Construction: F3/26 Results Wrap: Conditions Still Favorable for General/Subcontractors Amid Tight S/D

Research evidence excerpt

Construction: F3/26 Results Wrap: Conditions Still Favorable for General/Subcontractors Amid Tight S/D

IdeaMSubindustry view: Although we believe the operating environment is favorable for both

general contractors and subcontractors, among the various subindustries, we believe the

market focus will continue to center on general contractors, electrical engineering

subcontractors, and HVAC equipment subcontractors. The market for both general

contractors and subcontractors remains tight, owing to capacity constraints, and we

expect earnings growth to continue as high-margin projects make a greater contribution to

overall earnings.

In telecom engineering, FY3/27 guidance for mobile-related orders (which tend to

correlate with P/E) suggests weakening order momentum. Comsys Holdings is guiding for

9.8% YoY growth in mobile orders in F3/27, vs. the 44.3% growth marked in F3/26 (+5.1%

YoY growth projected for a new category that reflects reclassification of work for NTT

Docomo), while EXEO Group is guiding for -1.0% YoY change in orders (vs. +43% YoY in

F3/26). In addition, Comsys Holdings’ monthly mobile orders for April were -11% YoY. As

the company is still targeting YoY growth in mobile orders for F3/27, we believe timing of

orders may be partly behind the weak figure. However, with prior-year hurdles rising,

confirmation of YoY declines is likely to sharpen awareness of slowing momentum in

monthly mobile orders (a factor relevant for P/E) and make multiple expansion more

difficult. As such, we believe this subindustry is likely to be less favored on a relative basis

than other subindustries.

Also, as we expect the market’s focus on general contractors and subcontractors to

continue, we think that defensive names (such as Raito Kogyo and Sho-Bond Holdings) are