Daiseki Co.,Ltd. FY2026 FY Earnings Report

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Executive Summary

For the fiscal year ended February 2026, Daiseki reported Revenue of ¥718.5B (YoY +¥45.5B, +6.7%), Operating Income of ¥145.9B (YoY +¥2.7B, +1.8%), Ordinary Income of ¥148.8B (YoY +¥0.5B, +0.3%), and Net Income of ¥86.9B (YoY +¥7.4B, +9.3%). The Environmental Business performed steadily, delivering double-digit top-line growth and an improved gross margin of 33.5% (prior year 33.3%). However, SG&A rose to ¥95.0B (+13.4%), far outpacing revenue growth, causing the operating margin to decline to 20.3% from 21.3% a year earlier (about 100bp decrease). Ordinary Income remained flat, while Net Income increased due to an improved effective tax rate and the absence of certain one-off costs from the prior year. Operating Cash Flow (OCF) was ¥109.8B—over 20% higher than Net Income—indicating solid cash backing of profits. Nevertheless, an increase in trade receivables and a decrease in trade payables expanded working capital, leaving OCF/EBITDA at 0.61x and room for improvement. Free Cash Flow was ¥69.1B, largely covering dividends and share buybacks, and financial soundness remained very high (Equity Ratio 79.3%, Debt/EBITDA 0.34x).

Drivers of Performance

[Revenue] The company operates a single segment (Environmental Business), achieving Revenue of ¥718.5B (YoY +6.7%). Domestic sales account for over 90%, and revenue to external customers is diversified with low customer concentration. Gross profit was ¥240.9B (Gross Margin 33.5%), an improvement of +18bp from the prior year (33.3%), apparently aided by price pass-through and optimization of service mix. Trade receivables increased to ¥139.9B (prior year ¥117.5B), up +19.1%, outpacing revenue growth; as a result, days sales outstanding (DSO) are estimated at 71 days versus 64 days a year earlier, suggesting lengthening collection terms or timing effects in revenue recognition.

[Profitability] Operating Income reached ¥145.9B (+1.8%), with an operating margin of 20.3%, down about 100bp from 21.3% a year earlier. SG&A was ¥95.0B (+13.4%), nearly double revenue growth (+6.7%). Major drivers included logistics costs (freight ¥10.7B, +11.1%), an increase in bonus accruals (+¥2.1B), and higher depreciation (+¥1.9B, +37.4%). The increase in Gross Profit (+¥24.0B) was largely offset by higher SG&A (+¥13.7B), limiting operating leverage. Ordinary Income was ¥148.8B (+0.3%), nearly flat; non-operating income totaled ¥3.8B (interest income ¥1.1B, dividend income ¥0.3B, insurance proceeds ¥0.7B, etc.) versus non-operating expenses of ¥0.9B (interest expense ¥0.4B, etc.), yielding a small net non-operating gain of ¥2.9B. Pre-tax income was ¥145.9B (prior year ¥146.8B), a slight decline, and the effective tax rate rose modestly to 32.2% (prior year 31.2%). Extraordinary items totaled -¥3.0B, comprised of extraordinary gains of ¥0.6B (gain on sale of fixed assets) and extraordinary losses of ¥3.6B (impairment losses ¥1.7B, loss on retirement of fixed assets ¥1.6B, etc.). Net income attributable to non-controlling interests was ¥7.4B (prior year ¥7.8B), roughly unchanged. Net Income was ¥86.9B (+9.3%), with a Net Margin of 12.1% (prior year 11.8%), up 0.3pt, offsetting the slight increase in effective tax rate and extraordinary losses. In summary, the results reflect revenue growth and modest net income growth; while gross margin was maintained, a sharp rise in SG&A compressed operating margin, with net income ultimately improving.

Key Financial Metrics

[Profitability] Operating margin remained high at 20.3% but declined about 100bp from 21.3% a year earlier. Gross margin improved to 33.5% (prior year 33.3%), indicating solid pricing and mix, but the rise in SG&A ratio to 13.2% (prior year 12.1%) pressured operating margins. Net margin modestly improved to 12.1% (prior year 11.8%), and the effective tax rate increased slightly to 32.2% from 31.2% a year earlier. EBITDA was ¥181.0B (Operating Income ¥145.9B + Depreciation & Amortization ¥35.1B), and the EBITDA margin was 25.2%, still high but down roughly 100bp from around 26.2% the prior year. [Cash Quality] Operating Cash Flow / Net Income was 1.26x, indicating solid cash backing of profits; however, OCF/EBITDA was 0.61x, leaving substantial room for improvement. DSO is estimated at 71 days, DIO at 17 days, DPO at 24 days, yielding a Cash Conversion Cycle (CCC) of approximately 64 days, extended from an estimated 58 days prior year, showing working capital absorption. [Investment Efficiency] ROE was 10.4% (prior year 11.2%), still at a high level. DuPont decomposition aligns with Net Margin 12.1% × Total Asset Turnover 0.68 × Financial Leverage 1.26x. Total Asset Turnover improved from approximately 0.59 to 0.68 year-over-year, supporting ROE. ROA (on an Ordinary Income basis) was 14.1%, indicating high capital efficiency. [Financial Soundness] Equity Ratio rose to 79.3% (prior year 74.2%), showing a very solid financial base. Interest-bearing debt was ¥61.8B (short-term borrowings ¥26.6B, long-term borrowings ¥35.2B), with Debt/EBITDA of 0.34x and Interest Coverage of about 331x (EBITDA / interest paid), indicating substantial borrowing capacity. Current Ratio was 228.8%, Quick Ratio 214.5%, and cash & deposits of ¥184.0B are 6.9x short-term liabilities, limiting maturity mismatch risk. The proportion of short-term debt is somewhat high at 43.0%, but robust cash and low leverage provide strong refinancing resilience.

