Toyo Engineering (6330) Earnings, the Brazil Issue, and How to View the Rare Earth Business

1. General Review of the Current Earnings

The latest earnings report for Toyo Engineering (6330) contains quite severe content, with a net loss and a dividend cut due to significant losses in the Brazil business occurring. By fully incorporating the additional costs and collection risks associated with the gas-fired power plant project in Brazil, the full-year net profit forecast has been revised downward from a profit to a significant loss.

The biggest point in evaluating these earnings is determining to what extent the Brazil losses have been "front-loaded and fully accounted for."

2. What is Happening with the Brazil Business?

2-1. Overview of the Problematic Brazil Project

• The subject is an EPC project for a gas-fired power plant in Brazil.

• The initial completion date was July 2025, but due to construction delays and cost increases, it is now expected to slip to around April 2026.

• Regarding the delays and additional costs, Toyo Engineering negotiated with the client to revise the contract price and construction schedule, but no agreement was reached, and the talks broke down.

From here, the situation deteriorated rapidly.

2-2. "Payment Suspension" and Arbitration by the Client

After the negotiations broke down, the Brazilian client took the following actions:

• Claimed damages against Toyo Engineering for construction delays.

• Using that claim as a shield, they withheld payment (a de facto payment suspension) of the contract price.

• Toyo Engineering filed for international arbitration in July 2025, moving to a phase of seeking a resolution through legal proceedings.

In practical terms, the structure is that "construction is almost complete, but there is a dispute over delays, and since the other party will not pay, we are fighting it out in arbitration."
From an accounting perspective, the collectability of the outstanding receivables for which payment has been stopped was reviewed conservatively, and the additional construction losses until completion were also recorded in a lump sum.

As a result, the deterioration in the Brazil-related balance reached a scale of approximately 20 billion yen, which is the primary cause of the shift to a net loss and the elimination of dividends for this term.

2-3. The Question of "Can It Definitely Be Collected?"

This is what investors are most concerned about, but the conclusion is simple.

• Technically, the construction progress is almost complete, and the situation is such that Toyo Engineering can claim the right to request the contract price.

• However, the client is refusing payment citing delay damages, and the matter is now entirely on the playing field of the court (arbitration).

• The company itself has recorded the loss by "conservatively evaluating recoverability," and is not operating under the premise of "certain recovery."

In other words,

• Base scenario: This loss recording is the "bottom," and if some can be recovered depending on the arbitration, it will be an upside factor for the future.

• Risk scenario: A case where arbitration is prolonged or not recognized as much as expected, forcing the recording of further additional losses.

Since both of these are possible, it is not a situation where one can definitively say that "recovery is certain."

3. The "history" of Brazil risk that continues from the past

Brazil is not a one-off accident this time, but an area where problems have been repeated like a "chronic illness" for Toyo Engineering.

• In the past, multiple troubles have surfaced, such as losses at a Brazilian subsidiary, claims for damages, and the decision of fines related to bribery allegations.

• Each time, the stock price has plummeted, and the keyword "Brazil" itself has taken on a negative image for the company.

The trouble with the thermal power generation project this time can be said to be a manifestation of the "difficulty of Brazilian projects" once again.
In addition to the EPC business itself being a model that carries contract risks and project risks, the current situation is compounded by the "hard mode" of the country and counterparty being Brazil.

4. How about the rare earth business: Technology and potential

On the other hand, Toyo Engineering is in a very positive position in the context of "domestically produced rare earths."

4-1. Major technologies used for rare earth mud

What Toyo Engineering is involved in is subsea technology for collecting and lifting "rare earth mud" that lies dormant in the deep sea, such as off the coast of Minami-Torishima. The points are the following three.

1. Mud disintegration technology (slurrying of mud)

   • Since rare earth mud on the seabed is clay-like and does not flow as is, this is a technology that mixes it with seawater using a mud disintegrator to turn it into a slurry.

   • Toyo Engineering is responsible for the design and manufacture of this mud disintegration and collection equipment, and has strengths in the part that stably fluidizes deep-sea mud.

2. Mud collection and lifting technology (lifting from several thousand meters)

   • A system that continuously sucks up the slurried rare earth mud from several thousand meters deep to the ship through a lifting pipe.

   • A method is adopted that uses a circulation system such as the drilling vessel "Chikyu" to create a flow inside the pipe and raise the mud.

3. On-board separation and processing technology

   • A process that separates seawater from the pumped-up slurry and recovers only the rare earth mud.

   • This then leads to the phase of extracting rare earths through chemical processes such as ore dressing and smelting, and the demonstration stage for this, including these processes, is currently underway.

In short, Toyo Engineering is not a company that "sells rare earths themselves," but rather a player that provides infrastructure technology for the stable recovery of rare earth mud from the deep sea.

4-2. Project progress and positioning as a national policy

• Participating as one of the core companies for subsea systems in a project led by the Cabinet Office, JAMSTEC, and others.

• A roadmap that has already succeeded in demonstrating mud lifting from the deep sea and will move to the phase of test drilling and large-scale testing around 2026.

• From the perspective of resource security to reduce dependence on China, it has a very strong thematic appeal as the "first year of domestic rare earths," and is being sought after in the market as a rare earth-related stock.

