Revenue contracts on the exit, but margins surge in Q1

Revenue in Q1 of the fiscal year ending March 2027 was ¥24,108 million, down ¥6,802 million from ¥30,910 million in the same period of the previous year. Operating profit, meanwhile, rose ¥1,318 million, from ¥2,844 million to ¥4,162 million. The operating margin rose approximately 8.1 percentage points, from approximately 9.2% in the same period of the previous year to 17.3%, indicating that improved profitability after the business exits, rather than a simple recovery in demand, drove the increase in profit.

In addition to the increase in operating profit, ordinary profit was ¥4,322 million and profit attributable to owners of the parent was ¥4,056 million. The full-year forecasts are revenue of ¥84,000 million, operating profit of ¥8,000 million, ordinary profit of ¥6,500 million and net profit of ¥5,000 million. Progress against these forecasts in Q1 was 28.7% for revenue, 52.0% for operating profit, 66.5% for ordinary profit and 81.1% for net profit. Profit progress is strong, but net profit is ahead of the full-year forecast, so it will be necessary to separate out the extent to which extraordinary gains and losses and foreign-exchange factors are included in the first half.

The company cites increased sales of high-value-added, high-performance products, a review of unprofitable sales, price revisions and cost reductions as the factors behind the increase in profit. It will be important to determine whether these have become established as improvements in manufacturing costs, product mix and sales profitability in the continuing businesses, rather than reflecting temporary benefits from the exits or foreign-exchange valuation gains. Ordinary profit of ¥4,322 million was only ¥160 million above Q1 operating profit of ¥4,162 million, so dependence on non-operating factors may be lower than during the period from the fiscal year ended March 2023 to the fiscal year ended March 2024, although the effects of foreign-exchange gains and losses and interest expense in the first half should be monitored.

The company has not disclosed numerical assumptions for its first-half earnings forecast, sales volume, unit prices or raw-material and fuel prices. In the first-half results, investors should look not only at whether revenue exceeds ¥42,000 million, but also whether operating profit exceeds ¥4,000 million and the operating margin can be maintained around 17.3%. Even if the pattern of offsetting a revenue shortfall with higher margins continues, it will be necessary to confirm by segment whether the reduction in revenue from the exits is greater than expected and assess the growth potential of the remaining businesses.