NAGAWA CO.,Ltd FY2027 Q1 Earnings Report

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Executive Summary

Revenue and earnings increased, with Operating Income growing substantially faster than revenue, clearly demonstrating improved profitability. Revenue was ¥8.58B (+7.1% YoY), Operating Income was ¥0.98B (+31.9%), Ordinary Income was ¥1.41B (+25.6%), and Net Income was ¥0.92B (+23.6%). The Operating Margin improved by +2.2pt to 11.5%, from 9.3% in the same period of the previous year, supported by the maintenance of a 39.8% gross margin and the control of SG&A expenses (¥2.43B, -0.9% YoY). At the Ordinary Income level, non-operating income of ¥0.43B, primarily consisting of dividend income of ¥0.42B, provided an additional boost, expanding the Ordinary Income Margin to 16.4%.

Factors Affecting Results

【Revenue】Revenue was ¥8.58B (+7.1% YoY). By segment, the core ModularBuilding business, which accounted for 83.0% of total revenue, generated ¥7.12B (+6.0%); Prefabricated Building & System Buildings generated ¥1.29B (+16.2%); and Construction Machinery generated ¥0.17B (-9.1%). In addition to the steady growth of the core Modular business, strong growth in Prefabricated drove the overall revenue increase.

【Profit and Loss】Operating Income was ¥0.98B (+31.9%), and the Operating Margin improved to 11.5% from 9.3% in the previous year, an improvement of +2.2pt. While maintaining a 39.8% gross margin, SG&A expenses remained approximately flat year on year (¥2.43B, -0.9%), resulting in favorable operating leverage, with the revenue increase translating directly into Operating Income. Ordinary Income was ¥1.41B (+25.6%), further boosted by ¥0.43B in non-operating income, including ¥0.42B in dividend income. After recording ¥0.02B in extraordinary losses, including losses on disposal of fixed assets, Net Income was ¥0.92B (+23.6%). The period ended with increases in both revenue and earnings.

Segment Analysis

ModularBuilding generated revenue of ¥7.12B (+6.0%) and Operating Income of ¥0.81B (+21.8%), with an Operating Margin of 11.3%, driving results as the core business accounting for 83.0% of total company revenue. Prefabricated Building & System Buildings generated revenue of ¥1.29B (+16.2%) and Operating Income of ¥0.17B (+94.2%), with a margin of 13.0%, demonstrating the highest profitability among the three segments and posting substantial earnings growth. Construction Machinery recorded lower revenue of ¥0.17B (-9.1%), but Operating Income improved to ¥0.02B (+110.0%), with a margin of 12.4%, indicating an improvement in profitability and a change in project mix despite its small scale.

Key Financial Indicators

【Profitability】The Operating Margin improved to 11.5% (9.3% in the previous year, +2.2pt), while the Net Profit Margin was 10.7% (9.3% in the previous year, +1.4pt). The gross margin remained broadly flat year on year at 39.8%, confirming stable control over pricing and costs.【Cash Flow Quality】Based on quarterly revenue and cost data, days sales outstanding were approximately 41 days (approximately 52 days in the previous year), inventory days were approximately 77 days (approximately 79 days in the previous year), and the cash conversion cycle was approximately 74 days (approximately 80 days in the previous year). All three measures shortened from the previous year, indicating a slight improvement in working capital efficiency.【Investment Efficiency】ROE was 1.4%, while the total asset turnover ratio (quarterly revenue ÷ total assets) remained low at 0.11x. The asset composition, including substantial cash and deposits of ¥14.01B and investment securities of ¥21.20B, is weighing down the turnover ratio.【Financial Soundness】The Equity Ratio was 88.1% (87.3% in the previous year), total assets were ¥76.65B (-3.4% YoY), and net assets were ¥67.51B (-2.5% YoY), with the capital structure remaining conservative.

Cash Flow Analysis

As cash flow statement data has not been disclosed, cash flow trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥14.01B, down -5.8% from ¥14.88B in the previous year, while investment securities were ¥21.20B, down -6.9% from ¥22.76B in the previous year. Meanwhile, inventories increased to ¥4.38B (+5.1% YoY), and contract assets increased to ¥0.55B (+69.8% YoY), suggesting that the accumulation of assets accompanying project progress absorbed funds during the period. Income taxes payable decreased -66.1%, from ¥1.27B in the previous year to ¥0.43B, indicating cash outflows associated with tax payments. Net assets were ¥67.51B, down -2.5% from ¥69.25B in the previous year. This was primarily attributable to a reduction in the valuation difference on available-for-sale securities to ¥7.59B from ¥8.70B in the previous year, while retained earnings declined slightly to ¥51.37B from ¥52.00B.