At present, it is in the "technology demonstration phase driven by expectations" and has not yet reached the stage of making a significant contribution to the P/L, but it has high potential as a candidate for a future pillar business.

5. Overall company figures: Sales, profits, and retained earnings

5-1. Sales and profit levels (recent years)

The full-year consolidated results for the last three fiscal years are roughly as follows:

• Fiscal year ended March 2023

  • Net sales: approx. 193 billion yen

  • Net income: approx. 1.6 billion yen

• Fiscal year ended March 2024

  • Net sales: approx. 261 billion yen

  • Net income: approx. 9.8 billion yen

• Fiscal Year Ending March 2025

  • Revenue: Approx. 278 billion yen

  • Net Income: Approx. 2 billion yen

The fiscal year ended March 2024 was a "good year" in terms of profit levels, before the Brazil issue surfaced in earnest.
For the fiscal year ended March 2025, the deterioration in profitability of the Brazil project has already cast a shadow, and while revenue grew, net income dropped sharply.

In the latest current fiscal year (ending March 2026), the company has fallen into a net loss due to the lump-sum recording of Brazil-related losses, and dividends have been revised downward to zero.

5-2. Retained Earnings (Earned Surplus)

• As of the end of the fiscal year ending March 2025, consolidated retained earnings were approximately 29.1 billion yen.

• At the same time, net assets were approximately 60.2 billion yen, and shareholders' equity was approximately 51.4 billion yen.

Since retained earnings generally refer to earned surplus, the perspective is:
"How much will this be eroded by the current fiscal year's Brazil losses, starting from a state of having over 29 billion yen in reserves?"

6. Stock Price Level and the Perspective of "Where Can I Buy?"

I think this is the part that is most concerning for a blog, but the conclusion is:

• The current stock price (4,000 yen range) is a level significantly inflated by fundamental headwinds + expectations for rare earths.

• As a "zone to calmly pick up for the medium to long term," I would like to keep a PBR-based level one step lower in mind.

6-1. Current Valuation Sentiment

• Recent stock price: Early 4,000 yen range.

• FY2025 actual EPS: Around 30 yen.

• The actual P/E ratio easily exceeds 100x, which is clearly expensive for a typical EPC stock.

• The PBR has been bought up to around 1.7–2.0x, and it is being evaluated more as a "national policy rare earth stock" rather than a "value" stock.

6-2. Buying Zone I Would Personally Consider

From here on, this is just an example of one investor's way of thinking.

• If you want to enter carefully over the medium term (aiming for rare earths + a reconstruction story):

  • A PBR of around 1.0–1.2x is one benchmark.

  • As for a stock price image, I would want a dip in the 2,000–2,500 yen range.

  • At this level, even if things deteriorate further in Brazil, there is some defensive strength in that "there is still distance until it falls below book value."

• For short-term rebound trading

  • The idea is to enter in stages while checking the order book and volume for 'selling exhaustion + short covering' around the 3,000 yen level after the limit-down following the earnings shock.

  • However, chasing new buys in the 4,000 yen range means you are paying the full expected premium, so it is reasonable to consider that the risk-reward ratio has deteriorated significantly.

7. How to construct an investment story

While using around 2,000 yen as a benchmark,
I will invest while monitoring the chart movements and accounting.
I will not invest immediately, but will only monitor it.

7-1. Positive factors

• Strong in subsea technologies such as mud dissolution and mud lifting for the rare earth mud project, which is a core national policy.

• As the demonstration phase progresses, the company's valuation as a 'firm holding core technologies for Japan's rare earth supply chain' is likely to increase.

• Global geopolitical risks (reducing dependence on China) are also a tailwind for rare earth-related stocks.

7-2. Negative factors and risks

• A large loss on the Brazil project was recorded in a lump sum, resulting in a net loss and no dividend for this fiscal year.

• Depending on the outcome of the arbitration, risks of additional losses and prolonged issues remain, so 'certain recovery' cannot be assumed.

• There is a history of ongoing trouble with Brazil projects, and the 'country-specific risk' has not been wiped away.

• The stock price has already priced in significant rare earth expectations, and it is in an overvalued range as a standard EPC value stock.

7-3. The turning point for your stance

• If you view it as 'the Brazil losses have mostly been accounted for' and 'it could become a future pillar through rare earths',

  • a strategy of holding for the medium term during a major dip (around a PBR of 1x) is also viable.

• If you are cautious and view it as 'the history of Brazil x litigation is significant' and 'rare earths are still just a dream',

  • it is safer not to jump in easily, as the current 4,000 yen range is just 'paying for a story'.

8. Summary: How to position 6330

Toyo Engineering (6330) is,

• Currently: A phase where it has stumbled significantly on the Brazil project, with earnings showing a loss and no dividend, and credit concerns are being noted.

• Future: A 'stock with a dream' that possesses technology holding the key to the national project of domestic rare earths.

It is a stock where,extremely good and bad materials coexist.

That is precisely why,

• “To what extent are you willing to bet on the national policy story of rare earths?”

• “What level of PBR are you willing to tolerate regarding the Brazil risk?”

After deciding these two points for yourself with specific numbers,

• whether to buy incrementally if it falls to that level,

• or to keep your distance until the market trend chasing only the theme is over,

I feel it is important to decide.