Revenue and order backlog are still growing – But earnings fall short of the comparison period: SRV's interim report 1 January–30 June 2015

SRV GROUP PLC     INTERIM REPORT     6 AUGUST 2015, at 8.30 AM    

Revenue and order backlog are still growing – But earnings fall short of the comparison period: SRV's interim report 1 January–30 June 2015

First half of the year 1 January–30 June 2015 in brief:
• SRV's revenue was EUR 337.4 (281.6) million, change +19.8%
• Operating profit was EUR 3.4 (9.3) million, change -63.8%
• Result before taxes was EUR 2.6 (5.6) million, change -52.5%
• Earnings per share were EUR 0.01 (0.06)
• The order backlog at period-end was EUR 1,258.8 (1,047.0) million, change +20.2%
• Equity ratio was 36.3 (38.4) per cent

Reporting period 1 April–30 June 2015 in brief:
• SRV's revenue was EUR 164.5 (143.1 4-6/2014) million, change +15.0%
• Operating profit was EUR 0.8 (4.9) million, change -83.7%
• Result before taxes was EUR -0.7 (3.4) million
• Earnings per share were EUR -0.05 (0.05)
 
Events after the reporting period:
• SRV signed EUR 170 million contractor agreement on implementation of new Tampere University Hospital buildings in July 2015
• SRV to participate in Fennovoima’s nuclear power plant construction project as project manager and investor, with a financing commitment equivalent to a 1.8% stake. The news was released on 5 August 2015.
• SRV sold the Kalasatama’s wellbeing and health services centre to a property investment fund administered by the German company Deka with an agreement signed on 5 August 2015
• The strategic targets for the 2015-2019 period were reviewed on 5 August 2015

Thanks to the REDI shopping centre start-up, the Group's full-year revenue for 2015 is expected to increase on 2014 (EUR 684.4 million). The result before taxes is forecast to be in the range of EUR 10–20 million (EUR 18.5 million).

This interim report has been prepared in accordance with IAS 34, and the disclosed information is unaudited.

President & CEO Juha Pekka Ojala:

The first half of 2015 was a mixed bag. The REDI project at Kalasatama and construction work on the Niittykumpu Metro Centre were launched successfully and our order backlog continued to grow, reaching a record level at the end of June of nearly EUR 1.3 billion, i.e. 20% higher than the previous year’s first half.

Records were also set in terms of the signature of new contractor agreements. The Tampere University Hospital (TAYS) new construction project, signed in July after the review period, is one of the largest contractor agreements in our history, worth a total of EUR 170 million. Construction work in Tampere will begin in mid-August. The TAYS project is an excellent continuation to our hospital construction projects and an expression of the high esteem in which our expertise is held in these demanding projects. And let’s not forget our largest project, REDI at Kalasatama. It is wonderful to see how the site is now fully under way, and that work is proceeding quickly. Something of the scale of the project is evident from the fact that around 200 people are now working on the site daily and that rock equivalent in volume to nearly a large passenger ferry, around 170,000 cubic metres, has already been excavated from the area. After the review period, on 5 August 2015, an agreement was also signed on the construction of the Health and Wellness Centre to be built at Kalasatama and on the sale of the real estate company to a real estate investment fund managed by the German company Deka.

Nevertheless, as a result of a decline in revenue recognised for developer-contracted housing production and growth in the proportion of low-margin contracting, our result weakened, even though at the same time the volume of housing construction grew. The total number of housing unit start-ups, for example, rose to over one thousand units at the beginning of June. Sales of own-development housing are only recognised as revenue, however, according to percentage of completion. In addition, the result was affected by the fact that only 22 developer-contracted housing units were completed in the first half of the year, while the corresponding figure last year was almost five times larger. However, there are over 1,600 housing units under construction, of which 75 per cent is already sold. The good situation with housing start-ups and, for example, the record sales of housing units in June, nearly 150, certainly augur well for the coming years. We have concentrated our developer-contracted housing production mainly close to good transport links, such as in the direct proximity of metro lines and the stations of the Ring Rail Line, where we believe that the housing market will remain attractive in the future, despite the general, slightly challenging, situation.

Although the situation in Russia is marked by significant uncertainty, construction work of our projects already under way there is advancing according to plan, and project financing negotiations have also been successful, considering the circumstances. The large, around 144,000 square metre, shopping centre complex rising in the Okhta area of St. Petersburg will celebrate its topping-out ceremony in September and the shopping centre is scheduled to open its doors in summer 2016. Our other important project in St. Petersburg, the Pearl Plaza shopping centre, which opened in August 2013, is also going well. Customer numbers and sales are continuing to grow and the rental level of premises is still a massive 99%. Russia’s Best Medium-sized Shopping Centre 2015 Award, granted to the shopping centre in April, was followed up in June when the Pearl Plaza received the Golden Brick Award 2015, considered to be Russia’s most esteemed real estate sector prize.

Our large construction projects require not only commitment and hard work from our employees, but also additional financing. An Extraordinary General Meeting, held on 22 June 2015, authorised the Board of Directors to prepare for the acquisition of additional capital through a share issue. The overall objective is to raise a total of EUR 30-50 million in new capital as a foundation for future construction projects. The money will attract additional funding; when the balance sheet is strong, additional funding is easier to obtain.