Quality of Earnings

Non-operating income of ¥0.43B was equivalent to 5.0% of revenue, with dividend income of ¥0.42B accounting for the majority. While this represents relatively recurring income generated from the ¥21.20B holding of investment securities, it does not arise from the Company’s core operating activities, creating a structure in which the Ordinary Income Margin of 16.4% substantially exceeds the Operating Margin of 11.5%. Extraordinary losses were minor at ¥0.02B, and the difference between Ordinary Income and Net Income was primarily attributable to income taxes of ¥0.47B. The increases in inventories (¥4.38B, +5.1% YoY) and contract assets (¥0.55B, +69.8% YoY) represent accruals toward future revenue recognition. Attention should be paid to the possibility that the timing of cash conversion may lag somewhat behind the pace of earnings growth.

Earnings Forecast and Guidance

Q1 progress against the full-year Company plan was 22.6% for revenue (2.4pt below the simple 25% progress benchmark), 21.8% for Operating Income (-3.2pt), 27.6% for Ordinary Income (+2.6pt), and 27.8% for Net Income (+2.8pt). While revenue and Operating Income are slightly behind schedule, Ordinary Income and Net Income are ahead, reflecting the timing of recognition of non-operating income, primarily dividend income. The full-year Company plan calls for revenue of ¥38.00B (+7.4%), Operating Income of ¥4.50B (+2.7%), and Ordinary Income of ¥5.10B (+1.9%), while Net Income is planned to decline to ¥3.30B (-25.6%), which is a notable feature of the guidance.

Shareholder Returns

The year-end dividend for the previous fiscal year (FY ended March 2026) totaled ¥100 per share, comprising an ordinary dividend of ¥60 per share and a 60th-anniversary commemorative dividend of ¥40. No revisions have been made to the dividend forecast for the current fiscal year as of this point. The financial base, including cash and deposits of ¥14.01B and an Equity Ratio of 88.1%, supports the Company’s capacity to pay dividends.

Risk Factors

1. Segment concentration risk: ModularBuilding accounts for 83.0% of revenue, and its Operating Income of ¥0.81B represents a substantial portion of total company Operating Income of ¥0.98B. Consequently, fluctuations in demand and capacity utilization in this business are likely to have a relatively significant impact on overall results.

2. Working capital fluctuations: Inventories increased to ¥4.38B (+5.1% YoY), and contract assets increased to ¥0.55B (+69.8% YoY). The accumulation of assets accompanying project progress could affect the timing of cash conversion.

3. Securities price fluctuation risk: Investment securities of ¥21.20B account for 27.7% of total assets. Market fluctuations could affect the valuation difference on available-for-sale securities (¥7.59B) and the level of dividend income recorded as non-operating income.

Industry Benchmark (For Reference; Compiled by the Company)

Industry Benchmark (it_telecom)

Profitability and Returns

Both the Operating Margin and Net Profit Margin exceed the industry median, indicating that profitability is relatively high within the industry.

Growth and Capital Efficiency

The revenue growth rate is slightly below the industry median, indicating that growth remains at an average level relative to the Company’s high profitability.

※Source: Compiled by the Company

Key Points from the Earnings Results

1. The Operating Margin improved by +2.2pt to 11.5% (9.3% in the previous year), and the maintenance of a 39.8% gross margin and control of SG&A expenses enabled earnings growth of +31.9%, exceeding revenue growth of +7.1%.

2. The Ordinary Income Margin of 16.4% substantially exceeds the Operating Margin of 11.5%, resulting in an earnings structure with relatively high dependence on non-operating income, primarily dividend income of ¥0.42B.

3. While full-year progress for revenue and Operating Income is slightly behind schedule (22.6% and 21.8%, respectively), Ordinary Income and Net Income are ahead (27.6% and 27.8%, respectively). Consistency with the full-year Net Income plan (-25.6%) will be a point to monitor as quarterly results progress.

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, explicit five-year fade). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥3,691–¥3,913 at ±1% for the cost of equity, and ¥3,780–¥3,812 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.

