CENTRAL SECURITY PATROLS (9740) FY2027 Q2 Earnings Report

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Executive Summary

The key takeaway from this earnings report is that revenue and operating income continued to increase, while net income attributable to owners of the parent fell significantly due to the recognition of extraordinary losses. Revenue was ¥40.59B (+4.8% YoY), Operating Income was ¥2.79B (+10.0%), and Ordinary Income was ¥2.87B (+9.1%). Consolidated Net Income was ¥1.22B (△35.7%), while Net Income Attributable to Owners of the Parent was ¥0.99B (△41.9%). The main drivers of higher operating income were an increase in gross profit and a decrease in SG&A expenses (from ¥6.27B to ¥6.19B). The primary reason for the decline in final profit was that extraordinary losses of ¥1.41B exceeded extraordinary gains of ¥0.45B.

Factors Affecting Performance

【Revenue】Revenue was ¥40.59B, up 4.8% YoY. The core Security Business generated ¥39.56B (+4.7%), accounting for 97.5% of total revenue. The Building Management and Real Estate Business generated ¥1.02B (+9.0%). Growth was primarily driven by expansion in the core business, with contributions from newly consolidated subsidiaries also considered a factor.

【Profit and Loss】Gross profit was ¥8.98B, and the gross margin declined to 22.1% (from 22.7% a year earlier). Meanwhile, the SG&A ratio declined to 15.2% (from 16.2%), and the operating margin improved by just under 1pt to 6.9% (from 6.5%). SG&A cost controls offset the increase in the cost ratio. Ordinary Income, including non-operating items, was ¥2.87B (+9.1%). Extraordinary losses of ¥1.41B (¥0.004B a year earlier) were a temporary factor, and income before income taxes declined to ¥1.9B (from ¥2.86B). Income taxes were ¥0.68B, and profit attributable to non-controlling interests was ¥0.23B. In summary, revenue and operating/ordinary income increased, while final profit declined.

Segment Analysis

The Security Business recorded Revenue of ¥39.56B (+4.7%), Operating Income of ¥2.56B (+6.2%), and a 6.5% operating margin, accounting for most of the company-wide Operating Income. The Building Management and Real Estate Business recorded Revenue of ¥1.02B (+9.0%), Operating Income of ¥0.22B (+87.6%), and a high 21.4% operating margin, but accounted for just 2.5% of the revenue mix. Overall growth remains highly dependent on the Security Business.

During the period, Kansai CSP, a consolidated subsidiary, acquired Sanwa Security Services, resulting in a ¥0.21B increase in goodwill (provisional calculation). There were no material impairment losses on property, plant and equipment.

Key Financial Indicators

【Profitability】The operating margin was 6.9% (6.5% a year earlier), the gross margin was 22.1%, and the SG&A ratio was 15.2%. Annualized ROE was 5.5%, with profitability indicators weighed down by extraordinary losses. EPS was ¥70.44 (¥117.41 a year earlier, △40.0%).【Cash Quality】Operating Cash Flow (OCF) was ¥4.26B (△7.9% YoY), approximately 4.3x Net Income Attributable to Owners of the Parent of ¥0.99B. However, this included positive contributions from a ¥2.13B decrease in trade receivables and a ¥0.59B decrease in inventories.【Investment Efficiency】Capital expenditures were ¥1.01B, below depreciation and amortization of ¥1.46B. Including ¥0.68B of intangible asset acquisitions, total investment was ¥1.69B, exceeding depreciation and amortization. Free cash flow (OCF + investing CF) was ¥2.32B.【Financial Soundness】The Equity Ratio was 64.1%, and the current ratio was 199.0% (current assets of ¥38.24B ÷ current liabilities of ¥19.21B). Against cash and deposits of ¥15.87B, borrowings were approximately ¥3.7B, indicating substantial financial capacity. Goodwill was ¥0.99B, or just 2.2% of net assets.

Cash Flow Analysis

OCF was ¥4.26B, down from ¥4.62B a year earlier, but remained well above profit. The subtotal before working capital changes was ¥5.86B, with income taxes paid of ¥1.01B deducted. An inflow of ¥2.13B from the decrease in trade receivables provided support, while a ¥0.78B decrease in advances received and a ¥0.4B decrease in trade payables were outflow factors. Investing CF was △¥1.94B (△¥4.69B a year earlier), reflecting a reduction in the large outflow for subsidiary share acquisitions recorded in the prior-year period. Financing CF was △¥1.52B (+¥0.83B a year earlier), primarily reflecting dividend payments of ¥0.42B, repayment of borrowings, and repayment of lease liabilities. Free CF was ¥2.32B, comfortably exceeding the estimated interim dividend payment of approximately ¥0.56B. However, as there is no assurance that working capital improvements will recur, the sustainability of OCF levels warrants attention.

