SPACE (9622) FY2026 Q2 Earnings Report

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Executive Summary

Despite a decline in revenue, the Company secured higher profit through improved selling, general and administrative expense efficiency, with profit progress ahead of the full-year plan. Revenue declined to ¥329.2B (-2.8% YoY), while Operating Income increased to ¥27.2B (+1.9%), Ordinary Income to ¥27.5B (+2.4%), and consolidated Net Income to ¥18.6B (+3.6%). The primary cause of the revenue decline appears to be the timing of project recognition. Costs on uncompleted construction contracts increased +63.2% from the end of the previous fiscal year, suggesting room for revenue recognition in the second half, while the main driver of higher profit was the improvement in the SG&A ratio (4.8%→4.4%).

Factors Affecting Performance

【Revenue】Revenue was ¥329.2B, a decline of -2.8% YoY. The Company operates as a single segment, the Display Business, and does not disclose business-specific factors affecting changes. However, costs on uncompleted construction contracts increased by 3.10B (+63.2%), indicating the possibility that construction projects not recognized in the current period have been deferred for recognition as revenue from the second half onward.

【Profit and Loss】Operating Income was ¥27.2B (+1.9%), and the Operating Income margin improved by +0.4pt from the previous year to 8.3%. While the gross margin remained broadly flat at 12.7%, SG&A expenses decreased to ¥14.6B (-10.4%), and the improvement in the SG&A ratio from 4.8% to 4.4% contributed to higher profit. Ordinary Income increased by +2.4% to ¥27.5B, exceeding the rate of growth in Operating Income, supported by non-operating income (0.4B), including an increase in dividend income. The Company recorded a gain on the sale of investment securities of 0.2B as extraordinary income, which was a temporary factor. Consolidated Net Income increased by +3.6% to ¥18.6B, while the effective tax rate was 32.9%, broadly unchanged from 33.1% in the previous year. Accordingly, the quarter was characterized by lower revenue and higher profit.

Key Financial Indicators

【Profitability】The Operating Income margin improved by +0.4pt to 8.3% from 7.9% in the previous year, while the Net Income margin was 5.7% based on consolidated Net Income. The gross margin remained broadly flat at 12.7%. 【Cash Quality】Operating Cash Flow was 35.8B, approximately 1.9 times consolidated Net Income of 18.6B, indicating strong cash backing for earnings. 【Investment Efficiency】ROE was 5.2%, comprising the product of the Net Income margin, asset turnover, and financial leverage. However, leverage has been trending downward as the Equity Ratio has risen. 【Financial Soundness】The Equity Ratio was 80.6% (+3.4pt from 77.2% in the previous year), while Current Liabilities were limited to 78.2B against Current Assets of 299.6B, indicating high liquidity and financial safety.

Cash Flow Analysis

Cash Flow from Operating Activities was 35.8B, an increase of +6.0% YoY. The decrease in trade receivables and contract assets (+35.7B cash inflow) exceeded the decrease in trade payables (-7.2B), contributing positively from a working capital perspective. Cash Flow from Investing Activities was +9.5B, turning positive even after capital expenditures (-1.5B) and improving from -2.4B in the previous year. Cash Flow from Financing Activities was -12.5B, primarily due to dividend payments (-12.5B). Free Cash Flow (Operating CF + Investing CF) was ample at 45.4B, and cash and deposits accumulated to 168.9B at period-end (+13.6% from the end of the previous fiscal year).

Earnings Quality

The difference between Ordinary Income of 27.5B and consolidated Net Income of 18.6B was primarily attributable to the burden of income taxes of 9.1B, with the effective tax rate remaining broadly flat at 32.9% compared with 33.1% in the previous year. Most of the 0.4B in non-operating income consisted of dividend income of 0.2B, which was recurring in nature. The Company recorded a gain on the sale of investment securities of 0.2B as extraordinary income; however, the amount was small, and its impact on overall profit was limited to a temporary factor. Comprehensive Income was 20.0B, slightly exceeding consolidated Net Income of 18.6B. Valuation differences on securities of +1.6B and foreign currency translation adjustments of +0.2B contributed positively, while adjustments related to retirement benefits were -0.4B. The divergence between Net Income and Comprehensive Income was minor at approximately +1.4B, with no significant distortion from accrual factors observed.