(Model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not forecast 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. 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 with professionals as necessary.

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AI Financial Analysis

Executive Summary

Nagawа delivered a strong FY2027 Q1 earnings result, with operating profit growth materially outpacing sales growth. Revenue rose 7.1% year on year to ¥8.58bn. Operating income increased 31.9% to ¥0.98bn. Ordinary income rose 25.6% to ¥1.41bn, supported by ¥0.42bn of dividend income. Net income increased 23.6% to ¥0.92bn, while EPS rose to ¥59.24 from ¥47.54. Gross margin was broadly stable at 39.8%, down roughly 10 basis points from the prior-year quarter. The operating margin improved by approximately 215 basis points to 11.4% from 9.3%. This margin expansion was driven principally by operating leverage, as SG&A declined 0.9% year on year despite 7.1% revenue growth. Net margin expanded by around 144 basis points to 10.7%. Ordinary income exceeded operating income by ¥0.42bn because dividend income represented the overwhelming majority of non-operating income. Accordingly, headline net income includes a meaningful contribution from the investment portfolio rather than solely the underlying operating business. The effective tax rate was 33.6%, resulting in a tax burden factor of 0.663. The balance sheet remains exceptionally conservative, with an 88.1% equity ratio, a 448.2% current ratio, and 0.14x debt-to-equity. However, annualized ROE remained modest at 5.4%, constrained by low asset turnover and a deliberately low financial-leverage profile. ROIC of 4.9% is below the 5% monitoring threshold, indicating that the sizable asset base is not yet generating an adequate operating return. Inventory-related alerts, at 95 days and 77 days under the respective calculations, require attention as inventories increased while sales growth remained moderate. Full-year guidance implies Q1 sales and operating-profit progress rates of 22.6% and 21.8%, respectively, modestly below a standard 25% quarterly run rate but not at a level that signals a material shortfall. The ¥60 per-share full-year dividend forecast implies a moderate 28.2% dividend payout ratio against forecast EPS of ¥212.91. Overall, the quarter demonstrates improving operating efficiency and robust financial resilience, while future valuation of the earnings trajectory should focus on inventory discipline, capital efficiency, and the sustainability of investment-income support.

Profitability Analysis

Annualized DuPont ROE is 5.4%, decomposed into a 10.7% net profit margin, 0.448x annualized asset turnover, and 1.14x financial leverage. The strongest component is the net margin, which benefited from both higher operating profitability and non-operating dividend income. The weakest component is asset turnover, reflecting a large balance sheet containing ¥14.01bn of cash and deposits, ¥21.20bn of investment securities, and ¥28.00bn of property, plant and equipment. Financial leverage is intentionally low, consistent with the 88.1% equity ratio and 0.14x debt-to-equity ratio; this protects downside resilience but limits ROE amplification. Operating margin rose to 11.4% from approximately 9.3% in the prior-year quarter, an expansion of about 215 basis points. Gross margin remained essentially flat at 39.8%, indicating that the earnings improvement was not principally caused by gross-margin expansion. Rather, SG&A fell to ¥2.43bn from ¥2.45bn despite revenue increasing to ¥8.58bn from ¥8.01bn, creating favorable operating leverage. This cost discipline appears operationally positive, although its sustainability depends on whether lower selling and administrative spending can be maintained without weakening future sales coverage or service capability. Net income grew more slowly than operating income, at 23.6% versus 31.9%, due in part to a higher tax charge and a ¥0.22bn extraordinary loss on disposal of fixed assets. The ¥0.42bn dividend income is equivalent to 42.6% of operating income and lifts ordinary income materially above operating income. This investment-income contribution improves reported profitability but should be separated from core operating performance when assessing recurring earnings power. The 4.9% ROIC alert is a capital-efficiency concern because the operating return remains low relative to the substantial capital deployed in fixed assets and securities.

