Discernible improvement in SRV’s result and record high order backlog - Financial Statement Release 1 January - 31 December 2011

SRV GROUP PLC              FINANCIAL STATEMENT RELEASE  16 February 2012, 8.30 a.m. EET                                                

Accounting period 1 January - 31 December 2011 in brief:

• SRV’s revenue was EUR 672.2 million (EUR 484.2 million in Jan.–Dec. 2010), change +38.8%
• Operating profit was EUR 14.1 million (EUR 12.5 million), change +13.2%
• Profit before taxes was EUR 10.8 million (EUR 7.9 million), change +36.3%
• The order backlog at the end of the period was EUR 810.8 million (EUR 594.5 million), change 36.4%
• New contracts EUR 811.6 million (EUR 559.9 million), change +44.9%
• The equity ratio was 31.0 percent (35.2%)
• Earnings per share were EUR 0.17 (EUR 0.19)
• Proposed dividend per share EUR 0.12 (EUR 0.12).

Highlights for the fourth quarter 1 October–31 December 2011:

• Revenue amounted to EUR 266.7 million (EUR 157.9 million in Oct. – Dec. 2010)
• Operating profit was EUR 13.2 million (EUR 5.9 million)
• Profit before taxes was EUR 12.4 million (EUR 4.1 million)
• Earnings per share were EUR 0.24 (EUR 0.10).

The President and CEO Jukka Hienonen comments on SRV’s result:

Last year was marked both by strong optimism after the recession and by uncertainty in the face of fluctuating economic prospects. In the early part of the year, expectations for the development of the housing market were high. Through the euro crisis, we, like many other companies, kept a close eye on the ominous clouds gathering on the economic horizon. In the housing market, no decline was evident last year; housing sales were steady throughout the year and the price level remained stable.

We doubled our housing construction from the previous year. SRV has risen to become one of the Helsinki Metropolitan Area’s biggest housing constructors. Last year, a record number of residential units were completed. Some 70 per cent of SRV’s just over 2,000 residential units are rental housing units. Overall, of the residential units under construction by SRV, over 80 per cent will be sold to either private buyers or to institutional investors.

With respect to housing development, earnings are recognised – in accordance with IFRS practice – only when projects are completed and sold, which in practice delays the Group’s overall earnings formation until the final quarter.

Due to a continuing tight market situation, the number of business premises projects has remained modest. Last year, we completed and sold to investors the Karisma shopping centre in Lahti and logistics projects in Vantaa. In an intensely competitive climate, we have managed to win significant business premises contracts. One of the largest is for a soya factory in Uusikaupunki.

Our revenue grew well, by 38 per cent. Although business development in the final quarter exceeded our forecasts, the operating profit of EUR 15 million for the full year is below our target level. Increased input prices, the previous harsh winter which led to higher construction costs, and the typically low margins obtained in competitive contracting cast a shadow over the year. The result was improved, however, by the sale of parking facilities in Kamppi at the end of the year.

International business still represents only six per cent of revenue, but this is clearly growing. Together with domestic institutional investors, we founded the Russia Invest real estate investment company, which will enhance our opportunities to expand our operations in the Russian market.

Today, we also published our revised strategy, according to which we will aim for more aggressive growth than the market in our chosen growth centres in Finland and neighbouring areas. Our goal is to improve profitability by increasing the proportion of developer-contracting projects.

In addition to financial targets, our strategy also includes operational quality targets, which will distinguish us positively from our competitors. Our mission is to improve quality of life through sustainable solutions for the built environment. This goal will have a big impact on the way we work. To fulfil our brand promise “Constructing for life”, we are developing our ability to recognise the needs of different stakeholders at the different stages of projects. On this basis, we will improve our service process.

I am confident in our future, because we have a historically high order book and many interesting projects planned for the coming years. I would like to thank our customers, stakeholder representatives and personnel for the excellent work we have done together over the past year.

General review

In the accounting period 2011, SRV revenue and backlog continued on a favourable trend, and the company was able to reap the full benefits of the opportunities provided by its scalable business model. At the end of the period, the SRV Group order backlog showed an increase of 36.4 percent at EUR 810.8 million (EUR 594.5 million). The value of new contracts grew by 44.9 percent to EUR 811.6 million (EUR 559.9 million). In 2011, Group revenue increased by 38.8 percent to EUR 672.2 million (EUR 484.4 million in 2010) mainly due to the favourable developments in domestic housing construction.

Revenue from domestic operations jumped to EUR 632.3 million (+ 36.8%) and operating profit to EUR 27.9 million (EUR 26.4 million). The positive trends in revenue and profitability were especially evident in the last quarter thanks to the completions of developer-contracted housing production recognised upon delivery and the sales of the Kampin Luola Oy stock.

The volume of domestic business premises construction has remained at a good level but its profitability has been hit by the increasing share of low margin contracting in the order backlog and by the significant increase in the construction costs of a few projects completed in 2011 during their building time. Due to the increasing market instability some input costs have already started to come down. In order to improve profitability, SRV aims to increasingly shift the focus of operations onto own project development. In Finland, the competition for new orders in business premises is fierce. SRV successfully continued to ensure new orders and pushed the business premisess order backlog up to EUR 362.2 million by the end of the period (EUR 271.6).