Earnings Forecasts and Guidance

Progress against the full-year earnings forecast was 45.7% for Revenue (32,923/72,000 million yen), 54.0% for Operating Income, and 54.6% for Ordinary Income, indicating relatively more advanced progress on the profit side. Progress against Net Income attributable to owners of the parent, for which the full-year forecast is 33.0B, was 56.5%. EPS progress was also 76.04 yen/134.57 yen, or 56.5%, in line with this figure. Even assuming contributions from profit in the second half, profit progress is weighted toward the first half. Neither the earnings forecast nor the dividend forecast was revised during the quarter.

Shareholder Returns

The dividend per share at the end of Q2 was 36 yen, and the Payout Ratio against first-half EPS of 76.04 yen based on Net Income attributable to owners of the parent was 47.3%. The full-year dividend forecast is 72 yen (equivalent to the previous year's actual dividend of 72 yen and assumed unchanged from the DividendPerShareQ2 actual dividend of 36 yen), resulting in a Payout Ratio of 53.5% against forecast EPS of 134.57 yen. It is noted that the breakdown of the year-end dividend includes a special dividend of 8 yen 00 sen. Given the levels of Operating Cash Flow and cash and deposits (168.9B), the financial backing for the dividend is secured.

Risk Factors

1. Gross Margin Structure and Profitability Volatility Risk: The gross margin has remained broadly flat at 12.7% from the previous year. Accordingly, sensitivity to profit margins is relatively high should costs rise or project profitability deteriorate.

2. Seasonality Risk in Revenue Recognition Timing: Costs on uncompleted construction contracts increased by +3.10B (+63.2%) from the end of the previous fiscal year, suggesting a structure in which revenue recognition associated with construction progress is weighted toward the second half. The Revenue progress rate of 45.7% is below the Operating Income progress rate of 54.0%, supporting this trend.

3. Cash Flow Volatility Due to Working Capital Fluctuations: The decrease in trade receivables and contract assets (+35.7B) boosted Operating CF during the current period. However, this effect may be temporary, and the level of Operating CF may fluctuate depending on working capital trends from the second half onward.

Industry Benchmark (For Reference; Company Research)

Profitability and Returns

Profitability is below the industry median, reflecting the characteristics of a construction-oriented business model with a low gross margin.

Growth and Capital Efficiency

The Revenue growth rate is significantly below the industry median, indicating that the impact of project recognition timing is particularly notable within the industry.

※Source: Company research

Key Points in the Financial Results

1. Despite the decline in revenue, the improvement in the SG&A ratio (4.8%→4.4%) improved the Operating Income margin by +0.4pt to 8.3%, confirming the defense of profit margins through cost management.

2. Full-year progress is ahead on the profit side, with profit at approximately 54–57% compared with Revenue at 45.7%. While profit progress is ahead of plan, the Revenue structure appears dependent on the completion of projects in the second half.

3. Financial soundness remains high, as indicated by an Equity Ratio of 80.6% and ample Current Assets and cash relative to Current Liabilities.

Theoretical Share Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: 1,410 yen–1,490 yen at ±1% for the cost of equity, and 1,449 yen–1,449 yen at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used (there is a timing difference relative to the full-year forecast).
• As net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not 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. 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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AI Financial Analysis

