Positive profitability trend continues – SRV revises its revenue outlook: SRV’s interim report 1 January – 30 September 2013

SRV GROUP PLC     INTERIM REPORT     31 OCTOBER 2013, at 8:30 AM    

Reporting period 1 January – 30 September 2013 in brief:
• SRV’s revenue was EUR 507.8 million (EUR 466.2 million  1-9/2012), change +8.9%
• Operating profit was EUR 21.8 million (EUR 4.5 million), change +386%
• Profit before taxes was EUR 19.2 million (EUR 0.6 million)
• The order backlog at the close of the review period was EUR 911.5 million (EUR 747.1     million), change +22.0%
• Equity ratio was 39.3 per cent (28.5%)
• Earnings per share were EUR 0.38 (EUR -0.01)

SRV revises its outlook for 2013 in terms of revenue and reiterates the outlook in terms of profit before taxes. SRV estimates that both Domestic Operations’ and International Operations’ revenue will exceed last year’s level and that the growth of the final quarter’s revenue will slow down due to uncertainties related to the level of domestic housing sales. In addition, SRV expects that the sales of the Etmia II office property in Moscow and the Derby Business Park in Espoo are unlikely to materialise in 2013. The Group's full-year revenue is expected to amount to around EUR 700 million (EUR 641.6 million 1-12/2012), and profit before taxes is estimated to be at least around EUR 20 million (EUR 2.8 million 1-12/2012).

Earlier guidance: The Group's full-year revenue is expected to exceed EUR 700 million, and profit before taxes is estimated to be at least around EUR 20 million.

Third quarter 1 July – 30 September 2013 in brief:
• Revenue amounted to EUR 170.0 million (EUR 155.8 million in 7-9/ 2012)
• Operating profit was EUR 6.9 million (EUR -0.4 million)
• Profit before taxes was EUR 5.2 million (EUR -2.1 million)
• Earnings per share were EUR 0.06 (EUR -0.04)

The interim report has been prepared in accordance with IAS 34. The disclosed information is unaudited.

CEO Jukka Hienonen comments on SRV’s result:

SRV’s improved profitability trend has been encouraging, and this is a result of our chosen strategic focus. The biggest change in profitability took place in the second quarter, but in July-September SRV has continued to perform significantly better than in the previous year. The sector outlook is becoming more difficult as we approach the winter, however, and we must all be prepared for this.

SRV has shifted its business focus from the domestic market to Russia, where the company has concentrated on shopping centre construction. Our International Operations’ share of revenue has grown from just over 10 per cent last year to nearly 20 per cent. Russian business has been boosted by the Pearl Plaza shopping centre, which opened successfully in August, and by construction work on the site of the Okhta Mall shopping centre, which started on the same day. In addition to construction, our roles as a developer of, manager in and investor in shopping centre projects have created a foundation for long-term profitable business in Russia.

In Domestic Operations, we have managed a slight improvement in profitability, and revenue remained good due to a strong order backlog. The commercial premises market currently consists mainly of public contracts in which the constructors are mostly selected through competitive tenders. We have participated in these competitive tenders selectively, aiming to win the type of projects in which our added value for the client would also allow a health profit margin for SRV.

The domestic housing market is declining and also imbalanced. Large residential units are moving more slowly, while smaller properties are still selling well. Sales to housing funds have also increased demand for small apartments, and there is even a shortage of such properties on the market. Consumer sales are influenced by people’s general confidence in their own financial situation, which this year has been adversely affected by a deteriorating employment trend and implemented tax decisions. SRV is building 450 rental homes on land that it owns. Our total housing sales grew significantly from last year. There were fewer start-ups, on the other hand, due to the market situation.

Our financial position has strengthened over the year. The equity ratio is 40 per cent and our finances will remain robust even if market conditions deteriorate further. With respect to the REDI shopping centre and residential units being planned for the Kalasatama Centre, we are currently engaged in investment and financing negotiations, which it has now been possible to resume after an appeals process that lasted one and a half years. We expect that we will be in a position to start large-scale construction at Kalasatama next year.

We approach the coming winter prepared for a slow-down in the domestic construction market. Our long-term business projects in Finland and Russia will provide the continuity by which we will maintain stability during fluctuations in economic conditions.

SRV’S INTERIM REPORT 1 JANUARY – 30 SEPTEMBER 2013

1) In calculating the key ratio, only the profit for the period has been annualised.

Overall review

The Group's order backlog rose to EUR 911.5 million (EUR 747.1 million 9/2012). The value of new agreements grew to EUR 532.4 million (EUR 346.5 million 1-9/2012).

Thanks to growth in revenue from International Operations, the Group’s revenue grew by 8.9 per cent to EUR 507.8 million (EUR 466.2 million 1-9/2012). The Group’s operating profit rose to EUR 21.8 million (EUR 4.5 million) following operating profit improvements in International Operations in the second quarter and in Domestic Operations in the third quarter. The operating profit margin was 4.3 per cent (1.0%). Several factors contribute to the quarterly variation in the operating profit and operating profit margin: SRV’s own projects are recognised as income upon delivery, the part of the order backlog that is continuously recognised as income mainly consists of low-margin contracting, a share equivalent to the ownership of SRV’s associated companies is eliminated from the profit margins of construction carried out for these companies, and the project development nature of operations. The Group's profit before taxes was EUR 19.2 million (EUR 0.6 million). Financial expenses decreased, which had a positive effect on the result for the period.

The Group's equity ratio was 39.3 per cent (28.5%). Profitability improvement and the EUR 45 million hybrid bond that SRV issued on 28 December 2012 contributed to the growth in equity ratio.