The domestic housing construction continued on a positive note. SRV has increased its rental and owner-occupied housing production and become an important housing producer in its operational areas. The volume of the SRV housing production under construction doubled to 2,197 units, of which 81 percent were sold. Of the total SRV housing production, 72 percent are rental and right-of-residence housing units. SRV currently has 622 developer-contracted housing units under construction.  Decisions on start-ups of additional 91 housing units have been made following pre-marketing. In total, SRV sold 680 housing units to consumers and investors in 2011 (640 units in 2010).

Revenue from International Operations amounted to EUR 39.0 million (EUR 21.7 million). Due to the project development character of these operations they continued to be unprofitable. In Russia, the financial and property markets have begun to recover. SRV aspires to exploit the potential of the Russian markets through developer-contracted property development projects. To safeguard adequate financing for the Russian operations, a shareholder agreement was signed in September by SRV, Ilmarinen, Sponda, Etera and Onvest for the investment company Russian Invest. At the side of its key development projects, SRV continued with the preparations for the first investments of the VTB and Ashmore Fund. In the second half of 2011, the fund made its first investment in Moscow.

Of SRV's key international projects, the construction of the Pearl Plaza commercial centre in St. Petersburg commenced. The investment decision and a 100 million Euro contract for this project were signed in January.  The commercial centre is to be completed in 2013 and its commercialization has begun. As much as 35 percent of the total space of the new commercial centre has already been rented out to four anchor tenants.

The Group operating profit was EUR 14.6 million (EUR 12.5 million). In addition to the favourable volume development in housing construction, the Group operating profit was affected by the weakened profitability of the business premises segment and the decreased margins of the order backlog resulting from higher construction costs. Further factors affecting the operating profit were losses suffered in international operations and the growth in project development expenses from the previous period. A downward impact on the operating profit additionally came from the three million Euro expense reserve for the contract claim in dispute. Group profit before taxes was EUR 10.8 million (EUR 7.9 million).

SRV Project Development provides the company ample opportunity to grow its business volume in Finland. The projects require long-term development work and their lead times stretch over several years. SRV projects are often landmark projects which offer innovative new solutions for sustainable integrated development. The Keilaniemi Towers housing project and the Niittykumpu metro station development project in Espoo are examples of this as is the Kalasatama centre in Helsinki for which a construction agreement was signed in August 2011.

Domestic operations revenue for the fourth quarter 2011 was EUR 248.9 million (EUR 147.3 million Q4/2010) and the operating profit was EUR 17.9 million (EUR 8.4 million). The completion of domestic developer-contracted housing production and the sales of the Kampin Luola Oy stock contributed to the growth of revenue and operating profit.. Provision for impairment of EUR 3.0 million was made to disputed receivables, which reduced operating profit.

Financial targets

On 15 February 2012, the SRV Board of Directors confirmed a new Group strategy for the years 2012-2016 with the following strategic targets for the Group:

• SRV revenue will grow faster than the industry average and it will reach EUR milliard
• The share of International Operations revenue of Group revenue will exceed 20 percent
• The operating margin will go up to six percent
• The return on equity will be 15 percent at the minimum
• The equity ratio will be kept at above 30 percent
• Taking into consideration the capital needs of the businesses, SRV targets a dividend of 30 percent of the annual result.

These targets require a substantial increase in the sales of developer-contracted projects.

Outlook for 2012

The volume and the completion schedules of developer-contracted housing production, the construction margin trends, the number of new construction contracts, and the materialisation of planned project sales all have an effect on the trends and allocation of revenue and profitability in 2012. The developer-contracted housing production is recognised upon delivery. Based on the available completion schedules, SRV estimates that a total of 451 developer-contracted residential units will be completed in 2012.

The 2012 revenue is expected to reach the 2011 level (EUR 672.2) or go beyond it. The profit before taxes for the whole year 2012 is expected to exceed the previous year’s level (EUR 11.3 million).

Media conference

The financial statements report will be presented to the media and analysts at the press conference which will take place 16 Februrary.2012 at 10.30 a.m. in Hotel Scandic Simonkenttä, Simonkatu 9, Helsinki. The press conference will be held in Finnish. CEO Jukka Hienonen and Senior Executive Vice President, CFO Hannu Linnoinen will be present, among others.

Disclosure procedure

SRV Group Plc follows the disclosure procedure enabled by Standard 5.2b published by the Finnish Financial Supervision Authority. This is a summary of SRV’s Financial Statement Bulletin 2011 and the complete report is attached as a pdf-file to this release and is also available on our website at www.srv.fi

Espoo, 15 February 2012

Board of Directors

All forward-looking statements in this review are based on the management's current expectations and beliefs about future events, and actual results may differ materially from the expectations and beliefs such statements contain.

For further information, please contact:

Jukka Hienonen, CEO, tel. +358 (201) 455 213
Hannu Linnoinen, Senior Executive Vice President, CFO, tel. +358 (201) 455 990 or +358 (50) 523 5850
Taneli Hassinen, Director Communications, tel. +358 (201) 455 208 or +358 (40) 504 3321