Executive Summary

FY2026 Q2 results were resilient: revenue declined 2.8% year on year to ¥32.92bn, but operating income rose 1.9% to ¥2.72bn and net income increased 4.4% to ¥1.87bn. The company operates solely in the display business, including completed construction contracts, and the result indicates that profitability improved despite lower project revenue. Gross profit was ¥4.18bn, leaving the gross margin essentially unchanged at 12.7%. The low 12.7% gross margin is a quality alert relative to the 20% benchmark, reflecting a business model with substantial project-related materials, subcontracting, and construction costs. However, the gross-margin level was stable versus the prior-year period, rather than deteriorating. SG&A expense declined 10.4% year on year to ¥1.46bn, materially outpacing the revenue decline and driving operating-margin expansion. Operating margin improved by approximately 38 basis points to 8.3%, which is within the stated good profitability range. Net margin increased by approximately 40 basis points to 5.7%, supported by the operating improvement and modest non-operating income. Ordinary income rose 2.4% to ¥2.75bn, while profit before tax increased 3.3% to ¥2.77bn. Net income also benefited from ¥0.23bn of extraordinary income, including a ¥0.15bn gain on sale of investment securities; this is small relative to pre-tax profit but should be separated from recurring earnings. Cash conversion was strong, with operating cash flow of ¥3.58bn exceeding net income by 1.92x. Free cash flow was ¥4.54bn under the reported calculation, substantially supporting dividends and balance-sheet liquidity. The operating cash-flow strength was principally associated with a ¥3.57bn decrease in trade receivables and contract assets, partly offset by a ¥0.72bn decrease in trade payables. The company ended Q2 with ¥16.89bn of cash and deposits, a 383.0% current ratio, and a conservative 0.24x debt-to-equity ratio. Q2 revenue reached 45.7% of the ¥72.0bn full-year forecast, modestly below the standard 50% midpoint pace, while operating income reached 54.0% and net income reached 56.5%. Accordingly, the full-year profit plan appears attainable on the current run rate, although revenue recovery and maintenance of project margins in the second half remain central variables. The unchanged forecast and dividend plan imply management confidence, but the company must sustain SG&A discipline and avoid margin dilution as project activity develops.

Profitability Analysis

The reported annualized ROE is 10.5%, a good level under the stated 10-15% benchmark. The DuPont decomposition is annualized net profit margin of 5.7%, annualized asset turnover of 1.489x, and financial leverage of 1.24x. ROE is therefore driven primarily by operating profitability and asset utilization rather than balance-sheet leverage. Financial leverage is modest, consistent with the equity-funded capital structure and low solvency risk. The principal improvement in the interim income statement was operating leverage from lower SG&A: SG&A declined to ¥1.46bn from ¥1.63bn despite only a 2.8% revenue decline. This enabled operating income to rise to ¥2.72bn from ¥2.67bn and lifted operating margin to 8.3% from approximately 7.9%. Gross margin was broadly flat at 12.7%, so the earnings improvement did not arise from a better gross-profit rate. The low gross-margin alert remains important because a limited gross-profit buffer makes earnings sensitive to project cost overruns, subcontractor pricing, and unfavorable contract mix. In context, a 12.7% gross margin can be consistent with the construction-linked display business, where completed-construction costs account for most sales; stability year on year is a mitigating factor. EBITDA was ¥2.86bn and EBITDA margin was 8.7%, slightly above the operating margin because depreciation and amortization was limited at ¥0.14bn. The tax burden was 0.672, equivalent to a 32.9% effective tax rate, while the interest burden was 1.019 because pre-tax profit modestly exceeded EBIT through net non-operating income and extraordinary gains. Interest expense of ¥0.03bn was immaterial relative to EBIT, producing 838.83x interest coverage. The small gain on sale of investment securities should not be extrapolated into normalized net-income expectations.

Growth Assessment

Revenue decreased ¥0.95bn year on year to ¥32.92bn, indicating softer first-half sales volume or project timing. Completed construction revenue equaled total revenue, underscoring the project-based nature of reported sales. Costs on uncompleted construction contracts increased to ¥0.80bn from ¥0.49bn, which may indicate a larger volume of work in progress to be completed in future periods. The full-year revenue forecast is ¥72.0bn, implying that approximately ¥39.1bn of revenue is required in the second half. This required second-half revenue level is higher than first-half revenue and makes project execution, delivery timing, and customer capital-spending conditions important. Q2 sales progress of 45.7% is 4.3 percentage points below the standard 50% midyear pace, but does not exceed the 10-percentage-point deviation threshold. Operating-income progress is stronger at 54.0% against the ¥5.04bn forecast, and ordinary-income progress is 54.6% against the same ¥5.04bn plan. Net-income progress is 56.5% against the ¥3.30bn plan, above the standard midpoint pace. The forecast implies a full-year operating margin of 7.0%, below the Q2 8.3% margin, leaving room for normal second-half cost absorption, mix changes, or conservatism in the company plan. Sustained earnings growth depends on retaining the first-half SG&A efficiency while preserving gross margin on new and uncompleted projects. The absence of a forecast revision means the existing plan remains the relevant operating benchmark.

