TEKKEN CORPORATION Q2 FY2026 earnings call

• Overall Financial Performance

  • For the first half (second quarter ended) FY2026, consolidated sales were 87.2 billion yen, down 3 billion yen year-over-year. Gross profit was 8.7 billion yen, up 2.1 billion yen year-over-year. Net profit attributable to parent shareholders hit 2.8 billion yen, up 0.7 billion yen year-over-year despite headwinds from lower gain on sales of investment securities and higher bad debt provisioning.
  • Total order intake was 112.8 billion yen, up 24.2 billion yen year-over-year, with strong growth in both civil and architectural segments. Carried forward construction volume reached 309.2 billion yen, the highest level in 10 years.
  • Operating profit came in 0.8 billion yen above the prior plan at 2.9 billion yen, supported by higher gross profit from cost compression and design changes, higher real estate segment profits, and lower selling, general and administrative costs.

• Mid-Term Management Plan (MTMP 2028) Strategic Progress

  • Core KPIs: Targets of ≥5 billion yen operating profit and ≥7% ROE by FY2026, and ≥8 billion yen operating profit and ≥8% ROE by FY2028. ROE is the core KPI; DuPont analysis shows net profit margin and total asset turnover are lower than peers, requiring further improvement, while financial leverage is higher than peers and will be managed to avoid excessive expansion.
  • Focus Area Portfolio: Prioritize railway construction (core strength), road-related works (civil engineering, target to increase order share from 20% to 25% over the MTMP period), government/public architecture including defense-related construction (architectural engineering, order share already increased from 8% to 26%, target to maintain at ~20%), and real estate development as a new third profit pillar.
  • New Profit Pillar: Real estate development operates a circular capital business model where land is acquired, developed, and sold for value add. Currently 4 projects are in progress, with the first completed project delivered already, and 3 new investments are planned annually going forward. The company is also rebalancing its holding real estate portfolio to higher-quality assets.

• Asset Efficiency and Strategic Capital Allocation

  • Policy holding share reduction: Target to reduce policy holding shares to ≤20% of net assets by FY2026, with cumulative 5-year sales target of ~10 billion yen. 1.6 billion yen of shares were sold in H1 FY2026, with a full-year target of 4 billion yen, and progress is on track.
  • Digital Transformation (DX) Investment: Developing digital systems to reduce on-site management labor for highway renovation, rolling out ICT-enabled construction machinery for consistent precision in railway works, and building an in-house generative AI system to capture and share skilled worker know-how for technical succession. Further DX investments for productivity improvement are planned.
  • Human Capital Investment: Employee engagement initiatives have lifted engagement scores above the industry average. Increased recruitment outreach has secured substantially higher new graduate hiring volumes than prior years. The company maintains strong relationships with partner contractors through full cash payments and joint training programs via the Tekkenkai partner organization.

1. Civil Engineering (Civil Works) Segment: Q2 H1 FY2026 sales are 43.4 billion yen, accounting for approximately 50% of total consolidated sales. Gross profit is 4.6 billion yen, with a gross margin of 10.8%. Sales decreased by 1 billion yen year-over-year mainly due to lower overseas construction volume. Gross profit margin was broadly flat year-over-year, as delayed progress on design change negotiations for large domestic projects meant unconfirmed profitability was not recognized in the period. 2. Architectural Construction Segment: Q2 H1 FY2026 sales are 40.5 billion yen, accounting for approximately 46.4% of total consolidated sales. Gross profit is 3.0 billion yen, with a gross margin of 7.6%. Sales decreased by 3.1 billion yen year-over-year due to a pullback from strong prior period order volumes. Gross profit roughly doubled year-over-year, driven by a sharp reduction in low-margin projects affected by price inflation (down from 40% of segment sales in FY2023 to 8.5% in FY2025, projected to reach near-zero in FY2026) and successful design change negotiation outcomes. 3. Real Estate and Other Segment: Q2 H1 FY2026 sales are 3.1 billion yen, accounting for approximately 3.6% of total consolidated sales. Gross profit is 0.9 billion yen, with a gross margin of 30.3%. Sales increased by 1.1 billion yen year-over-year driven by a property sale completed by a consolidated subsidiary in Q1. Total consolidated gross margin improved from 7.3% year-over-year to 10% in the reporting period.

