Order backlog grows to a record high – SRV’s Financial Statement Release 1 January – 31 December 2012

SRV GROUP PLC      FINANCIAL STATEMENT RELEASE     13 February 2013, 8:30 a.m. EET    

Reporting period 1 January – 31 December 2012 in brief:

• SRV’s revenue was EUR 641.6 million (672.2 in January-December 2011), change -4.6%
• Operating profit was EUR 6.9 million (14.1), change -51.2%
• Profit before taxes was EUR 2.8 million (10.8), -74.3%
• The order backlog at the close of the review period was EUR 827.8 million (810.8), change +2.1%
• Equity ratio was 34.7 per cent (31.0%)
• Earnings per share were EUR 0.02 (0.17)
• Proposed dividend per share is EUR 0.06 (0.12)

Fourth quarter 1 October – 31 December 2012 in brief: 

• Revenue amounted to EUR 175.4 million (266.7 in October – December 2011)
• Operating profit was EUR 2.4 million (13.2)
• Profit before taxes was EUR 2.2 million (12.4)
• Earnings per share were EUR 0.03 (0.24)

CEO Jukka Hienonen comments on SRV’s result:

A year ago, we expected our financial performance in 2012 to be significantly more positive than the result we have now reported. The weaker result was particularly evident in domestic business, where profit was reduced by lower margin forecasts in a number of contracts. The change in operating profit was also affected by significant real estate sales that took place in the final quarter of the comparison year.

Naturally, we are not satisfied with last year’s result. SRV’s record of never returning a loss throughout its entire history was still maintained, however. We have honed our strategy, in which we focus on profitability instead of revenue growth. This is reflected in a change in contract structure and in the cutting of costs. An important component of reducing costs is exploiting economies of scale more effectively and assessing trends in input prices better.

We will participate more selectively in fixed-price competitive contracts, due to their narrower margins and also the risks relating to the development of input prices. We have focused on projects where we are able to influence the value chain over the longer term and in this way also to deliver added value to our customers. The change is already apparent in an improvement of the margin level of our order backlog. Our order backlog is the highest in the company’s history.

The housing market continued to be buoyant throughout the year and is continuing still. In sales of apartments, we again recorded a new record last year. The housing market has also started the current year on a positive note, as the number of housing units under construction is on par with the last years level.

Particularly in the Helsinki Metropolitan Area, there is no sign of a decline in the price level of  apartments. House prices will rise due to changes in value-added tax and capital transfer tax, increasing the already high costs to house buyers. Progress on SRV’s spearhead projects will be slowed by the long process associated with appeals made about city plans.

The development of international business was on the right track last year. Revenue in particular grew rapidly, to nearly double. The primary source of this was our Pearl Plaza shopping centre project in the vicinity of St. Petersburg, but a commercial premises contract was also concluded in Estonia. Our Estonian subsidiary recorded a small profit last year. The long-standing losses in international business overall were halved due to restructuring. In the final quarter, we made a profit.

Obstacles are gradually being removed from the path of the Okhta Mall shopping centre project near to central St. Petersburg, and this year we will take significant steps forward in the project. Positive development in Russia’s shopping centre market and SRV’s accumulated expertise have led us to focus on this sector in St. Petersburg and Moscow. As these projects have progressed, we have also managed to revitalise our stagnant balance sheet.

The changes made to our strategic priorities as well as the positive development of our Russian business mean that we set out into the coming year from a better foundation.

Overall review

At the end of the financial year, SRV’s order backlog had risen to EUR 827.8 million (810.8 on 31 December 2011). The average profit margin of the Group’s order backlog improved.

The Group’s revenue amounted to EUR 641.6 million (672.2 in January-December/2011), with strong growth in revenue from international operations. The Etmia II office property in Moscow and the Derby Business Park in Espoo remained unsold at the end of the financial year. 

The Group’s operating profit was EUR 6.9 million (14.1 in 1–12/2011). The Group’s profitability has been affected by the project development nature of operations and the fact that its order backlog primarily consists of low-margin contracting. Operating profit was burdened by the weakening of the estimated margins of three contracts by a total of about EUR 7 million in Operations in Finland as well as EUR 1.1 million in non-recurring depreciation recorded in International Operations as a result of a fire that destroyed a warehouse building in January. Operating profit for the reference period was increased by the sale of shares of two underground car park companies and completion of a higher amount of developer contracting housing production. The Group’s profit before taxes was EUR 2.8 million (10.8 in 1–12/2011). Financial expenses saw year-on-year growth. Financial items in the reference period were lower due to financial income from affiliates.

Revenue from Operations in Finland amounted to EUR 568.3 million (632.3 in 1-12/2011) and operating profit to EUR 14.8 million (27.9). The domestic order backlog was EUR 774.4 million (711.2 on 31 December 2011). The operational focus has been shifted to stepping up developer contracting and negotiated contracts.  Far fewer new fixed-price contracts were signed during the financial year than in the reference period. The average profit margin of the order backlog has improved.