Financial Health

Financial health is strong. Current assets were ¥29.96bn against current liabilities of ¥7.82bn, producing a 383.0% current ratio and an equal 383.0% quick ratio. These ratios are substantially above healthy reference levels and indicate no near-term liquidity or maturity-mismatch concern. Cash and deposits were ¥16.89bn, representing 38.2% of total assets and providing substantial operational and capital-allocation flexibility. Total liabilities were ¥8.58bn, equivalent to 19.4% of total assets, while total equity was ¥35.65bn. Debt-to-equity was 0.24x, well below the 1.0x conservative benchmark and far from the 2.0x warning threshold. Interest coverage of 838.83x and EBITDA interest coverage of 882.64x indicate that financing costs are immaterial relative to earnings. Working capital was ¥22.14bn, which is ample for a project-based construction and display operation. Equity increased to ¥35.65bn from ¥34.92bn in the comparison period, supported by retained earnings and positive comprehensive income. Property, plant and equipment was ¥10.06bn, including ¥7.03bn of land; this tangible asset base provides balance-sheet support. Intangible assets were only ¥0.35bn, or 0.8% of total assets, indicating little dependence on acquired intangible value. The balance sheet appears capable of absorbing normal working-capital movements and funding routine capital expenditure internally.

Notable B/S Changes

Cash and deposits: +¥20.40bn year on year to ¥168.91bn - strong interim cash accumulation, supported by operating cash generation and proceeds from time deposits. Current liabilities: -¥17.32bn year on year to ¥78.23bn (-18.1%) - further improves already strong short-term liquidity and reduces maturity-mismatch risk. Total liabilities: -¥13.35bn year on year to ¥85.81bn (-13.1%) - reinforces the conservative capital structure. Costs on uncompleted construction contracts: +¥3.10bn year on year to ¥8.00bn (+63.2%) - indicates higher work in progress and increases the importance of project completion and margin control. Intangible assets: +¥0.50bn year on year to ¥3.50bn (+16.9%) - remains immaterial at 0.8% of total assets and does not create meaningful intangible-asset concentration risk.

Cash Flow Quality

Cash-flow quality was favorable in Q2. Operating cash flow was ¥3.58bn, 1.92x net income of ¥1.87bn, comfortably above the 1.0x high-quality threshold and not indicative of an earnings-to-cash conversion problem. Cash conversion, measured as operating cash flow divided by EBITDA, was 1.25x, also above the 0.9x benchmark. The accruals ratio was negative 3.9%, consistent with cash realization exceeding accounting earnings. Operating cash flow benefited significantly from a ¥3.57bn decrease in trade receivables and contract assets. This is positive for liquidity, although the magnitude means subsequent-period operating cash flow will depend on the timing of new billing, collections, and project milestones. A ¥0.72bn decrease in trade payables partly offset the receivable collection benefit, indicating that cash generation was not simply achieved by extending supplier payments. Reported free cash flow was ¥4.54bn, exceeding both net income and the cash dividend requirement. Capital expenditure was ¥0.15bn, slightly above depreciation and amortization of ¥0.14bn, resulting in a 1.07x capex-to-depreciation ratio. This indicates that the company is at least maintaining its operating asset base rather than materially underinvesting. Investing cash flow was a ¥0.95bn inflow, including ¥1.28bn of proceeds from time deposits, and cash and deposits increased to ¥16.89bn. Overall, interim cash generation was strong, but investors should monitor whether receivables remain controlled as second-half revenue is executed.

Dividend Sustainability

The Q2 dividend was ¥36.00 per share, and the stated interim payout ratio was 51.3%. This is below the 60% sustainability reference level and leaves a meaningful portion of earnings for internal funding. The full-year dividend forecast is ¥72.00 per share, equal to the current Q2 payment annualized on a simple interim-plus-year-end basis. Based on forecast EPS of ¥134.57, the full-year dividend payout ratio is approximately 53.5%. This prospective payout level remains within a sustainable range if the company achieves its ¥3.30bn full-year net-income forecast. Reported free cash flow coverage was 4.74x, providing substantial cash coverage for the current dividend commitment. The ¥16.89bn cash balance and conservative 0.24x debt-to-equity ratio further support dividend capacity. Financing cash outflow of ¥1.25bn was largely attributable to ¥1.25bn of cash dividends paid, demonstrating that shareholder distributions were funded without balance-sheet strain. Dividend sustainability is therefore supported by recurring operating cash generation, conservative leverage, and a payout ratio near the low-50% range. The principal sensitivity is project profitability: a sustained decline in the 12.7% gross margin or weaker project collections would reduce the earnings and cash-flow buffer available for distributions.

