SANKYO FRONTIER CO.,LTD. FY2026 Q2 Earnings Report

Financial Highlights

• Net Sales: ¥25.00B
• Operating Income: ¥3.06B
• Net Income: ¥2.00B
• EPS: ¥90.06

Income Statement

Balance Sheet

Cash Flow Statement

Profitability Ratios

Year-over-Year Comparison

Share Information

Dividend Information

Full Year Forecast

Disclaimer

This data was automatically extracted from XBRL files. Please refer to the original disclosure documents for accuracy.

AI Financial Analysis

Executive Summary

FY2026 Q2 results indicate a softer first half with top-line pressure and margin compression, but underpinned by a conservative balance sheet. Revenue declined 10.5% YoY to 250.02, while operating income fell 22.2% to 30.60 and net income decreased 15.7% to 20.01. Gross profit was 100.20, implying a gross margin of 40.1%, showing resilient unit economics despite lower volumes. Operating margin compressed to 12.24% from an estimated 14.05% a year ago (approximately -181 bps), reflecting deleverage on SG&A and possibly mix. Ordinary income was 32.52 (-18.4% YoY) with margin at 13.01%, down roughly 124 bps YoY. Net margin settled at 8.00%, down about 48 bps YoY from ~8.48% previously. The DuPont framework points to ROE at 4.0%, driven by an 8.0% net margin, 0.379x asset turnover, and 1.33x financial leverage, underscoring modest profitability and conservative leverage. Operating cash flow of 14.40 covered only 72% of net income, flagging weaker cash conversion versus earnings. Liquidity remains sound with a current ratio of 130.7% and quick ratio of 117.8%, and interest coverage is very strong at 218.6x. Capital intensity persists with depreciation and amortization of 30.44, and capex of 10.44, implying continued investment in the asset base. Estimated ROIC is 3.9%, below the 5% warning threshold, indicating suboptimal capital efficiency in the current demand environment. Balance sheet strength is evident: total liabilities of 162.10 vs equity of 497.30 (D/E 0.33x reported), and short-term loans of 35.00 are amply covered by cash and current assets. The calculated payout ratio of 145.9% looks elevated relative to earnings and OCF, suggesting the need to align distributions with cash generation if softness persists (dividend details are unreported). Earnings quality is tempered by OCF/NI at 0.72x, likely reflecting working capital build amid lower sales. Forward-looking, sustaining margins and improving cash conversion will be key, alongside disciplined capex to lift ROIC above the cost-of-capital benchmark. Overall, the company enters the second half with solid financial cushioning but must re-accelerate revenue and defend margins to restore double-digit operating margin headroom and improve capital efficiency.

Profitability Analysis

ROE decomposition (DuPont): ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 8.0% × 0.379 × 1.33 ≈ 4.0%. The largest change YoY appears in margins rather than leverage, given revenue fell 10.5% while the balance sheet remains sizable. Operating margin contracted to 12.24% from an estimated 14.05% (-181 bps), ordinary margin to 13.01% from ~14.25% (-124 bps), and net margin to 8.00% from ~8.48% (-48 bps), indicating negative operating leverage and possibly less favorable mix or pricing pressure. Asset turnover at 0.379x is subdued, consistent with lower revenue against a largely fixed asset base in a capital-intensive model (modular units and sites). Financial leverage is conservative at 1.33x (Assets/Equity), offering stability but limiting ROE amplification. Business drivers of the margin compression likely include SG&A ratio elevation (SG&A at 27.8% of sales) as volumes softened, and potentially higher input costs not fully passed through. These changes look cyclical rather than structural; sustainability will hinge on demand recovery and cost discipline. Watch for any trend where SG&A growth exceeds revenue growth—current deleverage suggests cost base rigidity. Conclusion: current ROE softness is primarily margin- and turnover-driven; leverage policy remains prudent.

Growth Assessment

Revenue declined 10.5% YoY to 250.02, indicating a demand cooldown in the period. Operating income fell 22.2% to 30.60, a faster decline than revenue, underscoring negative operating leverage. Ordinary income and net income declined 18.4% and 15.7%, respectively, implying partial offset from non-operating items (non-operating income 2.21 vs expenses 0.29). Gross margin held at 40.1%, suggesting unit economics remain intact despite lower volumes. EBITDA of 61.04 (24.4% margin) points to a still-solid cash earnings base, but depreciation (30.44) reflects a heavy asset footprint. The outlook depends on order intake for modular units/leasing utilization, pricing power, and cost pass-through; recovery in construction and capex cycles would be supportive. With ROIC at 3.9%, growth needs to be profitable; prioritizing higher-yield projects and utilization improvements will be key to lift returns.