Growth Assessment

Revenue growth of 7.1% indicates a positive start to FY2027, while operating income growth of 31.9% demonstrates significant incremental profit conversion. The operating-profit growth premium over revenue growth was supported by lower SG&A expenditure and stable gross margin. Inventory increased 5.1% year on year to ¥4.38bn, broadly below the revenue growth rate, but the two inventory-days alerts of 95 days and 77 days remain elevated. The 95-day alert exceeds the 90-day warning threshold, while the 77-day alert also exceeds its 60-day threshold; both indicate that working-capital intensity and demand matching merit close monitoring. Finished goods account for the reported inventory balance, increasing the importance of inventory rotation and end-market demand visibility. Full-year company guidance calls for revenue of ¥38.0bn, operating income of ¥4.5bn, ordinary income of ¥5.1bn, and net income of ¥3.3bn. Q1 represents 22.6% of revenue guidance, 21.8% of operating-income guidance, 27.6% of ordinary-income guidance, and 27.8% of net-income guidance. These progress rates are within 10 percentage points of the standard 25% Q1 benchmark. The lower operating-profit progress rate suggests that the plan assumes a stronger contribution during the remainder of the fiscal year, potentially reflecting normal seasonality or planned sales activity. In contrast, the full-year forecast indicates only 2.7% operating-income growth and a 25.6% decline in net income year on year. This makes the quality and composition of non-operating income, particularly dividend income from investment securities, important to the full-year earnings path. Revenue sustainability will depend on converting inventory efficiently and maintaining the Q1 SG&A discipline without sacrificing growth investment.

Financial Health

Financial health is very strong. Current assets of ¥26.25bn exceed current liabilities of ¥5.86bn by ¥20.40bn, producing working capital of ¥20.40bn. The current ratio is 448.2% and the quick ratio is 373.4%, both far above conventional healthy thresholds. Cash and deposits of ¥14.01bn alone provide substantial liquidity relative to current liabilities. Total liabilities were only ¥9.14bn against total equity of ¥67.51bn, resulting in debt-to-equity of 0.14x. There is no warning on current-ratio adequacy because the ratio is well above 1.0, and there is no excessive-leverage warning because debt-to-equity is well below 2.0x. Noncurrent liabilities of ¥3.29bn are also modest relative to the ¥50.40bn noncurrent asset base. The company therefore shows no apparent maturity mismatch between short-term obligations and liquid current assets. Deferred tax liabilities of ¥3.15bn constitute a material portion of noncurrent liabilities and are linked to the asset and valuation structure rather than conventional financing debt. Equity declined 2.5% year on year to ¥67.51bn, primarily alongside lower retained earnings and lower valuation differences on securities, but the capital base remains substantial. Investment securities of ¥21.20bn represent 27.7% of total assets, creating exposure to market-value movements and variability in dividend income. Property, plant and equipment of ¥28.00bn represents 36.5% of total assets, reinforcing the need to improve asset utilization and ROIC.

Notable B/S Changes

Inventories: +¥0.21bn (+5.1%) to ¥4.38bn - increase coincides with elevated 95-day and 77-day inventory alerts; inventory conversion and demand alignment should be monitored. Investment securities: -¥1.56bn (-6.9%) to ¥21.20bn - remains a substantial 27.7% of total assets and a key source of both dividend income and market-value sensitivity. Cash and deposits: -¥0.86bn (-5.8%) to ¥14.01bn - liquidity remains exceptionally strong despite the decline. Valuation difference on securities: -¥1.10bn (-12.7%) to ¥7.59bn - lower unrealized gains contributed to the reduction in total equity and highlights equity sensitivity to market prices. Total equity: -¥1.74bn (-2.5%) to ¥67.51bn - capital remains very robust, with an 88.1% equity ratio.

Cash Flow Quality

Reported cash-flow measures are not used in this assessment. Earnings quality can nevertheless be assessed qualitatively from the income statement and balance sheet composition. Net income of ¥0.92bn was supported by ¥0.42bn of dividend income, equal to 45.5% of net income. This income is recurring only to the extent that portfolio dividends remain stable and investee companies sustain their distributions. Core operating income of ¥0.98bn grew strongly and provides a sounder indicator of underlying quarter performance. The ¥0.22bn extraordinary loss from disposal of fixed assets reduced profit before tax and is non-recurring in character. Inventory rose by ¥0.21bn year on year and the elevated 95-day and 77-day inventory metrics warrant close monitoring for potential future cash absorption. Accounts receivable declined to ¥3.85bn from ¥4.62bn, which is directionally constructive for working-capital management. Electronic receivables were broadly stable at ¥2.23bn. The combination of lower trade receivables and higher inventories suggests that inventory conversion, rather than customer collections, is the more important working-capital issue. Cash and deposits declined by ¥0.86bn year on year to ¥14.01bn but remain ample relative to obligations.

