HIROSHIMA GAS (9535) FY2026 Q3 Earnings Report

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Executive Summary

The key feature of the current period was that, despite a decline in revenue, the operating loss narrowed substantially, while ordinary income and net income turned profitable. Revenue was ¥61.88B (down -3.4% YoY, a decrease of ¥2.15B), operating income was ¥-0.22B (an improvement of ¥0.64B from ¥-0.86B in the previous year), ordinary income was ¥0.66B (turning profitable from ¥-0.35B in the previous year), and net income attributable to owners of the parent was ¥0.50B (turning profitable from ¥-0.29B in the previous year). The decline in revenue from the core gas business was offset by gross profit improvement from cost reductions, while non-operating income, including equity-method investment gains and dividends received, supported the shift into profitability from the ordinary income stage onward.

Factors Affecting Performance

【Revenue】Revenue was ¥61.88B, down 3.4% year on year. The primary factor was a 5.4% decline in the Gas Business, which accounted for 75.8% of the revenue mix. The LPG Business was ¥12.69B, essentially flat at +0.4%, while Other Businesses expanded 24.3% to ¥2.31B, although their scale remains small. The structure in which demand and unit-price factors in the core business determine the consolidated top line remains in place.

【Profit and Loss】The operating loss was ¥0.22B, an improvement of ¥0.64B from the ¥0.86B loss in the previous year, and the operating margin improved to -0.4% from -1.3%. This improvement was supported by the fact that the cost of sales declined at a faster pace than revenue, lifting the gross margin to 29.0% from 27.4%. Meanwhile, ordinary income of ¥0.66B was heavily dependent on ¥1.08B of non-operating income, including ¥0.53B in equity-method investment gains and ¥0.22B in dividends received, resulting in a substantial divergence between operating and ordinary income. The shift to net income of ¥0.55B (¥0.50B attributable to owners of the parent) was also driven primarily by non-operating income, in addition to ¥0.03B in extraordinary income. In conclusion, despite declining revenue, profitability improved substantially, representing a phase of earnings growth despite lower revenue (loss reduction and a return to profitability).

Segment Analysis

The Gas Business recorded revenue of ¥46.87B (-5.4%) and an operating loss of ¥0.36B, an improvement of ¥0.798B from the ¥1.16B loss in the previous year, and led the improvement in company-wide earnings. The LPG Business remained flat with revenue of ¥12.69B (+0.4%), but operating results deteriorated from a ¥0.13B profit in the previous year to a ¥0.02B loss, reducing the earnings diversification effect. Other Businesses, including construction and services for senior citizens, expanded 24.3% to ¥2.31B, but operating income declined to ¥0.03B from ¥0.10B in the previous year, indicating low profit conversion efficiency from revenue growth. The reduction in the company-wide operating loss was primarily attributable to improved profitability in the Gas Business, while the LPG and Other Businesses tended toward higher revenue but lower earnings.

Key Financial Metrics

【Profitability】The operating margin improved to -0.4% from -1.3%, and the net profit margin improved to 0.9% from a negative level in the previous year. However, the company remained loss-making at the operating level despite a gross margin of 29.0%. 【Cash Quality】Of ordinary income of ¥0.66B, equity-method investment gains of ¥0.53B and dividends received of ¥0.22B were the main components of non-operating income, indicating that net income was formed by factors separate from operating profitability. 【Investment Efficiency】Annualized ROE was low at 1.0%, while the total asset turnover ratio was also low due to the asset-intensive nature of the business. 【Financial Soundness】The equity ratio improved to 56.4% from 52.7%, and current assets of ¥37.30B substantially exceeded current liabilities of ¥19.03B, indicating stable short-term liquidity.

Cash Flow Analysis

Although individual line items in the statement of cash flows are not included in the disclosed data, cash trends can be assessed from changes in the balance sheet. Cash and deposits were ¥17.76B, down ¥2.85B from ¥20.62B in the previous year, while long-term borrowings also decreased by ¥4.45B year on year to ¥17.63B, suggesting that funds may have been allocated toward reducing interest-bearing debt. Investment securities increased by ¥1.89B year on year to ¥16.36B, indicating an allocation of funds to investment activities. Accounts payable increased by ¥2.03B year on year to ¥7.60B, with the increase in trade payables providing a certain degree of support for short-term liquidity. Overall, the company appears to be pursuing conservative financial management by reducing debt, despite a decline in its cash balance.