Cash Flow Analysis

OCF was ¥109.8B (YoY -20.5%), reflecting cash inflows before working capital changes and tax payments: Operating subtotal was ¥154.7B, less working capital changes and corporate tax payments of ¥46.1B. Working capital changes absorbed about ¥31.7B, with trade receivables at -¥23.9B, trade payables at -¥6.5B, and inventories at -¥1.3B, indicating delayed collections and progressed payments to suppliers that pressured cash. OCF / Net Income is a healthy 1.26x, but OCF/EBITDA remains at 0.61x, highlighting the need to improve working capital management. Investing Cash Flow was -¥40.7B, primarily capital expenditures of -¥60.1B (1.7x depreciation ¥35.1B), partially offset by proceeds from sale of fixed assets ¥8.4B, proceeds from sale of securities ¥12.1B, subsidy receipts ¥0.2B, etc. Free Cash Flow (OCF + Investing CF) was ¥69.1B, down from ¥134.5B a year earlier, but sufficient to cover dividend payments of ¥35.8B by 1.9x, supporting dividend sustainability. Financing Cash Flow was -¥187.3B, driven by dividend payments -¥35.8B, share buybacks -¥29.5B, additional acquisition of subsidiary interests -¥130.1B, and repayment of long-term borrowings -¥9.8B. Cash and cash equivalents declined by ¥118.2B to ¥183.0B (prior year ¥301.2B), with total returns to shareholders and the acquisition of subsidiary interests largely reducing cash. Free Cash Flow / CapEx was 1.15x, indicating the ability to sustain growth investment while retaining cash generation capacity; normalization of working capital is expected to stabilize future FCF levels.

Quality of Earnings

Of Ordinary Income ¥148.8B, Operating Income ¥145.9B accounts for about 98%, indicating strong core profitability. Non-operating income ¥3.8B consists of interest income ¥1.1B, dividend income ¥0.3B, insurance proceeds ¥0.7B, etc., mainly financial and business-related income and thus relatively stable. Extraordinary items were -¥3.0B (extraordinary losses ¥3.6B - extraordinary gains ¥0.6B), including impairment losses ¥1.7B and loss on retirement of fixed assets ¥1.6B, one-off expenses with limited impact on recurring earnings. On an accrual basis, OCF ¥109.8B significantly exceeds Net Income ¥86.9B (OCF/NI = 1.26x), confirming strong cash backing of profits. However, OCF/EBITDA at 0.61x reflects working capital absorption driven by higher receivables and lower payables, indicating timing differences between revenue recognition and cash collection temporarily reducing cash generation efficiency. Comprehensive income was ¥102.2B (Net Income ¥86.9B + Other Comprehensive Income ¥3.3B); OCI included valuation differences on securities ¥4.2B and actuarial adjustments for retirement benefits -¥0.9B, so divergence between comprehensive income and net income is minor and does not indicate material distortion in earnings quality. Overall, core recurring earnings make up the bulk of profit, one-off factors are limited, and operating cash flow exceeds net income—signs of high earnings quality—though improving working capital management could further enhance cash conversion efficiency.

Forecasts & Guidance

For FY2027 (ending February 2027), the company forecasts Revenue ¥742.0B (YoY +3.2%), Operating Income ¥168.0B (YoY +15.1%), Ordinary Income ¥170.0B (YoY +14.2%), and Net Income ¥87.0B (YoY +0.1%). Based on first-half results, full-year achievement ratios are Revenue 96.8%, Operating Income 86.9%, Ordinary Income 87.5%, and Net Income 99.9%, implying a plan for stronger revenue and profit in the second half. The company assumes that with Revenue growth of +3.2% and Operating Income growth of +15.1%, operating leverage will improve markedly, implicitly relying on restrained SG&A growth, improved utilization rates, and normalization of working capital. The nearly flat Net Income growth (+0.1%) may factor in a higher effective tax rate or potential recurrence of one-off items. The dividend forecast is ¥43 per annum (interim paid ¥36, year-end forecast ¥40 + alpha), implying a forecast payout ratio of 18.2% (based on forecast EPS ¥236.85), which is conservative. Achieving the company plan hinges on controlling SG&A growth and normalizing receivables; continued inflation in logistics and labor costs is a downside risk, while working capital improvement and higher utilization rates are upside factors to monitor.