Revenue from Domestic Operations was EUR 418.9 million (EUR 411.1 million 1-9/2012) and operating profit was EUR 13.4 million (EUR 13.1 million). Revenue and operating profit growth could be attributed to the increase in revenue from developer contracting during the third quarter. In addition, the profitability of commercial contracting has developed positively during the review period. The level of operating profit was also affected by the fact that the order backlog recognised as income mainly consisted of low-margin contracting, and a EUR 5.2 million profit margin decrease was recognised for one ongoing and four completed projects, primarily in the first quarter. The domestic order backlog rose to EUR 727.8 million (EUR 676.2 million). In order to improve profitability, the company will now be focusing on increasing developer contracting and negotiated contracts.

On the whole, housing sales trend in Finland was positive, with SRV selling a total of 584 units (538 1-9/2012) to consumers and investors. As sales to consumers slackened in the second quarter due to growing economic uncertainty and the transfer tax hike, the focus has been shifted to rental housing development projects. In addition to the sale of 316 rental housing units (201) to investors under negotiated contracts, SRV made preliminary agreements with two housing funds to build 252 housing units on plots owned by SRV. The units to be built under the preliminary agreements are not included in the domestic order backlog.

SRV had 1,398 rental and owner-occupied units under construction (2,126 on 30 September 2012), of which 550 were developer-contracted. 81 per cent of housing units under construction have been sold, and 71 per cent of production consists of rental and right-of-occupancy units. Based on advance marketing, the decision has been made to initiate the construction of 22 additional housing units. The volume of housing contracting has been reduced, and 61 per cent of production (43%) consisted of rental housing development projects or developed-contracted production sold to investors.

Revenue from International Operations rose to EUR 89.0 million (EUR 55.1 million). Most of the revenue was generated by the construction of the Pearl Plaza shopping centre, 50%-owned by SRV, and the sale in June of a 55 per cent stake in the Okhta Mall shopping centre project in St. Petersburg to investment company Russia Invest. Operating profit was EUR 11.7 million (EUR -5.6 million). Growth in the level of activity, the sale of the company’s holding in the shopping centre project, and the implementation of cost-savings measures contributed to the improvement in operating profit. Other contributing factors included the EUR 8.3 million change in the fair value of the holding in the Okhta Mall shopping centre following the surrender of SRV's controlling interest in a transaction carried out in June and the subsequent measurement of its remaining holding at fair value based on the sale of the majority holding.

The Group’s third-quarter revenue was EUR 170.0 million (EUR 155.8 million) and operating profit was EUR 6.9 million (EUR -0.4 million). The rise in revenue and operating profit could be attributed to the growth in the revenue and profitability of International Operations.

Of SRV’s major international projects, the Pearl Plaza shopping centre in St. Petersburg was completed in August 2013 and all of its premises have either been leased or a lease is in the final stages of negotiation. Leasing of the Okhta Mall shopping centre project in St. Petersburg has likewise progressed well, and its construction work has begun. Projects in Finland include the construction of the Derby Business Park in the Perkkaa district of Espoo. The second phase of this project was completed in June 2013, and over 90 per cent of the premises have been leased.

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 being 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 residential project, the Kalasatama Centre in Helsinki, and a project to develop the area adjacent to the Niittykumpu metro station in Espoo. In St. Petersburg and Moscow, SRV will from now on focus on the development of shopping centre projects. SRV will harness the investment potential of both the Russia Invest investment firm and the VTB and Ashmore property funds in order to support the financing of these projects.

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 strategic period, SRV will focus on improving profitability rather than on growth.
• International Operations will account for more than 20 per cent of Group revenue.
• The operating profit margin will reach 6 per cent.
• The return on equity will be at least 15 per cent.
• The equity ratio will remain above 30 per cent.
• A dividend payment 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 required.

Outlook for 2013

SRV revises its outlook for 2013 in terms of revenue and reiterates the outlook in terms of profit before taxes. SRV estimates that both Domestic Operations’ and International Operations’ revenue will exceed last year’s level and that the growth of the final quarter’s revenue will slow down due to uncertainties related to the level of domestic housing sales. In addition, SRV expects that the sales of the Etmia II office property in Moscow and the Derby Business Park in Espoo are unlikely to materialise in 2013.

The quarterly change and development of revenue and result in 2013 are affected by the recognition upon delivery of SRV's own projects, the continuously recognised order backlog comprising mostly low-margin contracting, the development of the order backlog's profit margins, the sales volume of self-developed housing production and the completion times of the properties, the number of new contracts, the project development nature of the operations, and the realisation of planned property sales, among other things. Based on current completion schedules, SRV estimates that a total of 539 developer-contracted housing units will be completed during 2013. The general uncertainty seen in the financial markets has also been unfavourably reflected in real estate markets.

The Group's full-year revenue is expected to amount to around EUR 700 million (EUR 641.6 million 1-12/2012), and profit before taxes is estimated to be at least around EUR 20 million (EUR 2.8 million 1-12/2012).

Press conference

The interim report will be presented to the media and analysts at the press conference which will take place on 31 October 2013 at 10.30 a.m. at conference room Espa at Hotel Scandic Simonkenttä, Simonkatu 9, Helsinki. The press conference will be held in Finnish. CEO Jukka Hienonen and Executive Vice President, CFO Hannu Linnoinen will be present, among others.

The presentation material of the press conference will be published in Finnish and English on the company website www.srv.fi/en/investors after the conference.

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 Interim report and the complete report is attached as a pdf-file to this release and is also available on our website at www.srv.fi/en/investors.

Espoo, 31 October 2013

Board of Directors

All forward-looking statements in this review are based on 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, +358 (201) 455 208, +358 (40) 504 3321