HOKKAIDO GAS (9534) FY2027 Q1 Earnings Report

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Executive Summary

Due to deteriorating profitability in the core Gas Business and a sharp decline in the profit margin of the Electric Power Business, profits fell substantially despite revenue remaining virtually flat. Revenue was ¥380.4B (down -0.7% YoY), Operating Income was ¥34.2B (down -41.1%), Ordinary Income was ¥35.4B (down -40.9%), and Net Income was ¥25.2B (down -41.5%). The Operating Income margin declined significantly to 9.0% from 15.2% in the same period of the previous year, while the gross margin also contracted to 35.6%, with the increase in the cost of sales being the primary cause of the earnings decline.

Factors Affecting Performance

【Revenue】Revenue was ¥380.4B, essentially flat, down 0.7% YoY. By segment, the core Gas Business declined to ¥225.0B (down -6.9%), while the Energy-Related Business increased to ¥103.6B (up +20.8%), partially offsetting the decline in gas. The Electric Power Business was ¥63.2B (up +0.5%), remaining essentially flat. The Gas Business accounts for approximately 59% of total company revenue, and its decline was the primary cause of the overall lack of growth.

【Profit and Loss】Operating Income declined substantially to ¥34.2B (down -41.1%). Profit from the Gas Business fell to ¥31.2B (down -36.9%), and the Electric Power Business declined significantly to ¥4.3B (down -58.2%), while the Energy-Related Business secured an increase in profit to ¥5.5B (up +9.9%). Company-wide expenses also increased to ¥8.1B from ¥6.9B in the same period of the previous year, resulting in negative operating leverage. The recognition of ¥0.9B in extraordinary income supported Profit Before Tax, but the Net Income margin declined to 6.6% from 11.2% in the same period of the previous year. In conclusion, the Company experienced declines in both revenue and profit.

Segment Analysis

The Gas Business recorded revenue of ¥225.0B (down -6.9%) and Operating Income of ¥31.2B (down -36.9%), with a profit margin of 13.9%, representing the core of company-wide profit (approximately 74% of the total). The Electric Power Business remained essentially flat in terms of revenue at ¥63.2B (up +0.5%), but Operating Income plunged to ¥4.3B (down -58.2%), causing its profit margin to fall significantly from the previous year to 6.8%. The Energy-Related Business recorded both revenue and profit growth, with revenue of ¥103.6B (up +20.8%) and Operating Income of ¥5.5B (up +9.9%), although its profit margin of 5.3% remained below that of the Gas Business. The primary drivers of the company-wide profit decline were the Gas Business’s revenue decline and the deterioration in the profitability of the Electric Power Business; growth in the Energy-Related Business was insufficient to offset these factors.

Key Financial Indicators

【Profitability】The Operating Income margin was 9.0%, down from 15.2% in the same period of the previous year, while the gross margin also contracted to 35.6% (previous year: 38.1%). The Net Income margin was 6.6% (previous year: 11.2%), reflecting the increase in the cost of sales and company-wide expenses as background factors behind the deterioration in profitability.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥50.1B, approximately 2.0 times Net Income of ¥25.2B, confirming cash backing for accounting earnings. While the collection of trade receivables made a significant contribution, the OCF-to-EBITDA ratio remained at 0.69x, indicating room for improvement in cash conversion efficiency.【Investment Efficiency】Annualized ROE was 10.0%, and the total asset turnover ratio remained at a certain level for an asset-intensive business.【Financial Soundness】The Equity Ratio improved to 54.9% from the equivalent of 50.3% in the previous year, and the current ratio was approximately 106.6%. The Company has strong interest-payment capacity relative to interest-bearing debt, and its financial foundation is generally stable.

Cash Flow Analysis

Operating Cash Flow was ¥50.1B, up +28.5% YoY. The collection of trade receivables was a factor supporting the increase, while a decrease in trade payables and payments of corporate taxes and other taxes acted as cash outflows. Investing Cash Flow was -¥56.3B, reflecting continued maintenance and renewal investment in infrastructure assets, centered on ¥46.7B in capital expenditures. As a result, Free Cash Flow was -¥6.2B, indicating that investment could not be fully financed by OCF alone. Financing Cash Flow was -¥58.5B, with the main cash outflow factors being the net decrease in commercial paper, dividend payments, and repayment of long-term borrowings; cash and cash equivalents declined to ¥33.3B at the end of the period. Capital expenditures exceeded depreciation and amortization of ¥39.0B, and funding conditions should be monitored continuously as the Company prioritizes growth and renewal investment.