Risk Assessment

Business risks include Project-execution risk is material because completed construction contracts account for all reported revenue; delays, scope changes, subcontractor shortages, or cost overruns can affect both revenue timing and margin., The 12.7% gross margin is below the 20% quality-alert benchmark, leaving a relatively narrow gross-profit buffer against materials inflation, labor-cost inflation, subcontractor price increases, and unfavorable project mix., First-half revenue declined 2.8% year on year and reached 45.7% of the full-year plan; achieving the ¥72.0bn sales forecast requires a stronger second half., Demand risk is linked to customers' store openings, renovations, commercial-facility investment, and broader construction and retail capital-expenditure cycles., Uncompleted-construction costs increased to ¥0.80bn, making timely execution and conversion of work in progress into completed revenue important..

Financial risks include Large receivable collection supported Q2 operating cash flow; future cash-flow volatility may arise if contract assets and receivables rebuild during second-half project execution., Investment securities generated a ¥0.15bn gain on sale and valuation changes contributed to comprehensive income; these items can introduce non-operating and equity-value volatility., The effective tax rate was 32.9%, and changes in tax mix or deferred-tax items could affect net-income conversion from operating profit..

Key concerns include The low gross-margin quality alert is the primary earnings sensitivity. Its root cause is the high completed-construction cost base, with cost of completed construction of ¥28.74bn against revenue of ¥32.92bn. It is broadly consistent with a construction-linked display business, and its stability year on year is constructive, but margin compression would have a disproportionate effect on earnings. The investment implication is that operating-margin resilience depends heavily on project selection, procurement discipline, and avoidance of loss-making contracts., Profit outperformance versus the full-year plan at Q2 contrasts with slightly below-midpoint revenue progress. This supports plan attainability but also places emphasis on whether first-half SG&A savings and the 8.3% operating margin can persist through the higher-revenue second half., The balance sheet and interest-servicing profile are not current areas of concern: liquidity is high, leverage is low, and interest coverage is exceptionally strong..

Investment Implications

Key takeaways include Operating income increased 1.9% and net income rose 4.4% despite a 2.8% revenue decline, demonstrating favorable first-half cost control., Operating margin expanded to 8.3%, while gross margin remained stable at 12.7%; the improvement was driven by SG&A reduction rather than gross-margin expansion., Annualized ROE of 10.5% is supported by a 5.7% net margin, 1.489x asset turnover, and low 1.24x financial leverage., Operating cash flow of ¥3.58bn and reported free cash flow of ¥4.54bn provide strong support for the ¥36.00 per-share interim dividend and planned ¥72.00 annual dividend., The balance sheet is highly liquid, with ¥16.89bn cash and deposits, a 383.0% current ratio, and 0.24x debt-to-equity..

Metrics to watch include Second-half revenue conversion needed to reach the ¥72.0bn full-year sales forecast, Gross margin and operating margin, particularly the ability to preserve the 12.7% gross margin and 8.3% Q2 operating margin, SG&A trajectory after the first-half 10.4% year-on-year reduction, Trade receivables and contract assets following the ¥3.57bn Q2 cash-flow benefit from collections, Costs on uncompleted construction contracts and any provision for loss on orders, Dividend payout ratio and free-cash-flow coverage against the ¥72.00 per-share full-year dividend plan.

Regarding relative positioning, The company presents as a conservatively financed, cash-rich project-services operator with good annualized ROE and strong interim cash conversion. Relative to broad profitability benchmarks, its 8.3% operating margin is good and its 10.5% annualized ROE is solid, while its 12.7% gross margin is structurally low and makes execution discipline more important than for higher-gross-margin service or software businesses.