We announced on 5 August 2015 that we will participate in Fennovoima’s nuclear power plant construction as project manager and at the same time as owner with a 1.8% stake. The agreement represents a significant increase in SRV’s operations, being one of the most notable agreements in the company’s history, and further strenghtens our position as a pioneer of project management contracting. The project required the participation of a reliable Finnish partner familiar with local legislation and regulations. SRV has strong experience of project management and we have been well acquainted with Fennovoima’s nuclear power plant project for a long time now. This is a wonderful addition to our already great order backlog and we are looking forward to starting the project.

In summary, it seems appropriate to be modestly optimistic about the rest of the year. While the uncertain future of Greece and the situation in Russia are overshadowing the economic development of Europe, in Finland small signs of recovery are perceptible, for example in housing sales. In business premises projects, too, the latter part of the year is expected to be better, after a very weak 2014. The start-up of new, large-scale projects, the record high order backlog and the large number of housing start-ups will, above all, demand much from all of our employees. Resources have been strengthened and will be strengthened further according to need, and several new projects relating to employees’ wellbeing will be launched during the autumn.  Feedback received from customers and stakeholders as well as the new projects we have won reinforce my view of the high professionalism of our employees and their really strong commitment to our company.

Overall review

First half of the year, 1 January-30 June 2015

The Group's order backlog increased to EUR 1,258.8 (1,047.0) million during the review period thanks to new contractor agreements, the largest of which were for the REDI project in Kalasatama and the Niittykumpu Metro Centre. 85 per cent of the order backlog has been sold, a total of EUR 1,074 million. The value of the Group's new contracts rose to EUR 716.7 (502.0) million.

The Group's revenue increased to EUR 337.4 (281.6) million. The start-up of the REDI shopping centre and parking facility project contributed to this rise in revenue, as quarrying and other infrastructure work completed prior to the decision to start the project construction was recognised as revenue in accordance with the level of completion. Sales of developer-contracted residential units to consumers rose to 310 (101), but no sales were made to investors (347). During the first half of the year, 22 (100) developer-contracted housing units recognised as revenue upon delivery were completed.

The Group's operating profit totalled EUR 3.4 (9.3) million, generating an operating margin of 1.0 (3.3) per cent. This decline in operating profit was mainly due to a fall in revenue from developer-contracted residential construction and the higher share accounted for by business contracting with low profit margins. Numerous large-scale projects were started up during the review period. These construction volumes increased fixed costs, thereby reducing operating profit. Furthermore, operating profit for the comparison period included rental income from the Derby business premises, which were sold in Q3 2014. On the other hand, the improved earnings of associated companies and joint ventures increased operating profit.

The relative level of operating profit is reduced by the elimination of a share equivalent to SRV's ownership from the profit margins of three shopping centre projects (Okhta Mall, Daily and REDI), which will be recognised as income only when the investment is sold.

Several factors contribute to the quarterly variation in SRV's 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; and the nature of the company's operations (project development).

The Group's net financial expenses totalled EUR -0.7 (-3.8) million. Net financial expenses were improved by a fall in general interest rates, growth in interest income, exchange rate differences resulting from the strengthening rouble, and the recognition of EUR 1.4 million in credit loss provisions.

The Group's profit before taxes was EUR 2.6 (5.6) million. Net profit for the review period was EUR 2.0 (4.1) million. Income taxes totalled EUR -0.6 (-1.5) million. Earnings per share were EUR 0.01 (0.06). The Group's equity ratio was 36.3 (38.4) per cent. The equity ratio weakened as a result of capital tied up in construction, especially in the REDI project.

Second quarter 1 April-30 June 2015

Second-quarter revenue amounted to EUR 164.5 (143.1) million and operating profit to EUR 0.8 (4.9) million. The start-up of the REDI project contributed to this rise in revenue. Operating profit was weakened by lower revenue and profit margins in residential construction in Finland and the larger share accounted for by low-margin business contracting. Numerous large-scale projects were started up during the review period. These construction volumes increased fixed costs, thereby reducing operating profit. The Group's result before taxes was EUR -0.7 (3.4) million.

Outlook for 2015

In addition to general economic trends, SRV's revenue and result will be affected by several factors in 2015, such as: 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; trends in the order backlog's profit margins; the sales volume of developer-contracted housing and the completion schedules of the properties; and the start-up of new contracts and development projects.  The largest project is REDI in Kalasatama, started up in April. Based on current completion schedules, SRV estimates that a total of 247 developer-contracted residential units will be completed during 2015.

Thanks to the REDI shopping centre start-up, the Group's full-year revenue for 2015 is expected to increase on 2014 (EUR 684.4 million 1–12/2014) and the result before taxes is forecast to be in the range of EUR 10–20 million (EUR 18.5 million 1–12/2014).

Press conference

The interim report will be presented to the media and analysts at a press conference which will take place on 6 August 2015 at 10.30 a.m. at conference room Espa at Hotel Scandic Simonkenttä, address Simonkatu 9, Helsinki. The press conference will be held in Finnish. CEO Juha Pekka Ojala and CFO Ilkka Pitkänen will be present, among others.

A live webcast of the press conference will be available on the company’s website www.srv.fi/en/investors. The webcast will be in Finnish. The presentation material of the press conference will be published in English and Finnish on 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 the company website at www.srv.fi/en/investors.

For further information, please contact:

Juha Pekka Ojala, President & CEO, +358 (201) 455 213
Ilkka Pitkänen, CFO, +358 (201) 455 200, +358 (40) 6670906
Päivi Kauhanen, VP, Communications, +358 (50) 598 9560

www.srv.fi