METAWATER (9551) FY2027 Q1 Earnings Report

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Executive Summary

Despite higher revenue, the operating loss widened, with increased SG&A expenses offsetting the improvement in gross profit. Revenue increased to ¥376.8B (+14.0% YoY), while Operating Income deteriorated to ¥-9.1B (¥-6.0B in the previous year), and Ordinary Income also widened its loss to ¥-8.6B (¥-6.7B in the previous year, -29.5%). Net Income was ¥-6.1B, improving 33.2% from ¥-9.2B in the previous year; however, this was attributable to a ¥2.5B tax benefit and diverged from the deterioration in core operating profitability. The primary driver of revenue growth was a 25.3% increase in the overseas business, while the main factors behind the deterioration in earnings were the widening loss in the Environmental Engineering Business and company-wide increases in SG&A expenses.

Factors Affecting Financial Performance

【Revenue】Revenue was ¥376.8B (+14.0% YoY). By segment, International (¥147.8B, +25.3%) recorded the largest increase and led overall growth, while Environmental Engineering (¥95.0B, +11.0%), System Solution (¥72.7B, +5.3%), and Operation (¥61.3B, +5.6%) also posted revenue growth. International was the largest segment, accounting for approximately 39% of total revenue.

【Profit and Loss】Gross profit was ¥84.1B, with a gross margin of 22.3%, improving from 20.8% in the previous year. However, SG&A expenses increased to ¥93.2B, with the SG&A ratio rising to 24.7% from 22.6% in the previous year, exceeding the pace of revenue growth. Consequently, the operating margin deteriorated to negative 2.4% from negative 1.8% in the previous year. By segment, the primary cause of the deterioration in consolidated results was the widening Operating Loss in Environmental Engineering to ¥7.3B from ¥4.3B in the previous year. System Solution’s loss was ¥11.4B, largely unchanged; Operation improved to Operating Income of ¥2.4B; and International, despite higher revenue, recorded Operating Income of ¥7.2B (-18.4%), representing a decline in profit, with its operating margin falling from 7.5% to 4.8%. Ordinary results were partially offset by ¥2.9B in non-operating income, including a ¥1.3B foreign exchange gain and ¥1.0B in dividend income, but resulted in an Ordinary Loss of ¥8.6B. The Net Loss of ¥6.1B was smaller than the Ordinary Loss due to the recognition of a ¥2.5B tax benefit, and the divergence between ordinary results and net income was primarily attributable to this temporary tax-related factor. In conclusion, the Company recorded higher revenue but lower profit.

Segment Analysis

International was the largest segment, with revenue of ¥147.8B (approximately 39% of total revenue, +25.3%), but Operating Income declined to ¥7.2B (-18.4%) and its operating margin fell to 4.8%. Environmental Engineering generated revenue of ¥95.0B (+11.0%), but its Operating Loss widened to ¥7.3B from ¥4.3B in the previous year, resulting in the lowest margin among all segments at negative 7.7%. System Solution posted revenue of ¥72.7B (+5.3%) and an Operating Loss of ¥11.4B, largely unchanged, with an operating margin of negative 15.7%. Operation recorded revenue of ¥61.3B (+5.6%) and Operating Income of ¥2.4B, showing a significant improvement approaching a return to profitability (+111.5%, operating margin of 3.9%). The decline in International’s operating margin, despite its role as the main driver of revenue growth, and the widening loss in Environmental Engineering were the primary causes of the increase in the consolidated Operating Loss.

Key Financial Indicators

【Profitability】The operating margin was negative 2.4%, deteriorating from negative 1.8% in the previous year, while the net profit margin was negative 1.6%. The gross margin of 22.3%, which improved from 20.8% in the previous year, was more than offset by the SG&A ratio of 24.7%, which increased from 22.6%, directly contributing to the deterioration in profitability.【Cash Flow Quality】Net Loss was limited to ¥6.1B compared with an Ordinary Loss of ¥8.6B, with the ¥2.5B tax benefit accounting for the difference. Accordingly, the Company’s core earnings power should be assessed based on the level of Ordinary Loss.【Investment Efficiency】Annualized ROE was negative 2.6%, while the Equity Ratio was 44.0%, up from 40.6% in the previous year. Capital efficiency remained negative due to the impact of the operating deficit.【Financial Soundness】Total assets were ¥2105.4B and net assets were ¥927.4B. Cash and deposits amounted to ¥593.7B, indicating ample liquidity, with cash coverage of current liabilities of ¥713.4B at approximately 83%. Interest-bearing debt consisted of ¥50.2B in long-term borrowings and ¥200.0B in bonds. Together with the Equity Ratio of 44.0%, the Company’s financial foundation is relatively stable.

