Musashino Kogyo (9635) FY2026 Q3 Earnings Report

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Executive Summary

The cumulative results for Q3 were characterized by a temporary surge in net income, primarily due to gains on the sale of investment securities, while the earnings power of the core business remained on a declining trend. Revenue was ¥9.81B (down 2.4% YoY) and operating income was ¥0.28B (down 31.8% YoY). Meanwhile, ordinary income increased to ¥0.51B (up 7.4% YoY) due to higher non-operating income, and net income attributable to owners of the parent surged to ¥3.26B (up 732.5% YoY), primarily reflecting ¥3.76B in gains on the sale of investment securities. Although the gross profit margin improved to 53.0%, the increase in SG&A expenses was greater, causing the operating margin to decline to 2.9%.

Factors Affecting Performance

【Revenue】Revenue was ¥9.81B, down 2.4% YoY. The core Real Estate Business generated ¥4.32B (44.0% of total revenue, down 1.3% YoY), the Cinema Business generated ¥3.25B (down 6.4% YoY), the Driving School Business generated ¥2.13B (up 1.4% YoY), and the Trading Business generated ¥0.06B (up 0.8% YoY). The decline in the Cinema Business and the slight decrease in the Real Estate Business were the main factors behind the overall revenue decline.

【Profit and Loss】The gross profit margin improved to 53.0%, up 370bp from 49.3% in the same period of the previous year. However, SG&A expenses increased to ¥4.91B (up 8.3% YoY), and after absorbing this increase, the operating margin declined by 130bp to 2.9%. Ordinary income increased 7.4% due to higher equity-method investment income (¥0.20B versus ¥0.04B in the previous year). However, the primary reason for the surge in net income was the ¥3.76B gain on the sale of investment securities, recognized as extraordinary income, and must be evaluated separately from the profitability of the core business. Overall, the company experienced lower revenue and lower operating profit, while the increase in net income was attributable to temporary factors.

Segment Analysis

The Real Estate Business was the core contributor to consolidated profit, generating segment profit of ¥2.48B (segment margin of 57.5%). The Cinema Business improved to a loss of ¥0.01B from a loss of ¥0.25B in the same period of the previous year, but remained unprofitable. While revenue in the Driving School Business increased 1.4% YoY, segment profit declined sharply from ¥0.17B to ¥0.01B, resulting in a pattern of higher revenue but lower profit. Corporate expenses amounted to ¥2.40B (up 6.2% YoY), absorbing most of the combined profits of the reportable segments and compressing consolidated operating income of ¥0.28B.

Key Financial Indicators

【Profitability】The operating margin of 2.9% declined from 4.2% in the same period of the previous year, while the ordinary income margin improved to 5.2% from 4.7%. The net profit margin of 33.2% and annualized ROE of 11.0% appear high, but do not reflect ordinary earnings power because they include ¥3.76B in gains on the sale of investment securities. 【Cash Quality】Cash and deposits were ¥11.79B, up 36.9% from ¥8.61B in the same period of the previous year, indicating increased financial flexibility following the sale of investment securities. 【Investment Efficiency】Annualized ROIC remained at 1.0%, indicating that ordinary operating income is small relative to property, plant and equipment, which accounts for 69.6% of total assets (including ¥39.04B in land). 【Financial Soundness】The equity ratio was 62.0%, the current ratio was 344.0%, and interest-bearing debt was low at ¥2.78B, indicating a sound financial foundation.

Cash Flow Analysis

Although the statement of cash flows has not been disclosed, cash trends can be assessed from changes in the balance sheet. Cash and deposits increased by ¥3.18B (+36.9%) from ¥8.61B in the same period of the previous year to ¥11.79B, while investment securities decreased by ¥0.78B (-17.5%). The sale of investment securities is therefore considered the primary reason for the increase in cash. Interest-bearing debt was ¥2.78B, down from ¥3.12B in the same period of the previous year, indicating that reliance on borrowings has not increased. Retained earnings increased by ¥3.26B, with the recognition of net income directly contributing to the accumulation of equity.

