■The performance trends of Innovation Holdings <3484>

1. Overview of Consolidated Performance for the Second Quarter of the Fiscal Year Ending March 2025

For the cumulative second quarter of the fiscal year ending March 2025, the consolidated results showed revenue increased by 16.8% year-on-year to 8,288 million yen, operating profit increased by 30.1% to 684 million yen, ordinary profit increased by 24.9% to 698 million yen, and net profit attributable to shareholders of the parent company increased by 23.2% to 469 million yen. This was a significant increase exceeding previous financial estimates (initial estimates as of May 13, 2024, with revenue of 8,066 million yen, operating profit of 434 million yen, ordinary profit of 452 million yen, and net profit attributable to shareholders of the parent company of 311 million yen).

In the store sub-leasing business, the number of contracts (total of new and successor contracts) decreased year-on-year due to the structural reform of the sales organization (decrease of 17 contracts to 217), but the number of sub-leased properties increased steadily (increase of 210 properties to 2,545). The property yield exceeded expectations due to rent revisions upon contract execution and existing renewals, and the costs for vacant properties and selling, general and administrative expenses were below expectations. Furthermore, the sales from the real estate sales business exceeded expectations due to the sale of large properties. Overall gross profit increased by 21.9% year-on-year, and the gross profit margin rose by 0.8 points to 18.6%. Selling, general and administrative expenses increased by 16.0%, mainly in personnel costs, but the ratio of these expenses remained flat at 10.4%. As a result, the operating margin rose by 0.9 points to 8.3%.

The quarterly trend of revenue (from the third quarter of the fiscal year ending March 2023 to the second quarter of the fiscal year ending March 2025) shows that while the initial revenue from the store sub-leasing business and real estate sales fluctuates, the running earnings from the store sub-leasing business (such as rental income from sub-leased properties) have shown a stable upward trend.

The number of sub-leased properties continues to show an increasing trend without change.

2. Trends by Business Segment.

In the store sub-leasing business (including rent guarantee services), revenue increased by 10.3% year-on-year to 7,305 million yen, and segment profit increased by 34.1% to 567 million yen. In response to strong demand for store openings from individuals and small-scale dining operators, aggressive procurement of small, well-located properties was promoted, leading to significant increases in both revenue and profit from the increase in the number of sub-leased properties. The total number of contracts decreased by 17 to 217. Although there was a decrease compared to the same period last year due to ongoing structural reforms in the sales organization aimed at long- to medium-term strengthening of sales capabilities, the quarterly figures show a recovery trend with 114 contracts in the second quarter following a bottom of 103 contracts in the first quarter of the fiscal year ending March 2025. Furthermore, the number of cancellations continues to trend at a low and stable level. The total number of sub-leased properties increased by 210 to 2,545. There is no change in the upward trend.

The Real Estate sales business (including rental income during the holding period of sale items and allocated overhead costs) recorded revenue of 983 million yen, a 108.0% increase compared to the same period last year, and segment profit increased by 13.7% to 116 million yen. The sale of large properties also contributed to significant revenue and profit increases. During the period, there were three sales and six acquisitions, bringing the number of properties held at the end of the interim period to seven. There is no major change in the policy of emphasizing funding efficiency while conducting transactions within a certain holding limit, with the aim of strengthening relationships with real estate agents, but there is a commitment to actively focus on sales and acquisitions from the third quarter of the fiscal year ending March 2025 onward.

The actual equity ratio is at a high level.

3. Financial Conditions

From a financial perspective, the total assets at the end of the second quarter (interim period) of the fiscal year ending March 2025 increased by 460 million yen compared to the end of the fiscal year ending March 2024, reaching 14,157 million yen. This increase was primarily due to a rise of 130 million yen in cash and deposits, 68 million yen in properties for sale, and an increase in the number of sub-leased properties leading to an increase in security deposits by 162 million yen. Total liabilities increased by 328 million yen, amounting to 10,701 million yen. This was mainly due to an increase of 76 million yen in corporate taxes payable and an increase of 74 million yen in deferred revenue, along with an increase of 141 million yen in custodial deposits. Total net assets increased by 132 million yen to 3,456 million yen, primarily due to an increase of 134 million yen in retained earnings. As a result, the equity ratio rose by 0.2 percentage points compared to the end of March 2024, reaching 24.4%.

Although the equity ratio is slightly low, due to the nature of the company's store sublease business, the proportion of security deposits and custodial deposits booked to both the landlord and the subtenant, as well as prepaid expenses and deferred revenue, is high. The adjusted actual equity ratio will be 58.2% as of the end of the second quarter of the fiscal year ending March 2025. The actual equity ratio is at a high level, and there are no particular concerns regarding the financial soundness according to the company's assessment.

(Authored by FISCO guest analyst Masanobu Mizuta)