• Full-year FY2026 guidance was upward revised: Full-year consolidated sales are projected at 179 billion yen (down 6 billion yen from the prior forecast due to pullback from prior year architectural volumes), operating profit is projected at 4.6 billion yen (up 1.2 billion yen year-over-year, 2.5% operating margin, up from 1.9% prior year), ordinary profit is projected at 4.3 billion yen (up 1.3 billion yen year-over-year), and net profit attributable to parent shareholders is projected at 4.4 billion yen (up 1.0 billion yen year-over-year).
  • Dividend guidance was upward revised: Full-year dividend per share was increased from 130 yen to 160 yen, a 30 yen increase. The company currently targets 50% payout ratio with progressive dividend policy, and is evaluating the introduction of a DOE (dividend on equity) framework for more stable dividends.
  • Mid-Term Management Plan 2028 rolling review: The review was initiated following stronger-than-expected profit improvement, with the goal of incorporating more ambitious targets reflecting investor feedback that original targets were conservative. The revised plan is expected to be announced around mid-May next year, and will include updated operating profit, ROE targets, and further evaluation of DOE introduction.
  • Full-year FY2026 progress through the first half: Sales and gross profit progress are around 50% of the full-year forecast, which is in line with plan. Higher progress for operating profit, ordinary profit and net profit reflects higher general and administrative spending planned for the second half and timing of gains (anonymous partnership investment gain recognized in H1), which is in line with expectations.

• Civil engineering segment faces delayed design change negotiation timelines for large domestic projects, which creates uncertainty around profit recognition for unconfirmed scope.
  • Current completion-stage profitability is approximately 2% lower than industry peers, requiring continued improvement in productivity and cost management.
  • PBR remains below 1x, and ROE continues to stay below the updated 7.5% cost of equity, requiring continued operational improvement to lift market valuation.
  • Net profit margin and asset turnover are both below peer averages, which acts as a drag on ROE performance against stated targets.

Q: What is the status of the rolling review for the Mid-Term Management Plan 2028, given that current full-year FY2026 results are already approaching the original FY2026 plan targets?

A: The company has already started the review process for updating the mid-term plan. It aims to finalize and publish the revised plan around mid-May of next year, incorporating more ambitious targets in response to investor feedback that original targets were conservative.

Q: What drove the large improvement in architectural segment profit, and what is the outlook going forward?

A: The main driver is a sharp reduction in low-margin legacy projects affected by prior cost inflation. The company also established dedicated cost management and centralized support teams within the architectural division to strengthen on-site cost control and support, which has directly contributed to improved profitability. The segment will continue to see further gains as low-margin projects are fully eliminated next fiscal year.

Q: What types of facilities fall under defense-related construction order intake, and what is Tekken's competitive advantage in this segment?

A: Tekken has a long history of working on defense-related projects dating back decades, with an established track record across all regions of Japan, including facilities at Misawa Air Base, Maizuru Base, and Okinawa. Specific projects include construction and renovation of Self-Defense Force offices, hangars, and other defense infrastructure. The company expects defense-related construction volumes to grow going forward, and will leverage its historical track record to expand this segment.

Q: What initiatives is the company pursuing to reach a PBR of 1x, and what are the key priorities?

A: The company views improving ROE through better profitability as the core priority to lift PBR. It is also focused on implementing tangible initiatives to build long-term growth expectations to lift its low PER. Key current initiatives include portfolio rebalancing, building out the new real estate profit pillar, improving profit and productivity in core civil and architectural construction, and improving asset efficiency through policy share sales. The company will continue advancing these efforts and communicating progress to investors.