STARTS CORPORATION INC. 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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