HIROSHIMA GAS CO.,LTD. FY2027 Q1 Earnings Report

Financial Highlights

• Net Sales: ¥22.35B
• Operating Income: ¥704M
• Net Income: ¥427M
• EPS: ¥5.59

Income Statement

Balance Sheet

Profitability Ratios

Year-over-Year Comparison

Share Information

Segment Information

Full Year Forecast

---

AI Financial Analysis

Executive Summary

FY2027 Q1 results show a mixed start: revenue growth but sharp profit compression due to weaker gas margins and higher tax burden. Revenue rose 4.1% YoY to 223.5bn JPY-equivalent (223.53 億円), while operating income fell 22.6% to 7.04 億円. Ordinary income declined 27.4% to 7.18 億円, and net income decreased 32.9% to 3.84 億円. Gross margin held at 31.3%, but operating margin compressed to 3.2% from 4.2% YoY (about -108 bps). Ordinary margin also compressed to 3.2% from 4.6% (-140 bps). Net margin fell to 1.7% from 2.7% (-94 bps). Segment mix was pivotal: LPG posted resilient profitability (8.9% margin) offsetting a steep contraction in Gas (0.9% margin). Non-operating income of 2.23 億円 (notably dividend income of 1.23 億円) partially cushioned operating weakness, but equity-method losses (0.89 億円) and a high effective tax rate (40.4%) pressured bottom line. Leverage and liquidity remain conservative, with current ratio at 198% and D/E at 0.67x. Interest coverage is strong at 14.7x, supported by modest interest expense. Progress versus full-year guidance is mixed: revenue is broadly on track, operating income is ahead, while net profit lags due to the tax burden and equity method losses. ROE for the quarter is low at 0.5%, driven by thin margins and a low asset turnover of 0.178. The balance sheet is asset-heavy (PPE 53.6% of assets), consistent with a regulated utility footprint. Forward-looking, stabilization of gas margins and normalization of the tax burden are key to closing the gap to full-year net income guidance. Continued strength in LPG profitability is a positive offset as the company executes on its plan.

Profitability Analysis

ROE of 0.5% decomposes into Net Profit Margin (1.7%) × Asset Turnover (0.178) × Financial Leverage (1.67x). The main driver of the decline is the net margin, which fell YoY as operating margin contracted and the effective tax rate remained elevated. Operating margin decreased to 3.1% as gas segment profitability weakened sharply despite stable gross margin, indicating limited operating leverage and sensitivity to cost pass-through timing. Asset turnover of 0.178 reflects the capital-intensive nature of gas infrastructure, and it has less variability QoQ than margins. Financial leverage at 1.67x is conservative and did not exacerbate the ROE decline. The largest moving piece this quarter was Gas segment operating income (-70.4% YoY), which compressed consolidated margins; LPG's steadier 8.9% margin helped but could not offset the Gas shortfall. The elevated tax burden further reduced net margin, widening the ordinary-to-net income gap. SG&A growth relative to revenue is not separately disclosed; however, the margin compression in Gas implies weaker operating leverage within that segment. Sustainability: LPG margin strength appears recurring given stable YoY performance, while Gas margin weakness is more likely cyclical/temporary, linked to fuel cost adjustments and seasonality, rather than structural.

Growth Assessment

Top-line growth of 4.1% was broad-based: Gas +3.0% and LPG +2.8%. Profit growth was negative as operating income declined 22.6%, driven by Gas margin compression; LPG operating income rose 5.9%, showcasing resilience. Non-operating income contributed 2.23 億円, mainly recurring dividends (1.23 億円), but equity-method losses (-0.89 億円) weighed on ordinary income. The effective tax rate of 40.4% suppressed net profit growth relative to ordinary income. For FY guidance, revenue progress is ~24.3% of full-year (near the typical 25% Q1 cadence), and ordinary income progress is ~25.6% (on track). Operating income progress is ~35.2%, ahead of cadence, while net income progress is ~17.5%, lagging. Outlook hinges on normalization of Gas margins through fuel cost adjustments and maintaining strong LPG profitability.

Financial Health

Liquidity is solid: current ratio 198% and quick ratio 193% indicate ample short-term coverage. Capital structure is conservative with D/E at 0.67x and Debt/Capital at 17.0%. Interest-bearing debt is 153.22 億円 against cash and deposits of 149.79 億円, implying near-full cash coverage of debt. Short-term loans are minimal at 1.40 億円 and well covered by cash (Cash/ST debt ~107x), limiting maturity mismatch risk. Long-term funding aligns with the asset duration of PPE (53.6% of assets), supporting balance sheet stability. No off-balance sheet obligations are noted in the provided data.

Cash Flow Quality

Working capital indicators are stretched: DSO of 112 days and DIO of 156 days suggest slower cash conversion within the quarter. The high inventory and receivables intensity can elevate intra-year cash needs, though seasonality in gas utilities can drive such patterns. Interest coverage at 14.7x supports the view that earnings comfortably cover financing costs even with working capital frictions.

Dividend Sustainability

FY guidance implies EPS of 32.01 JPY and DPS of 12 JPY, a payout ratio of ~37.5%, comfortably within a sustainable range for utilities. Balance sheet strength (current ratio near 2x, modest leverage) and strong interest coverage provide additional cushion. Near-term sustainability depends on stabilizing Gas margins to lift net profit back toward guidance, but the current policy appears manageable within projected earnings.

Risk Assessment

Business risks include Gas segment margin sensitivity to fuel cost pass-through timing and tariff adjustments, Demand seasonality in city gas affecting quarterly utilization and inventory levels, Equity-method income volatility impacting ordinary profit, Concentration in Gas revenue (75.9%) increases exposure to segment-specific shocks.

Financial risks include High working capital intensity (DSO 112 days, DIO 156 days) may pressure cash conversion, Elevated effective tax rate (40.4%) reduces net earnings leverage, Low operating margin (3.1%) provides limited buffer against cost spikes.

Key concerns include ROIC at 0.6% indicates subpar capital efficiency for the quarter, Ordinary-to-net income gap (~47%) driven by tax burden and equity-method losses, Gas operating income down 70.4% YoY despite revenue growth, indicating margin compression.

Investment Implications

Key takeaways include Revenue grew 4.1% YoY, but operating income fell 22.6% as Gas margins compressed, LPG is the core profit engine this quarter (8.9% margin; 4.67 億円 OI vs Gas 1.44 億円), Net income progress vs guidance (17.5%) lags due to high tax burden and equity-method losses, Balance sheet is conservative with D/E 0.67x and interest coverage 14.7x, ROE at 0.5% is constrained by thin margins and low asset turnover.

Metrics to watch include Gas segment margin recovery and fuel cost adjustment timing, Equity-method income trajectory and contributions, Effective tax rate normalization relative to guidance assumptions, Working capital turns (DSO/DIO) and cash conversion, Progress vs full-year NI guidance in Q2 (target cumulative ~50%).

Regarding relative positioning, Within Japanese gas utilities, Hiroshima Gas exhibits conservative leverage and solid liquidity but currently trails peers on operating efficiency and capital returns, with LPG strength partially offsetting weaker city gas profitability.