Quality of Earnings

It should be noted that the return to profitability during the current period was highly dependent not only on improved operating results but also on non-operating income, which cannot necessarily be regarded as recurring. Of the ¥1.08B in non-operating income, equity-method investment gains of ¥0.53B and dividends received of ¥0.22B were the main components. Because these items are affected by the performance and dividend policies of investee companies, they should be evaluated separately from the core business’s earnings power. Extraordinary income was small at ¥0.03B, and the impact of temporary factors was limited. Comprehensive income was ¥1.44B, exceeding net income of ¥0.55B. The difference was attributable to ¥1.12B in valuation differences on available-for-sale securities, an accounting increase reflecting changes in asset prices and therefore distinct in nature from an improvement in operating profitability.

Earnings Forecast and Guidance

The Q3 cumulative progress rates against the Full-Year plan were 69.4% for revenue, 34.1% for ordinary income, and 37.0% for net income. Operating income was a cumulative loss of ¥0.22B, resulting in a negative progress rate against the Full-Year plan of ¥1.30B. Achieving the operating income plan requires approximately ¥1.52B in operating income in Q4 alone. Substantial improvement in Q4 earnings is also required to achieve the ordinary income plan of ¥1.95B and the net income plan of ¥1.35B. The Full-Year forecast has not been revised from the previous forecast. While revenue and ordinary income are expected to show modest year-on-year changes (revenue -2.6% and ordinary income +2.1%), the net income plan calls for a 20.0% decline year on year. This indicates a plan structure in which operating improvement does not necessarily translate directly into higher net income.

Shareholder Returns

The Q2 dividend was ¥6.00 per share, and the Full-Year dividend forecast is ¥12.00, with no revision from the previous forecast. Based on forecast Full-Year net income of ¥1.35B and the average number of shares outstanding during the period, the forecast payout ratio is approximately 61.0%, calculated using dividends alone as the numerator. Cumulative Q3 net income attributable to owners of the parent was ¥0.50B, representing progress of only 37.0% against the Full-Year plan. Accordingly, the degree to which the Full-Year plan is achieved will affect dividend sustainability. No disclosure regarding share buybacks has been made.

Risk Factors

1. Concentration of earnings in the Gas Business: The Gas Business accounts for 75.8% of consolidated revenue, and revenue from this business declined 5.4% year on year during the current period. Consolidated performance is structurally subject to significant fluctuations depending on raw material and LNG procurement prices and the timing of fuel-cost adjustments.

2. Insufficient interest-payment capacity from operating income: Against an operating loss of ¥0.22B, the company recorded interest expenses of ¥0.13B, indicating that operating income was insufficient to absorb the interest burden. Trends in the cost of funds for long-term interest-bearing liabilities—long-term borrowings of ¥17.63B and bonds of ¥16.00B—require monitoring.

3. Deterioration in LPG Business profitability: Operating results in the LPG Business shifted from a ¥0.13B profit in the previous year to a ¥0.02B loss, reducing the earnings diversification effect outside the core gas business.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (utilities)

Profitability and Return

The company’s operating margin was negative as of the current period, and median data for assessing its relative position within the industry is not currently available.

Growth and Capital Efficiency

The revenue growth rate was negative, and comparative data against the industry median is not currently available.

※Source: Compiled by the Company

Key Points from the Financial Results

1. The operating loss improved by ¥0.64B year on year, while the gross margin also increased by approximately 154bp to 29.0%, indicating progress in cost management. However, the company has not yet achieved operating profitability.

2. The return to profitability in ordinary income and net income was highly dependent on non-operating income, including ¥0.53B in equity-method investment gains, and should be considered separately from improvement in the core business’s operating profitability.

3. Achieving the Full-Year operating income plan of ¥1.30B requires approximately ¥1.52B in operating income in Q4 alone. Profitability trends, including the seasonality of the gas business, will determine whether the Full-Year plan is achieved.

Theoretical Share Price (Reference Value)

Sensitivity: ¥814–¥860 at ±1% for the cost of equity, and ¥830–¥841 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end were 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.

(Model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest Rate Reference Month: 2026-07 / Mechanically calculated using only publicly disclosed data; this is not a forecast of the market price or a recommendation of any specific investment action, nor does it predict or guarantee the future share price.)

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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 a professional as necessary.