Financial Health

Liquidity is adequate: current ratio 130.7% (>1.0) and quick ratio 117.8% (>1.0). No warning on current ratio (<1.0) or excessive leverage (D/E > 2.0); reported D/E is 0.33x, indicating conservative solvency. Interest coverage is exceptionally strong at 218.6x, and short-term loans of 35.00 are covered by cash of 44.17; total current assets of 182.11 exceed current liabilities of 139.33. Maturity mismatch risk appears limited near term, though the reliance on short-term borrowings suggests some refinancing cadence to monitor. Noncurrent liabilities are modest at 22.76. No off-balance sheet obligations are reported in the provided data.

Cash Flow Quality

OCF/Net Income is 0.72x, below the 0.8 caution threshold, indicating weaker conversion—likely due to working capital consumption in the half (specific drivers unreported). Using a simple proxy, OCF (14.40) less capex (10.44) implies an estimated pre-dividend FCF of ~3.96; this would be tight against any cash dividends if maintained at historical levels (actual dividends unreported). There are no explicit signs of working capital manipulation in the data, but the gap between NI and OCF suggests inventory or receivables build; confirmation would require period-on-period working capital detail. Financing CF of 3.23 indicates modest net inflows, consistent with the conservative leverage profile.

Dividend Sustainability

Dividend details are unreported, but the calculated payout ratio of 145.9% implies distributions exceed earnings for the half. With OCF/NI at 0.72x and estimated FCF of ~3.96 (OCF minus capex), cash coverage appears thin if dividends are maintained at that implied level. Given ROIC at 3.9% and near-term earnings softness, maintaining an elevated payout could constrain reinvestment unless supported by cash reserves. Policy outlook will hinge on H2 cash generation; a more balanced payout aligned with FCF would improve sustainability if conditions do not rebound.

Risk Assessment

Business Risks:

• Demand softness in modular buildings/leasing leading to negative operating leverage
• Pricing pressure and/or less favorable mix compressing operating margin
• Input cost volatility (steel, materials) impacting gross margin if not fully passed through
• Execution risk on capex and asset utilization given high depreciation base

Financial Risks:

• OCF to net income at 0.72x indicating weaker cash conversion
• Sub-5% ROIC (3.9%) highlighting low capital efficiency
• Exposure to short-term debt (35.00) necessitating ongoing refinancing, albeit covered by liquidity

Key Concerns:

• Margin compression: operating margin down ~181 bps YoY
• Cash flow coverage for dividends appears tight given estimated FCF
• Sustained revenue decline (-10.5% YoY) weighing on asset turnover and returns

Investment Implications

Key Takeaways:

• Top-line down 10.5% with operating income down 22.2% indicates negative operating leverage
• Operating margin compressed to 12.24% (-181 bps YoY); net margin 8.00% (-48 bps)
• ROE at 4.0% and ROIC at 3.9% highlight muted returns given conservative leverage
• OCF/NI at 0.72x flags earnings quality concerns; estimated FCF pre-dividend ~3.96
• Balance sheet remains strong: current ratio 130.7%, D/E 0.33x reported, interest coverage 218.6x

Metrics to Watch:

• Order intake and backlog for modular units/leasing utilization
• Operating margin trajectory and SG&A ratio
• OCF/NI and working capital movements (AR, inventory, payables)
• ROIC progression versus a 7–8% medium-term target
• Dividend declarations vs. FCF generation

Relative Positioning: The company maintains a stronger-than-average balance sheet and interest coverage versus many domestic SMid industrial peers, but currently lags on capital efficiency (ROIC 3.9%) and growth momentum, with margins under pressure and cash conversion below par.

Disclaimer

This analysis was auto-generated by AI. Please note the following:

• No Guarantee of Accuracy: The accuracy and completeness of this analysis are not guaranteed. For accurate financial data, please refer to the original disclosure documents published on TDnet or other official sources
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