary weakness in Q1. Operating cash flow was ¥1.84bn against profit attributable to owners of ¥5.56bn, producing an OCF/net-income ratio of 0.33x, below the 0.8x warning threshold. The root cause was cash absorption after an operating-CF subtotal of ¥8.64bn, particularly ¥6.75bn of income taxes paid, a ¥2.99bn reduction in trade payables, a ¥2.26bn inventory increase, and a ¥0.97bn reduction in contract liabilities. Receivables decreased by ¥2.17bn and therefore provided cash, which partly offset these outflows. The combination of growing inventories, lower contract liabilities, and reduced payables is consistent with a Q1 working-capital draw rather than evidence of cash collection stress, but it requires monitoring because it constrained conversion of reported earnings into cash. The low cash-conversion alert is also confirmed by OCF/EBITDA of 0.19x, far below the 0.7x caution level. Its impact is that the group relied on financing cash flow of ¥2.43bn, including a ¥4.79bn net increase in short-term loans, to support dividends, investing activity, and cash balances during the quarter. Capital expenditure was ¥1.39bn, equal to 0.77x depreciation and amortization of ¥1.81bn; this is below replacement-level depreciation but remains above the 0.7x underinvestment threshold. Investing cash flow was negative ¥2.63bn, including ¥1.39bn of PPE purchases, ¥0.60bn of intangible-asset purchases, and ¥1.26bn of investment-securities purchases. Free cash flow was negative ¥0.79bn in Q1. The accruals ratio of 1.1% remains low and is favorable, indicating that the cash-flow weakness is not accompanied by a high balance-sheet accrual build-up. Ordinary income exceeded profit before tax by only ¥0.08bn, and extraordinary items were nearly neutral, with ¥0.69bn of extraordinary income offset by ¥0.77bn of extraordinary loss; therefore, net income was not materially dependent on extraordinary gains.

Dividend Sustainability

The full-year dividend forecast is ¥150 per share, unchanged from the prior disclosure. Against forecast EPS of ¥548.95, the implied dividend payout ratio is 27.3%, well below the 60% sustainability benchmark. There were no reported share repurchases, so the dividend payout ratio is also the relevant shareholder-return measure rather than a total return ratio. The projected dividend requirement is approximately ¥7.10bn based on Q1 average shares of 47.36 million. Forecast profit attributable to owners of ¥26.0bn would cover that projected dividend about 3.7x. Retained earnings were ¥184.70bn, providing a substantial balance-sheet buffer for dividends. However, Q1 operating cash flow of ¥1.84bn and negative free cash flow of ¥0.79bn do not independently cover a linear quarterly portion of the projected dividend. Q1 cash dividends paid were ¥3.52bn, and financing cash flow remained positive because increased short-term loans helped offset dividend and investment cash outflows. Dividend sustainability is therefore strong on forecast earnings, retained earnings, liquidity, and interest-service capacity, but near-term funding quality depends on improvement in operating cash conversion and normalization of working capital.

Risk Assessment

Business risks include Property-market and project-timing risk: condominium-sales revenue declined 74.9% YoY and the segment recorded a ¥0.16bn loss, illustrating the volatility of development-sales recognition and project mix., Construction margin risk: construction revenue grew 13.4%, but segment profit increased only 2.8%, reducing margin; labor, materials, subcontractor costs, and project execution can further pressure profitability., Brokerage-cycle risk: sales brokerage delivered strong revenue and profit growth, but transaction volumes and commissions are sensitive to property prices, buyer sentiment, mortgage availability, and transaction activity., Recurring-property income risk: the core real estate management business provides substantial rent-related and management income, but remains exposed to tenant turnover, vacancy, rent conditions, property operating costs, and hospitality demand., Industry-specific interest-rate risk: higher Japanese interest rates could raise financing costs over time, reduce real-estate transaction affordability, pressure property valuations, and slow development demand..

Financial risks include High leverage alert: debt/EBITDA was 5.77x. The metric is high relative to the 4.0x benchmark, increasing sensitivity to any EBITDA setback, although debt-to-capital of 22.4%, cash of ¥86.94bn, and EBITDA interest coverage of 50.3x provide meaningful mitigation., Cash-conversion alert: OCF/net income was 0.33x and OCF/EBITDA was 0.19x. Inventory growth, lower trade payables, lower contract liabilities, and tax payments reduced operating cash flow, leaving Q1 free cash flow negative., Short-term funding increased: short-term loans rose 69.4% YoY to ¥11.69bn. Cash coverage is strong, but continued reliance on short-term debt while operating cash flow is weak would increase refinancing and liquidity sensitivity., Property-asset concentration: PPE represented 41.6% of total assets and land was ¥74.79bn, exposing the balance sheet to real-estate valuation, utilization, and return-on-asset risks..

Key concerns include Priority 1: conversion of accounting earnings into operating cash flow, especially the trajectory of inventories, trade payables, contract liabilities, and tax cash payments., Priority 2: restoration of operating leverage, as SG&A increased 9.5% while revenue grew 4.7% and operating margin compressed by 120bp., Priority 3: execution against the full-year plan, because Q1 operating-income progress was 20.0% versus a 25% linear reference., Priority 4: recovery in condominium-sales profitability and the pace at which finished real estate inventory is monetized., Priority 5: debt/EBITDA discipline if property investment, development funding, or working-capital needs remain elevated..

Investment Implications

Key takeaways include Revenue growth remains diversified, led by construction, real estate management, and brokerage, while the core management segment continues to generate the largest segment profit., Q1 net-income growth of 8.4% exceeded operating-profit performance because favorable non-operating items supported ordinary income; sustainable earnings improvement requires operating-margin stabilization., Annualized ROE of 11.3% is solid, but it is supported by healthy margins and leverage rather than rapid asset turnover, appropriate for an asset-heavy real-estate group., Balance-sheet liquidity and interest coverage are strong, but debt/EBITDA of 5.77x and weak cash conversion warrant close attention., The ¥150 full-year DPS implies a conservative 27.3% payout ratio versus forecast EPS, with balance-sheet and earnings support for the distribution..

Metrics to watch include Operating margin and SG&A growth relative to revenue growth, Real estate management segment revenue, rent-related revenue, and segment margin, Condominium-sales revenue, segment profit, and finished real-estate inventory turnover, Operating cash flow, OCF/net income, OCF/EBITDA, and free cash flow, Inventory, trade payables, contract liabilities, and income taxes paid, Debt/EBITDA, short-term-loan balance, cash/short-term-debt coverage, and interest coverage, Progress toward FY2027 guidance: ¥290.0bn revenue, ¥40.0bn operating income, and ¥26.0bn profit attributable to owners.

Regarding relative positioning, The company combines a substantial recurring real estate-management and rent-related earnings base with cyclical construction, brokerage, development-sales, hotel, and service operations. Its liquidity, modest debt-to-capital, and interest coverage compare favorably with its elevated debt/EBITDA profile, while its low goodwill reduces M&A-related balance-sheet risk. Relative earnings resilience depends on whether recurring management income and brokerage momentum can offset volatility in condominium-sales timing and construction margins.