Cash Flow Analysis

As cash flow statement items are not included in the disclosed data, cash trends are analyzed based on changes in the balance sheet. Cash and deposits increased significantly from ¥593.7B in the previous year, strengthening liquidity, while accounts receivable and notes receivable declined substantially to ¥621.2B, and accounts payable and notes payable also declined to ¥147.9B. This suggests that the collection of receivables and the settlement of trade payables progressed simultaneously. Property, plant and equipment increased to ¥185.9B, indicating that capital investment has continued. The maintenance and expansion of cash and deposit balances despite the recognition of an Operating Loss suggest that the conversion of receivables into cash has supported cash management. Going forward, however, the recovery of cash generation from core operations will be important for the sustainability of the funding base.

Quality of Earnings

Of the ¥8.6B Ordinary Loss, non-operating income of ¥2.9B included market- and asset-holding-related items such as a ¥1.3B foreign exchange gain and ¥1.0B in dividend income, partially offsetting the ¥9.1B Operating Loss from core operations. The Net Loss of ¥6.1B was smaller than the Ordinary Loss of ¥8.6B because income taxes and other taxes resulted in a ¥2.5B benefit; this does not indicate an improvement in the business structure. Comprehensive Income was positive at ¥3.1B, but most of this resulted from a ¥7.1B foreign currency translation adjustment, while Comprehensive Income attributable to owners of the parent was limited to ¥1.6B. Accordingly, the positive Comprehensive Income depended on a temporary translation factor related to foreign exchange and should be evaluated separately from any substantive improvement in net income.

Earnings Forecast and Guidance

The full-year Company plan calls for Revenue of ¥2,400B (+14.4%), Operating Income of ¥150B (+16.5%), and Ordinary Income of ¥145B (+10.1%), with no revision during the quarter. Q1 Revenue progress was 15.7%, while an Operating Loss of ¥9.1B was recorded; both were below the simple pro rata benchmark of 25%. Although the seasonality of completion and acceptance timing under the percentage-of-completion method, which is weighted toward the second half, must be taken into account, achieving the full-year Operating Income target will require a substantial improvement in the profit margin over the remaining three quarters.

Shareholder Returns

The full-year dividend forecast is ¥80 per share (¥35 actual dividend in the previous year), with no revision during the quarter. Using the full-year forecast Net Income attributable to owners of the parent of ¥100B as the denominator, the forecast Payout Ratio is approximately 35%. This figure is calculated by dividing dividends only by net income and is not the Total Return Ratio, which includes share repurchases. In Q1, the Company recorded a Net Loss attributable to owners of the parent of ¥7.1B, and the feasibility of the dividend will depend on a recovery in earnings from the second half onward and progress toward achieving the full-year plan.

Risk Factors

1. Segment profitability deterioration risk: Despite 11.0% revenue growth in the Environmental Engineering Business, its Operating Loss widened from ¥4.3B to ¥7.3B. Cost overruns on construction projects and schedule delays may be continuously weighing on profitability.

2. Overseas business profitability decline risk: While the International Business achieved 25.3% revenue growth, Operating Income declined 18.4% to ¥7.2B, and its operating margin fell from 7.5% to 4.8%. Revenue growth has not translated into profit growth, suggesting the impact of pricing, cost, and foreign exchange factors.

3. Fixed-cost absorption risk due to increasing SG&A expenses: SG&A expenses increased 24.5% YoY, exceeding the 14.0% revenue growth rate, and the SG&A ratio rose to 24.7%. If SG&A expenses continue to increase faster than the improvement in the gross margin, the recovery in operating results may be delayed.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (utilities)

Profitability and Returns

The Company’s profitability is substantially below the industry median and is at a low level even within the industry.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median and ranks among the higher levels within the industry, while the divergence from profitability is notable.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. Revenue growth of 14.0% and the improvement in the gross margin (approximately 150bp) were positive factors, but the increase in the SG&A ratio (approximately 210bp) offset these benefits, causing the operating margin to deteriorate from the previous year. The key focus will be whether revenue growth can be converted into profit growth.

2. The overseas business accounted for the largest share of consolidated revenue and drove revenue growth, but its Operating Income margin declined. Achieving both growth and profitability remains a key challenge.

3. The widening loss in the Environmental Engineering Business demonstrates the significant impact that the accuracy of project-level cost control and construction progress management has on consolidated performance. The extent to which the full-year plan is achieved may depend on the improvement in profitability of this segment during the second half.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,188–¥2,316 at Cost of Equity ±1%; ¥2,248–¥2,255 at ω±0.1.

Notes:

• Net assets as of the end of the quarter are used (there is a timing difference from the full-year forecast).
• As 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 using only publicly disclosed data; this 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. The 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 professionals as necessary.

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