Earnings Quality

The difference between Ordinary Income of ¥2.87B and income before income taxes of ¥1.9B reflects a net extraordinary loss of ¥0.97B. Extraordinary gains of ¥0.45B included insurance proceeds of ¥0.4B and gains on sales of investment securities of ¥0.02B; both are non-recurring. Extraordinary losses of ¥1.41B were also temporary and should be assessed separately from earnings power at the operating level. Non-operating income was ¥0.14B, including dividend income of ¥0.07B, making only a small contribution to Ordinary Income. After deducting profit attributable to non-controlling interests of ¥0.23B from consolidated Net Income of ¥1.22B, Net Income Attributable to Owners of the Parent was ¥0.99B. OCF substantially exceeding profit indicates cash backing for earnings. However, as working capital improvements contributed to this result, their sustainability requires separate assessment. Comprehensive income was ¥1.04B, with valuation differences on securities (△¥0.06B) and adjustments related to retirement benefits (△¥0.12B) having negative effects.

Earnings Forecast and Guidance

The full-year forecast is Revenue of ¥80B (+1.6%), Operating Income of ¥3.9B (△13.3%), Ordinary Income of ¥4B (△14.9%), Net Income Attributable to Owners of the Parent of ¥1.8B (△28.1%), and EPS of ¥128.27. The earnings forecast was revised during the current quarter.

First-half progress was 50.7% for Revenue, 71.5% for Operating Income, 71.7% for Ordinary Income, and 54.8% for Net Income Attributable to Owners of the Parent. Implied second-half Operating Income is ¥1.11B, corresponding to an operating margin of approximately 2.8%, a substantial decline from 6.9% in the first half. Second-half profitability will be a key focus.

Shareholder Returns

The interim dividend was ¥40 per share, up from ¥30 in the prior-year period. The full-year dividend forecast is ¥81. Based on the weighted-average number of shares during the period (approximately 14 million shares), the interim dividend payment is estimated at approximately ¥0.56B, implying a Payout Ratio of approximately 57% against Net Income Attributable to Owners of the Parent of ¥0.99B. Free CF of ¥2.32B covers this amount approximately 4.1x. Based on the full-year forecast, the Payout Ratio is approximately 63% against forecast net income of ¥1.8B. Share repurchases were a negligible ¥0.0005B, with dividends accounting for the bulk of shareholder returns.

Risk Factors

1. Business concentration risk: The Security Business accounts for 97.5% of Revenue and most segment Operating Income. The gross margin has declined to 22.1% from 22.7% a year earlier. If higher labor costs cannot be passed through to customers, pressure on margins may persist.

2. Extraordinary items and earnings volatility risk: Due to extraordinary losses of ¥1.41B, Net Income Attributable to Owners of the Parent declined 41.9% despite a 10.0% increase in Operating Income. A recurrence of similar losses could lead to greater volatility in final profit.

3. Working capital and acquisition-related risks: OCF includes a combined ¥2.72B decrease in trade receivables and inventories, and inflows of a similar magnitude cannot be assumed. In addition, figures may change once the purchase price allocation for the provisional goodwill arising from the acquisition of Sanwa Security Services is finalized. Goodwill was ¥0.99B, or 2.2% of net assets.

Industry Benchmarks (Reference; Company Research)

Profitability and Returns

Both the operating margin and net profit margin are below the industry median, placing them toward the lower end of the interquartile range.

Growth and Capital Efficiency

The growth rate is below the industry median but remains within the interquartile range.

※Source: Company analysis

Key Points to Watch in the Earnings Report

1. Revenue and operating income increased at the operating level (Revenue +4.8%, Operating Income +10.0%), with SG&A cost controls offsetting the decline in the gross margin. Meanwhile, final profit was weighed down by extraordinary losses, so it is important to distinguish underlying earnings power from temporary factors.

2. OCF substantially exceeded profit, while the current ratio was 199.0% and the Equity Ratio was 64.1%, indicating a strong financial foundation. However, OCF includes working capital factors such as the decrease in trade receivables.

3. The full-year plan has reached 71.5% progress for Operating Income, while the second-half operating margin is set at a low approximately 2.8%. The trend in second-half profitability and developments in extraordinary items are key areas to monitor in upcoming earnings reports.

Theoretical Share Value (Reference)

Sensitivity: ¥2,617 to ¥2,763 for cost of equity ±1%; ¥2,673 to ¥2,698 for ω ±0.1.

Notes:

• Taxes, acquisition-related costs, minority interests and similar items compress net income substantially relative to operating income (net income / operating income 46%). This estimate reflects that compression at face value; if the causes are temporary, underlying value may be higher.
• Forecast ROE is below the cost of equity, so the estimate falls below book value per share.
• Net assets are taken at the quarter end (there is a timing gap with the full-year forecast).
• Net assets include non-controlling interests, so the estimate may be somewhat high.

(Model: residual income model (Ohlson-type, explicit 5-year fade) / rate reference month: 2026-09 / a mechanical estimate from public data only; it is not a forecast of the market price or a recommendation of any investment action, and it does not predict or guarantee future share prices)

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This report is an automatically generated earnings analysis prepared by AI based on XBRL earnings release data. It does not constitute a recommendation to invest in any specific security. Industry benchmarks are reference information compiled by the company based on publicly available earnings data. Investment decisions should be made at your own discretion and, where appropriate, after consulting a professional.

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