Construction earnings recovery remains uncertain due to losses on a large overseas civil engineering project

In FY2027-Q1, consolidated net sales were ¥65,363 million, down 6.3% year on year, and operating income was ¥2,627 million, down 36.5%. According to the supplementary earnings materials, the gross profit margin improved by 0.8 percentage points year on year to 14.0%, but the improvement in gross margin was not enough to offset the decline in operating income. As consolidated net sales and operating income had recovered to ¥307,202 million and ¥15,928 million, respectively, for FY2026, with an operating margin of 5.2%, it is necessary to determine whether the Q1 decline reflects a temporary fluctuation in project profitability or a deterioration in the underlying assumptions for FY2027.

By segment, civil engineering recorded net sales of ¥28,906 million and operating income of ¥1,474 million. Revenue increased 22.0% year on year, while operating income declined 29.1%. Building construction recorded net sales of ¥32,954 million and operating income of ¥1,938 million. Despite a 25.1% decline in revenue, operating income increased 1.2%. In building construction, profitability appears to have been supported by winning additional work on projects carried over from the previous fiscal year and by cost reductions. In civil engineering, however, the company said that substantial losses were incurred on a specific large overseas project. The breakdown of the loss amount, provision for losses on construction contracts, and additional costs required through completion had not been sufficiently disclosed as of Q1.

In FY2027-H1, we will first check whether civil engineering operating income falls below ¥1,474 million and whether additional losses on the large overseas project are recognized. At the same time, we should confirm whether building construction operating income remains at ¥1,938 million, the increase in gross profit from additional work, the amount of cost reductions, and whether the profitability of unfinished projects has been reassessed. Infrastructure operations and related businesses recorded an operating loss of ¥1,477 million as of Q1. We will also assess, through disclosure of segment operating income and gross margins, whether consolidated earnings can be supported by improvements in the construction business alone.