Earnings Quality

Operating Income, which indicates recurring earnings power, declined significantly by 41.1% YoY, and the profit level for the quarter strongly reflects deteriorating profitability in the core business. Non-operating income and expenses contributed only slightly positive net income, with income of ¥2.7B and expenses of ¥1.5B, and the difference between Ordinary Income and Operating Income was limited. Extraordinary income of ¥0.9B was recognized, meaning that a portion of Profit Before Tax of ¥36.3B was supported by temporary factors. From an accrual perspective, OCF reached approximately 2.0 times Net Income, indicating sound cash backing for earnings, with no excessive reliance on non-cash items. However, the OCF-to-EBITDA ratio was somewhat low at 0.69x, leaving room to improve the absolute efficiency of cash conversion from earnings.

Earnings Forecast and Guidance

Progress toward the Full-Year earnings forecast was 20.0% for Revenue, 26.8% for Operating Income, 27.2% for Ordinary Income, and 26.8% for Net Income. Profit-related indicators slightly exceeded the standard quarterly progress rate of 25%. However, the Full-Year Operating Income forecast of ¥128.0B incorporates a year-on-year decline of -22.1%, making it a conservative plan that anticipates further profit compression for the full year even after taking into account the substantial decline in Q1. The Revenue progress rate was 20.0%, slightly below the standard level, and achieving the Full-Year revenue forecast of ¥1902.0B (up +9.0% YoY) will require accelerated revenue growth from the second half onward. As of the current quarter, no revisions have been made to the earnings forecast or dividend forecast.

Shareholder Returns

The Full-Year dividend forecast is ¥27.00 per share, and the forecast Payout Ratio based on Full-Year forecast EPS of ¥106.38 is approximately 25.4%, representing a restrained dividend burden relative to earnings. Dividend payments of ¥11.5B during the current quarter were covered within OCF of ¥50.1B, ensuring dividend coverage through OCF. On the other hand, Free Cash Flow including investment was -¥6.2B, meaning that dividends and capital expenditures could not both be financed internally during the quarter alone. Nevertheless, the Equity Ratio of 54.9% indicates a stable financial foundation, and no revision has been made to the dividend forecast.

Risk Factors

1. Deterioration in the profitability of the core Gas Business: Revenue in the Gas Business declined substantially to ¥225.0B (down -6.9% YoY), while segment profit fell to ¥31.2B (down -36.9%). As this business accounts for approximately 74% of total company segment profit, fluctuations in demand trends and raw fuel costs have a significant impact on consolidated performance.

2. Deterioration in the profitability of the Electric Power Business: While revenue in the Electric Power Business remained essentially flat (up +0.5%), segment profit was ¥4.3B, down -58.2% YoY, and its profit margin declined significantly to 6.8%. Fluctuations in electricity procurement prices and wholesale electricity market prices pose a direct risk to profitability.

3. Decline in cash conversion efficiency: The OCF-to-EBITDA ratio remained at 0.69x, with the current quarter benefiting significantly from the collection of trade receivables. Whether this ratio can be maintained or improved after working capital improvements will be a capital allocation challenge as capital expenditures continue.

Industry Benchmark (For Reference; Company Analysis)

Profitability and Returns

Compared with peer companies, both the Operating Income margin and Net Income margin were below the median, placing profitability somewhat toward the lower end of the industry.

Growth and Capital Efficiency

The Revenue growth rate was substantially below the industry median, contrasting with peer companies that are generally experiencing revenue growth.

※Source: Company analysis

Key Points from the Earnings Results

1. The Operating Income margin declined by 617bp to 9.0%, primarily due to the Gas Business’s declines in both revenue and profit and the sharp deterioration in the Electric Power Business’s profit margin. The pace of profitability recovery in both businesses is a structurally important factor that will determine future performance.

2. OCF/Net Income was approximately 2.0 times, confirming cash backing for earnings; however, the OCF-to-EBITDA ratio was low at 0.69x, and sustainably improving cash conversion efficiency from cash generation dependent on the collection of trade receivables remains a challenge.

3. The Full-Year Operating Income progress rate was 26.8%, broadly in line with the plan, but the Full-Year plan itself incorporates a -22.1% YoY decline in profit. The certainty of a recovery in profitability from the second half onward will therefore be a key focus.

Theoretical Share Price (Reference Value)

Sensitivity: ¥1,127–¥1,194 at ±1% for the cost of equity, and ¥1,159–¥1,160 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).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

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

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings summary data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with a professional as necessary.

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