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AI Financial Analysis

Executive Summary

Hiroshima Gas delivered a material year-on-year earnings recovery through FY2026 Q3, although the consolidated gas utility business remained loss-making at the operating level. Revenue declined 3.4% YoY to ¥61.879bn, principally reflecting lower gas-business sales. Gross profit nevertheless increased 1.0% YoY to ¥17.921bn. The gross margin expanded by approximately 160bp to 29.0% from 27.4% in the prior-year period, indicating improved procurement-to-selling-price economics despite lower revenue. Operating loss narrowed sharply to ¥0.220bn from ¥0.863bn, an improvement of ¥0.643bn, and the operating margin improved by roughly 99bp to -0.4%. Ordinary income turned positive at ¥0.664bn, compared with a ¥0.351bn loss a year earlier. Profit attributable to owners of parent also turned positive at ¥0.500bn, versus a ¥0.294bn loss in the prior-year period. The return to bottom-line profitability was supported by ¥1.082bn of non-operating income, including ¥0.222bn of dividend income and ¥0.530bn of equity-method earnings. Consequently, the 0.8% net margin remains modest and is not yet matched by a positive operating margin. Comprehensive income was stronger than net income at ¥1.441bn, supported by positive valuation changes in securities and foreign-currency translation adjustments. The annualized DuPont ROE was only 0.9%, with the low net margin being the principal constraint despite reasonable annualized asset turnover of 0.645x and financial leverage of 1.77x. Liquidity remains robust, with a 196.0% current ratio, a 190.7% quick ratio, and ¥17.761bn of cash and deposits. Capital structure is moderate on reported metrics, with D/E of 0.77x and debt/capital of 19.6%, but negative EBIT makes debt-servicing capacity a key issue. The company has maintained its FY2026 forecast, but Q3 progress is behind the normal 75% seasonal benchmark for operating, ordinary, and net income. The investment-relevant issue into Q4 is whether the gas segment can sustain its substantial loss reduction and convert gross-margin recovery into consistently positive operating earnings.

Profitability Analysis

Annualized DuPont ROE was 0.9%, decomposed into a 0.8% net profit margin, 0.645x asset turnover, and 1.77x financial leverage. The limiting factor is profitability rather than balance-sheet utilization or leverage: the annualized net margin is below the 3% minimum profitability benchmark, while annualized turnover is reasonable for an asset-intensive utility. Operating margin improved to -0.4% from approximately -1.3% in FY2025 Q3, a 99bp improvement, as gross profit rose 1.0% despite a 3.4% sales decline. Gross margin improved 160bp to 29.0%, suggesting better fuel-cost pass-through, selling-price conditions, or procurement economics. However, the company still recorded an operating loss of ¥0.220bn, so the gross-profit improvement has not yet fully absorbed fixed operating costs. The gas business, the largest revenue segment at ¥46.873bn, reduced its segment loss to ¥0.365bn from ¥1.163bn; this ¥0.798bn improvement was the dominant driver of consolidated operating recovery. LPG revenue was broadly stable at ¥12.691bn, up 0.4% YoY, but its segment result deteriorated to a ¥0.023bn loss from a ¥0.129bn profit. Other businesses generated the only positive reported segment profit, ¥0.035bn, although this was below ¥0.100bn a year earlier. Under the reported segment-profit contribution, Other is the core earnings contributor at Q3, while Gas remains the core revenue franchise. Non-operating income of ¥1.082bn exceeded the operating loss and enabled ordinary profitability; therefore, the current earnings profile remains dependent on investment-related and affiliate income rather than solely on utility operations. Interest burden is structurally unfavorable because EBIT is negative: the reported interest burden was -3.18x and interest coverage was -1.75x. The annualized ROIC of -0.3% also indicates that operating capital is not currently earning an adequate return. Sustainability of the earnings rebound depends on the gas segment completing its turnaround and on maintaining gross-margin gains rather than relying on non-operating income.