Revenue from domestic commercial construction fell. SRV posted higher revenue from commercial construction in the reference year due to the greater volume of contracting and the sale of the Kampin Luola and Kamppi Parkki car parks. The profitability of commercial construction has been impacted by the fact that the order backlog consists primarily of low-margin contracting. In order to improve profitability, SRV seeks to shift the focus of operations to its own project development. The order backlog for commercial construction grew to EUR 438.7 million (362.2 on 31 December 2011).

In domestic housing construction, revenue grew thanks to the rise in the volume of residential contracting. Total housing sales saw year-on-year growth. SRV sold a total of 745 housing units (680 in 1-12/2011), of which 477 (482) were developer-contracted and 268 (198) were sold to investors under negotiated contracts. SRV’s ongoing housing construction at the end of the financial year amounted to 1,849 housing units (2,197 on 31 December 2011). More than 80 per cent of the housing units under construction have been sold, and about 70 per cent of production consists of rental and right-of-occupancy units. SRV has 586 developer-contracted housing units under construction. Based on advance marketing, the decision has been made to initiate the construction of 55 additional housing units. The order backlog for housing construction came to EUR 335.7 million (349.0).

Revenue from International Operations grew to EUR 73.1 million (39.0). Construction of the Pearl Plaza shopping centre, of which SRV owns 50 per cent, generated most of the revenue.  Due to the project development nature of this business area, its result remained in the red. SRV aims to tap into the market potential in Russia through developer-contracted property development projects financed with the support of the Russia Invest investment company and the investment potential of the VTB and Ashmore property funds.

The Group’s fourth-quarter revenue was EUR 175.4 million (266.7) and operating profit was EUR 2.4 million (13.2). Revenue and operating profit for the reference period were increased by the recognition of income from 351 housing units upon delivery during the fourth quarter (114 in 10-12/2012) and the sale of the Kampin Luola and Kamppi Parkki car parks. The decline in operating profit in the fourth quarter of 2012 was in part due to the weakening of the estimated profit margins of three contracts in Finnish operations by a further EUR 4 million.

SRV’s own project development operations are paving the way for substantially increasing operating volumes in Finland. These projects require long-term development work and are carried out over the course of several years. Many of SRV’s projects are so-called landmark projects – innovative new solutions for the needs of sustainable regional construction. Such projects include, for example, the Keilaniemi Towers housing project, the development project for the vicinity of the Niittykumpu metro station in Espoo, and the Kalasatama Centre development project in Helsinki.

Financial targets

On 12 February 2013, SRV’s Board of Directors confirmed the Group's strategy for 2013–2017. The Group’s strategic targets are defined as follows:
 

• During the strategy period, SRV will focus on improving profitability instead of growth
• International Operations will account for more than 20 per cent of Group revenue
• Operating profit margin will reach 6 per cent
• Return on equity will be at least 15 per cent
• Equity ratio will stay above 30 per cent
• The target is to pay dividends equalling 30 per cent of the annual result, taking into account the capital needs of business operations

For the set targets to be achieved, a significant increase in the number of developer-contracted projects is needed.

Events after the reporting period

In February, SRV and VVO signed a construction contract to build two apartment houses to Nihtisilta, Espoo. Construction of the 88 free market rental apartment unit project will begin at March 2013 and it will be completed in October 2014. The project is based on SRV’s own project development.

In February, SRV acquired Russian partner’s 12.5 per cent share of the Septem City project by a share transaction. With the transaction, SRV now owns 100 per cent of the project.

Outlook for 2013

The volume and the completion schedules of developer-contracted housing production, trends in the margin of the order backlog, 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 2013. Developer-contracted housing production is recognised as income upon delivery. Based on the available completion schedules, SRV estimates that a total of 505 developer-contracted residential units will be completed in 2013. SRV’s full-year earnings can be significantly affected by the timing of the sale of the Etmia II office property in Moscow and the Derby Business Park in Espoo. The general uncertainty seen in the financial markets has had a negative effect on real estate markets.

The Group’s result before taxes is expected to exceed the previous year’s level and full-year revenue is estimated to be at least on a par with the previous year’s level, even if the office property sales are not completed during this year.

Media conference

The financial statement release will be presented to the media and analysts at the press conference which will take place 13 February 2013 at 10.30 a.m. in Hotel Scandic Marski, Mannerheimintie 10, Helsinki. The press conference will be held in Finnish. CEO Jukka Hienonen and 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 release 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, 12 February 2013

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, President and CEO, +358 (201) 455 213
Hannu Linnoinen, Executive Vice President, CFO, +358 (201) 455 990, +358 (50) 523 5850
Taneli Hassinen, Vice President, Communications and Brand, +358 (201) 455 208, +358 (40) 504 3321