Shikoku Electric Power Company (9507) FY2026 Q3 Earnings Report

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Executive Summary

The most important takeaway from this earnings announcement is that Operating Income was maintained at approximately the previous year’s level despite declining Revenue, as improved cost efficiency and earnings in the power generation and retail business absorbed the impact of lower sales. Revenue was ¥561.03B (-9.2% YoY), Operating Income was ¥65.34B (+0.0%), Ordinary Income was ¥65.34B (-3.0%), and Net Income was ¥48.37B (-2.7%). The primary factor behind the decline in Revenue was a decrease in external sales in the power generation and retail business, while segment profit in that business increased due to improved earnings from fuel cost adjustments and other factors. The divergence between Ordinary Income and Operating Income was limited, although higher interest expenses affected the decline in Ordinary Income.

Factors Affecting Earnings

【Revenue】Revenue was ¥561.03B, representing a 9.2% YoY decline. The primary causes were lower sales in the power generation and retail business (Revenue of ¥431.24B, YoY -10.6%) and the transmission and distribution business (¥59.64B, YoY -13.5%), which together accounted for 87.2% of consolidated sales. Meanwhile, the information and communications business (+5.0%) and other businesses (+43.7%) recorded higher sales, with non-electricity businesses partially offsetting the decline.

【Profit and Loss】Operating Income was ¥65.34B, maintaining the same level as the previous year (YoY +0.0%), while the Operating Income margin improved to 11.6% from 10.6% in the previous year. Segment profit in the power generation and retail business rose sharply to ¥37.82B (YoY +25.7%), apparently reflecting the impact of fuel procurement costs and the fuel cost adjustment system. In contrast, profit in the transmission and distribution business declined sharply to ¥9.58B (YoY -53.7%), potentially affected by the wheeling charge system and grid-related costs. Ordinary Income was ¥65.34B (YoY -3.0%), as higher interest expenses of ¥5.43B (¥4.66B in the previous year) worsened non-operating income and expenses. Net Income was ¥48.37B (YoY -2.7%), maintaining a level broadly consistent with the decline in Ordinary Income even after income taxes and other deductions. Overall, the trend was one of lower sales and higher profit on an Operating Income basis, but lower sales and lower profit on an Ordinary Income and Net Income basis, with increased profit in the power generation and retail business absorbing the impact of lower sales.

Segment Analysis

The power generation and retail business recorded Revenue of ¥431.24B (YoY -10.6%) and segment profit of ¥37.82B (YoY +25.7%), representing a substantial increase in profit despite lower sales, with a profit margin of 8.8%. The transmission and distribution business recorded Revenue of ¥59.64B (YoY -13.5%) and profit of ¥9.58B (YoY -53.7%), resulting in lower sales and lower profit, while its profit margin declined to 16.1%. The information and communications business recorded Revenue of ¥30.39B (YoY +5.0%) and profit of ¥8.80B (YoY +7.6%), maintaining its position as a highly profitable segment with a 29.0% profit margin. The energy business recorded Revenue of ¥16.42B (YoY -2.9%) and profit of ¥3.94B (YoY +10.4%), resulting in lower sales but higher profit. The construction and engineering business recorded Revenue of ¥14.99B (YoY -0.2%) and profit of ¥2.53B (YoY -13.4%), with profit declining despite nearly flat sales. In terms of segment composition, the power generation and retail business is the largest pillar in both Revenue and profit, while the sharp decline in profit in the transmission and distribution business is a key area for monitoring consolidated earnings.

Key Financial Metrics

【Profitability】The Operating Income margin was 11.6%, improving by approximately 1.0pt from 10.6% in the previous year, while the Net Income margin improved to 8.6% from approximately 8.0% in the previous year. Annualized ROE was 13.7%. Its decomposition into a Net Income margin of 8.6%, total asset turnover of 0.436x, and financial leverage of 3.66x indicates a structure in which high financial leverage supports profitability.【Cash Flow Quality】Cash and deposits were ¥95.24B, down 26.8% YoY, while accounts receivable also declined 25.2% YoY to ¥76.75B, with progress in cash collection partially mitigating the decline in cash.【Investment Efficiency】Total asset turnover remained low, reflecting the capital-intensive nature of the business, which owns substantial transmission and distribution networks and power generation facilities.【Financial Soundness】The Equity Ratio was 27.3%, improving from 26.0% in the previous year. However, non-current liabilities of ¥1,040.97B accounted for the majority of total liabilities, and reliance on long-term funding remained high, with long-term borrowings of ¥464.30B and bonds of ¥407.00B.

Cash Flow Analysis

Although detailed disclosure of the statement of cash flows is limited, an analysis of funding trends based on balance sheet changes shows that cash and deposits declined by ¥34.95B (-26.8% YoY) to ¥95.24B. Meanwhile, accounts receivable also declined by ¥25.90B from the previous year to ¥76.75B, with progress in the collection of operating receivables partially mitigating the decline in cash. Inventories increased 20.5% YoY to ¥50.69B, suggesting that increases in fuel inventories and other items may be tying up working capital. Retained earnings increased by ¥38.94B YoY to ¥293.82B, indicating continued retention of accumulated profits. At the same time, outstanding long-term funding, including long-term borrowings and bonds, increased from the previous year, suggesting continued debt financing for capital expenditures and funding requirements.