Growth Assessment

Consolidated revenue contracted 3.4% YoY to ¥61.879bn, while the FY2026 full-year revenue forecast assumes a 2.6% YoY decline to ¥89.200bn. Q3 revenue progress is 69.4% of the full-year forecast, 5.6 percentage points below the standard 75% Q3 run rate; this is not a material deviation under the stated 10-point threshold. Gas segment external revenue fell 5.4% YoY to ¥46.873bn, accounting for the consolidated revenue decline. LPG segment revenue was resilient, increasing 0.4% to ¥12.691bn. Other-business revenue grew 24.3% to ¥2.313bn, but its segment profit declined to ¥0.035bn from ¥0.100bn, indicating lower profitability on that growth. Gross profit increased to ¥17.921bn notwithstanding lower sales, which is a constructive sign for pricing and cost recovery. The operating-loss reduction of ¥0.643bn YoY is meaningful, but operating income has not yet returned to positive territory. Against the full-year forecast of ¥1.300bn operating income, Q3 cumulative operating income is negative ¥0.220bn, or -16.9% progress versus the normal 75% benchmark. Ordinary-income progress is 34.1% of the ¥1.950bn forecast, 40.9 points below the standard Q3 pace. Net-income progress is 37.0% of the ¥1.350bn forecast, 38.0 points below the standard Q3 pace. These deviations imply a substantial Q4 earnings concentration, potentially reflecting utility seasonality, but they also raise the execution bar for the unchanged forecast. The absence of a forecast revision leaves management's expectations intact, yet Q4 operating profit must be materially stronger than the cumulative Q3 result to achieve guidance. The principal indicator of revenue sustainability is stabilization in gas sales volumes and effective fuel-cost pass-through, while the key indicator of profit quality is a transition from non-operating-income-supported profit to positive operating income.

Financial Health

Liquidity is strong. Current assets of ¥37.298bn exceed current liabilities of ¥19.028bn, producing working capital of ¥18.270bn and a current ratio of 196.0%. The quick ratio is similarly high at 190.7%, supported primarily by ¥17.761bn of cash and deposits and ¥8.418bn of trade receivables. Accordingly, there is no apparent short-term maturity mismatch between current assets and current obligations. Total equity increased to ¥72.205bn from ¥71.592bn a year earlier, and the equity ratio improved to 53.8% from 52.7%. Reported D/E of 0.77x is below the 2.0x aggressive-leverage warning threshold, while debt/capital of 19.6% is conservative relative to the 40% investment-grade reference point. The balance sheet includes ¥17.627bn of long-term loans and ¥16.000bn of bonds payable, making stable access to financing important for the capital-intensive gas network. Long-term loans declined ¥4.446bn, or 20.1% YoY, which is supportive of solvency. However, the debt-service quality alert is material: interest coverage was -1.75x because EBIT was negative ¥0.220bn against ¥0.126bn of interest expense. This does not indicate an immediate liquidity problem given cash holdings and current ratios, but it means recurring operations did not cover cash interest through Q3. Accounts payable increased ¥2.031bn, or 36.5% YoY, to ¥7.600bn; this supports near-term working capital but should be monitored as it may reflect payment timing or higher procurement balances. Intangible assets increased ¥0.327bn, or 176.8% YoY, to ¥0.512bn, but remain immaterial at 0.4% of total assets. Property, plant and equipment remains the principal asset base at ¥68.339bn, or 53.4% of total assets, consistent with the capital-intensive regulated-utility model. Investment securities totaled ¥16.360bn, or 12.8% of assets, and contributed to non-operating income and comprehensive-income volatility. Asset retirement obligations were ¥0.222bn and the net defined benefit liability was ¥0.284bn.

Notable B/S Changes

Intangible assets: +¥0.327bn (+176.8%) to ¥0.512bn; the increase is large in percentage terms but remains immaterial at 0.4% of total assets. Accounts payable: +¥2.031bn (+36.5%) to ¥7.600bn; this increased short-term funding from suppliers and warrants monitoring alongside procurement costs and cash conversion. Long-term loans: -¥4.446bn (-20.1%) to ¥17.627bn; deleveraging is supportive of solvency, although negative operating interest coverage remains a constraint. Investment securities: +¥1.887bn (+13.0%) to ¥16.360bn; the sizable asset balance contributed to valuation-related comprehensive income sensitivity.

Cash Flow Quality

Dividend Sustainability

The company paid an interim dividend of ¥6.00 per share and forecasts full-year DPS of ¥12.00. The calculated interim payout ratio is 82.5%, based on the ¥6.00 payment and FY2026 Q3 net income, which is elevated because cumulative earnings are still modest. On the full-year forecast, the ¥12.00 DPS represents an estimated dividend payout ratio of approximately 61.0% against forecast EPS of ¥19.68. This is slightly above the 60% sustainability reference point, but remains below the 100% warning threshold. Dividend sustainability therefore depends on delivery of the ¥1.350bn full-year profit forecast rather than on the Q3 cumulative earnings base. The balance sheet provides support through ¥17.761bn of cash and deposits, positive working capital, and moderate reported leverage. However, negative operating income and negative interest coverage reduce the margin of safety if the expected Q4 earnings recovery does not materialize. The unchanged dividend forecast signals management's intention to maintain shareholder distributions, but future coverage should be assessed against recurring operating earnings rather than investment and affiliate income.