Quality of Earnings

Against operating income of ¥0.28B, non-operating income of ¥0.25B (including ¥0.20B in equity-method investment income) was added, resulting in ordinary income of ¥0.51B. Pretax income was ¥3.94B, representing an increase of ¥3.43B from this level, primarily due to the ¥3.76B gain on the sale of investment securities recognized as extraordinary income. Extraordinary losses included ¥0.34B in losses on the disposal of fixed assets and other items. With an effective tax rate of 17.1%, the majority of net income of ¥3.26B and EPS of ¥312.04 was attributable to non-recurring asset sales. Accordingly, operating income of ¥0.28B and ordinary income of ¥0.51B should be used as the basis when assessing earnings sustainability.

Earnings Forecasts and Guidance

Progress against the full-year forecast was 76.7% for revenue, 96.7% for operating income, 81.0% for ordinary income, and 96.0% for net income. Revenue was slightly above the standard progress rate of 75%, while the high progress rates for operating income and net income were largely attributable to the recognition of gains on the sale of investment securities by Q3. To achieve the company’s forecasts, approximately ¥2.99B in revenue, ¥0.01B in operating income, ¥0.12B in ordinary income, and ¥0.14B in net income will be required in Q4. The full-year forecasts therefore imply that profits in Q4 will remain almost flat.

Shareholder Returns

The Q2 dividend was ¥0 per share, and the company’s full-year dividend forecast is also ¥0. Against net income of ¥3.26B (company forecast: ¥3.40B), the payout ratio is 0%. Treasury stock amounted to ¥0.09B, representing only a slight increase YoY, and no large-scale share repurchase was identified during the period. Because net income includes a significant gain on the sale of investment securities, recurring operating income and ordinary income should also be considered when evaluating future shareholder return capacity.

Risk Factors

1. Declining core business earnings power: The operating margin declined to 2.9%, 5.5pt below the industry median of 8.3%. The primary factor was the increase in SG&A expenses (+8.3%), which exceeded the improvement in the gross profit margin (+370bp), making cost control a key issue.

2. Non-recurring nature of profit: Gains on the sale of investment securities accounted for ¥3.76B of net income of ¥3.26B, creating a significant divergence from ordinary income of ¥0.51B. Net income and ROE could decline significantly in subsequent periods due to the reversal of these gains.

3. Deteriorating segment profitability: Despite revenue growth (+1.4%), segment profit in the Driving School Business contracted from ¥0.17B to ¥0.01B, while the Cinema Business remained in the red. Together with the increase in corporate expenses (+6.2%), these factors are exerting downward pressure on consolidated profit.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

The operating margin was below the industry median, while the net profit margin was substantially above the median due to gains on the sale of investment securities. The contributions of the core business and temporary gains and losses must therefore be considered separately.

Growth and Capital Efficiency

The revenue growth rate was substantially below the industry median and was also below the lower bound of the IQR.

※Source: Compiled by the Company

Key Takeaways from the Earnings Results

1. While the gross profit margin improved to 53.0%, up 370bp, the operating margin declined to 2.9%, down 130bp. Whether the company can absorb the increase in SG&A expenses (+8.3%) is the key focus for improvement in the core business.

2. Net income of ¥3.26B and annualized ROE of 11.0% are heavily dependent on the ¥3.76B gain on the sale of investment securities. It is therefore important to assess earnings power based on ordinary income of ¥0.51B.

3. While the Real Estate Business was the core contributor to consolidated profit, with segment profit of ¥2.48B, the continued loss in the Cinema Business and declining profit in the Driving School Business are observable issues for the overall business portfolio.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,758–¥2,918 at ±1% cost of equity, and ¥2,807–¥2,856 at ω±0.1.

Notes:

• To exclude the effects of temporary gains and losses, normalized EPS calculated from ordinary income and other items is used (company forecast EPS: ¥325.0).
• Because net income progress against the full-year forecast (96%) exceeds the standard rate (75%), forecast EPS is adjusted upward within a maximum of +10% (because companies whose progress is ahead of schedule tend to exceed forecasts; the adjustment may be excessive for businesses with strong seasonality).
• Because 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).
• 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 solely from 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 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 a professional as necessary.

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