Quality of Earnings

Ordinary Income was ¥65.34B, approximately equal to Operating Income of ¥65.34B, as non-operating income of ¥6.14B (including dividend income of ¥0.75B and other non-operating income of ¥1.13B) and non-operating expenses of ¥6.13B (primarily interest expenses of ¥5.43B) nearly offset each other. Interest expenses increased 16.6% from ¥4.66B in the previous year to ¥5.43B, contributing to the deterioration in non-operating income and expenses. However, they remain within the range of recurring financial costs and cannot be considered a temporary factor. Net Income of ¥48.37B resulted from deducting income taxes and other items of ¥16.97B from Ordinary Income of ¥65.34B, implying an effective tax rate of approximately 26.0%, within a normal range. Comprehensive income was ¥37.61B, below Net Income of ¥48.37B. The difference was attributable to negative other comprehensive income, including adjustments related to retirement benefits of -¥9.40B and foreign currency translation adjustments of -¥3.27B. This divergence reflects non-recurring factors arising from market fluctuations and pension remeasurement and does not impair the quality of Net Income itself, although it should be monitored as a factor affecting changes in net assets.

Earnings Forecast and Guidance

The progress rates for cumulative Q3 results relative to the Full-Year forecast, revised on January 30, were 72.9% for Revenue (forecast: ¥770.00B), 95.4% for Operating Income (forecast: ¥68.50B), and 96.1% for Ordinary Income (forecast: ¥68.00B). Although the Revenue progress rate was slightly below the standard 75%, progress on the profit front was significantly above the standard, indicating that the Full-Year forecast assumes a relatively low level of profit in Q4. The Full-Year Operating Income forecast of ¥68.50B represents a YoY decline of 23.1%, while the Ordinary Income forecast of ¥68.00B represents a YoY decline of 25.8%. Full-Year results are therefore expected to fall below the previous year, and the improvement in profit margins through the cumulative period is not assumed to continue at the same level from Q4 onward.

Shareholder Returns

The Q2 dividend remains unchanged at ¥25 per share, and the Full-Year dividend forecast remains unchanged at ¥50 per share. The forecast Payout Ratio based on forecast EPS of ¥253 is approximately 19.8%, substantially below the 60% benchmark for dividend sustainability. The forecast total dividend amount of approximately ¥10.28B also provides ample coverage relative to cumulative Q3 profit attributable to owners of the parent of ¥48.23B. As there has been no disclosure regarding share repurchases, shareholder returns are evaluated based on the Payout Ratio rather than the Total Return Ratio.

Risk Factors

1. Fuel and electricity market volatility risk: While Revenue in the power generation and retail business declined 10.6%, segment profit increased 25.7%. The timing lag in the fuel cost adjustment system and fluctuations in fuel and wholesale electricity prices therefore represent structural risks that could determine the sustainability of the improvement in earnings.

2. Declining profitability in the transmission and distribution business: Segment profit in the transmission and distribution business was ¥9.58B, down 53.7% from ¥11.11B in the previous year, and its profit margin also declined to 16.1%. The wheeling charge system and grid reinforcement investments may affect profitability going forward.

3. Financial leverage and interest rate sensitivity: The D/E ratio was high at 2.66x, while interest expenses increased 16.6% YoY to ¥5.43B. Interest coverage remained resilient for the time being at 12.03x; however, in a rising interest rate environment, higher refinancing costs for long-term funding could weigh on Ordinary Income.

Industry Benchmark (For Reference; Compiled by the Company)

Key Takeaways from the Earnings Announcement

1. Despite a 9.2% decline in Revenue, the Operating Income margin improved from 10.6% in the previous year to 11.6%, with improved earnings in the power generation and retail business contributing to the maintenance of consolidated profit. Future quarters will provide an indication of whether this improvement is temporary, driven by fuel prices and regulatory factors, or reflects a structural improvement in cost competitiveness.

2. Progress toward the Full-Year forecast was high, at 95.4% for Operating Income and 96.1% for Ordinary Income, with Q4 premised on a relatively low level of profit. The Full-Year forecast itself also represents YoY declines of 23.1% for Operating Income and 25.8% for Ordinary Income, creating a gap between strong cumulative performance and the Full-Year outlook.

3. The high leverage reflected in a D/E ratio of 2.66x and the 20.5% YoY increase in inventories indicate that, while the characteristics of this capital-intensive business should be taken into account, trends in capital efficiency and inventory levels warrant ongoing monitoring.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,409–¥2,555 at ±1% for the cost of equity, and ¥2,476–¥2,488 at ±0.1 for ω.

Notes:

• Because progress toward the Full-Year forecast for Net Income (93%) exceeds the standard level (75%), forecast EPS has been adjusted upward within a maximum range of +10% (because companies whose results are ahead of forecast progress tend to outperform their forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Net assets as of the quarter-end are used (there is a timing difference relative to the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Valuation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / This is a mechanically calculated value based solely on publicly disclosed data; it is not a forecast of the market share price or a recommendation of any specific investment action, and 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. 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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