Risk Assessment

Business risks include Gas-business revenue declined 5.4% YoY to ¥46.873bn and the segment remained loss-making at ¥0.365bn, exposing the group to demand, volume, tariff, and fuel-cost pass-through risk., Commodity exposure, particularly LNG and other fuel procurement costs, can pressure margins if cost-adjustment mechanisms lag market movements or if competitive conditions constrain retail price recovery., The LPG segment moved from a ¥0.129bn profit to a ¥0.023bn loss despite broadly flat revenue, indicating margin sensitivity within a key diversification business., Utility operations remain exposed to regional demand conditions, weather-driven consumption variability, natural disasters, network resilience requirements, and regulatory changes affecting permitted returns and customer competition., The ¥7.900bn construction-in-progress balance indicates ongoing infrastructure investment execution risk, including cost inflation and the need for an adequate return on completed assets..

Financial risks include Interest coverage of -1.75x is a material debt-service warning: negative EBIT did not cover ¥0.126bn of interest expense through Q3., The reported interest burden of -3.18x reflects the fact that financing costs are significant relative to negative EBIT, making earnings sensitive to borrowing costs and the pace of operating recovery., The annualized ROIC of -0.3% and annualized ROE of 0.9% indicate weak current returns on the substantial asset and equity base., Accounts payable rose 36.5% YoY to ¥7.600bn; a continued increase without a corresponding operating recovery could indicate greater reliance on supplier financing for working capital., Investment securities of ¥16.360bn expose comprehensive income and equity to market-value movements; securities valuation differences supported the current period's comprehensive income..

Key concerns include Highest priority: the FY2026 forecast requires a pronounced Q4 recovery, as operating-income progress is -16.9%, ordinary-income progress is 34.1%, and net-income progress is 37.0% versus the normal 75% Q3 benchmark., High priority: consolidated profitability remains dependent on ¥1.082bn of non-operating income, including equity-method earnings and dividends, while core operations reported a loss., High priority: the gas segment's loss narrowed substantially but must become sustainably profitable for the earnings recovery to be durable., Moderate priority: payout coverage is dependent on full-year forecast delivery, as the estimated full-year dividend payout ratio is approximately 61.0% and the interim payout ratio against Q3 earnings is 82.5%., Moderate priority: capital-intensive utility assets require continued investment discipline and reliable regulated or contractual returns to lift ROIC..

Investment Implications

Key takeaways include Gross-margin improvement and a ¥0.643bn reduction in operating loss demonstrate a meaningful earnings recovery versus FY2025 Q3., The gas segment drove the turnaround in profitability, reducing its loss by ¥0.798bn YoY, but remains the central operating risk because it is still loss-making., Ordinary and net income are positive, but non-operating income of ¥1.082bn was essential to the result, limiting the quality of current profitability., Liquidity and reported leverage are sound, yet negative interest coverage means operational recovery is more important than balance-sheet ratios alone imply., The unchanged full-year forecast embeds a heavily back-end-loaded Q4, making delivery of positive operating income the key near-term test..

Metrics to watch include Gas segment revenue, segment margin, and the timing of a return to positive segment profit, Consolidated operating margin and annualized ROIC, Fuel-cost pass-through effectiveness and gross-margin retention, Q4 operating, ordinary, and net-income delivery versus FY2026 forecasts of ¥1.300bn, ¥1.950bn, and ¥1.350bn, respectively, Interest coverage and the relationship between EBIT and ¥0.126bn of cumulative interest expense, Accounts payable trend and cash balance movement, Dividend coverage relative to forecast EPS and recurring operating profit.

Regarding relative positioning, Hiroshima Gas displays the defensive liquidity and asset backing typical of a regional gas utility, with a 53.8% equity ratio and strong short-term liquidity. Relative operating positioning is weaker than a mature utility profitability profile because the company recorded a negative operating margin, negative annualized ROIC, and negative interest coverage through Q3. The improving gross margin and sharply reduced gas-segment loss are constructive, but the earnings profile remains less resilient than that of utilities generating stable positive operating profit and interest coverage from regulated core operations.