Dividend Sustainability

The company forecasts a FY2027 dividend of ¥60 per share. Based on forecast EPS of ¥212.91, the implied dividend payout ratio is 28.2%. This is well below the 60% sustainability benchmark and leaves substantial earnings retention capacity. The conservative balance sheet, including ¥14.01bn of cash and deposits and 0.14x debt-to-equity, provides additional support for dividend continuity. The prior FY2026 year-end distribution included a ¥60 ordinary dividend and a ¥40 60th-anniversary commemorative dividend. The FY2027 forecast of ¥60 per share therefore appears to represent normalization to the ordinary-dividend level rather than a deterioration in ordinary shareholder returns. Retained earnings of ¥51.37bn provide a large accumulated buffer. Dividend sustainability should be evaluated primarily against normalized operating earnings and recurring investment income, rather than against one-off valuation gains. The forecast payout ratio appears conservative, although the pace of inventory investment and the return generated on the substantial securities and fixed-asset base remain relevant capital-allocation considerations.

Risk Assessment

Business risks include Inventory and demand-matching risk: inventory rose to ¥4.38bn, while inventory-day alerts of 95 days and 77 days exceed their respective warning levels. Elevated inventory duration can lead to cash absorption, discounting pressure, or valuation losses if demand weakens., Operating-leverage sustainability risk: Q1 operating-margin expansion relied heavily on SG&A declining 0.9% despite 7.1% sales growth. Sustaining this cost discipline without impairing sales execution, customer service, or growth investment is important., Industry-specific modular-building and construction-cycle risk: demand can be influenced by construction activity, public-sector budgets, disaster-recovery needs, corporate capital expenditure, and raw-material or logistics cost inflation., Investment-income concentration risk: dividend income of ¥0.42bn accounted for most non-operating income and materially supported ordinary income. Changes in investee profitability or dividend policy could affect reported earnings..

Financial risks include Capital-efficiency risk: the 4.9% ROIC alert is below the 5% threshold, indicating limited operating return on the capital employed., Market-value risk in investment securities: investment securities total ¥21.20bn, or 27.7% of total assets, while valuation differences on securities are ¥7.59bn. Equity and earnings may be sensitive to market-price movements and investee distributions., Low financial leverage limits downside risk but also suppresses annualized ROE, which was 5.4%..

Key concerns include High priority: improve inventory rotation and determine whether the 95-day and 77-day inventory metrics are temporary or structural., High priority: raise ROIC above the 5% threshold through improved operating returns, higher asset utilization, or disciplined portfolio allocation., Medium priority: distinguish sustainable core operating-profit growth from investment-income-supported ordinary and net income., Medium priority: monitor whether Q1's 11.4% operating margin can be maintained as the company progresses toward full-year guidance..

Investment Implications

Key takeaways include Q1 operating income grew 31.9% year on year, substantially faster than 7.1% revenue growth, supported by favorable SG&A leverage., Operating margin improved to 11.4%, placing profitability within the stated 8-15% good benchmark range., Net margin reached 10.7%, but dividend income of ¥0.42bn was a material contributor to below-the-line earnings., The company has a highly conservative financial profile, with 448.2% current ratio, 373.4% quick ratio, 88.1% equity ratio, and 0.14x debt-to-equity., Capital efficiency remains the central strategic issue: annualized ROE was 5.4% and ROIC was 4.9%., The forecast ¥60 dividend implies a moderate 28.2% dividend payout ratio and appears well supported by earnings and balance-sheet resources..

Metrics to watch include Inventory days, including the 95-day and 77-day alert measures, and finished-goods balance trends, ROIC relative to the 5% threshold and annualized ROE relative to the current 5.4%, Operating margin sustainability after the Q1 increase to 11.4%, SG&A growth relative to revenue growth, Dividend income and market valuation movements in the ¥21.20bn investment-security portfolio, Progress against full-year guidance, particularly operating-income progress from the current 21.8%.

Regarding relative positioning, Nagawа is positioned as a financially resilient, asset-rich company with strong liquidity and limited balance-sheet risk. Its Q1 operating-margin performance is solid, but relative capital efficiency is weaker than profitability and solvency metrics suggest because a large fixed-asset, cash, and securities base generates only a 4.9% ROIC and 5.4% annualized ROE.