Shareholder Returns

For FY2026, the dividend was ¥76 per annum (interim ¥36, year-end ¥40). On an actual basis (not forecast), the payout ratio was 39.4% (dividend ¥76 / EPS ¥193.02). Total dividends amounted to ¥35.8B, covering 51.8% of Free Cash Flow ¥69.1B and 41.2% of Net Income ¥86.9B, indicating high sustainability. Share buybacks of ¥29.5B were executed, bringing total shareholder returns to ¥65.3B and a total return ratio of 75.2% versus Net Income. Free Cash Flow coverage of total returns was 0.95x, nearly fully covered, and with cash & deposits of ¥184.0B and low leverage (Debt/EBITDA 0.34x), financial constraints are limited. The dividend forecast for FY2027 is ¥43 per annum, a substantial cut from the actual ¥76, but this reflects the company’s conservative assumptions combining first-half results (¥36) and a year-end forecast (assumed ¥40). The dividend policy targets stable payouts, apparently aiming for a payout ratio in the high-30s to low-40s percent range, and given cash generation and a strong balance sheet, there is sufficient capacity for further dividend increases. Share buybacks are implemented opportunistically, and continuation of buybacks is expected to play a role in maintaining the total return ratio going forward.

Risk Factors

1. Structural increase in SG&A: SG&A of ¥95.0B (+13.4%) grew nearly twice as fast as revenue (+6.7%), with notable increases in logistics costs (freight ¥10.7B, +11.1%) and bonus accruals (+¥2.1B). If wage and transport cost pass-throughs or cost-savings do not materialize, there is continued downward pressure on operating margins, risking difficulty in maintaining historically high margin levels (operating margin above 20%). The SG&A ratio rose +110bp to 13.2% from 12.1%, warranting close monitoring.

2. Prolonged working capital management risk: DSO is estimated at 71 days, extended about 7 days from 64 days prior year, and working capital absorption of approximately ¥31.7B resulted from a ¥23.9B increase in receivables and ¥6.5B decrease in payables. If OCF/EBITDA remains at a low 0.61x, cash generation during growth phases may structurally weaken and free cash flow stability could be impaired. Persistent lengthening of collection terms or deterioration in customers’ credit profiles could necessitate higher allowance for doubtful accounts and increase liquidity risk.

3. Single-segment concentration risk: The company is concentrated in the Environmental Business as a single segment; declines in utilization or processing prices in that business would directly affect consolidated results. Domestic sales exceed 90%, limiting geographic diversification; domestic economic slowdown, regulatory changes, or intensified competition could cause significant swings in revenue and profit. Recurrent extraordinary losses (impairment ¥1.7B, disposal of fixed assets ¥1.6B) suggest potential declines in fixed-asset profitability and latent risk of delayed recovery of invested capital.

Industry Benchmark (reference, company compilation)

Profitability & Returns

The company’s operating and net margins both substantially exceed industry medians, placing it among the top performers in the sector.

Growth & Capital Efficiency

Revenue growth lags the industry median, positioning the company at mid-to-lower range on growth within the sector.

※ Source: Company compilation

Key Points from the Financial Statements

1. Maintaining a high-profit business model while focusing on SG&A control: The company maintains industry-leading profitability with an Operating Margin of 20.3% and an EBITDA margin of 25.2%, but SG&A growth (+13.4%) is nearly double revenue growth (+6.7%). While Gross Margin improved by +18bp, Operating Margin fell by about 100bp, indicating structural increases in logistics and labor costs are compressing margins. The FY2027 plan assumes a significant +15.1% increase in Operating Income, so the effectiveness of SG&A controls and utilization improvements will be critical to future profit levels.

2. Room to improve cash conversion efficiency and working capital management: OCF / Net Income of 1.26x indicates solid cash backing, but OCF/EBITDA of 0.61x leaves substantial room for improvement. DSO extended to about 71 days from 64 days, and working capital absorption reached approximately ¥31.7B. Free Cash Flow of ¥69.1B almost fully covered total returns of ¥65.3B, but if working capital normalization does not occur, cash generation sustainability could be impaired. Improvement in receivables collection and shortening DSO are keys to restoring cash generation.

3. Strong financial soundness and ample shareholder return capacity: With an Equity Ratio of 79.3%, Debt/EBITDA 0.34x, and Interest Coverage of 331x, the financial base is extremely solid. Payout ratio of 39.4% and total return ratio of 75.2% indicate active shareholder returns, and Free Cash Flow / Dividends of 1.9x shows dividend sustainability. Cash & deposits of ¥184.0B equal 6.9x short-term liabilities, limiting liquidity risk. Low leverage and strong liquidity support capacity for further dividend increases and opportunistic buybacks, representing a strength in the results.

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This report was automatically generated by AI analyzing XBRL financial statement data. It does not constitute a recommendation to invest in any specific security. Industry benchmarks are compiled by the company based on public financial statements and are for reference only. Investment decisions are your responsibility; consult a professional advisor as needed.