Revenue grew, modest profitability: SRV’s Interim Report 1 January – 30 September 2012

SRV GROUP PLC                                   INTERIM REPORT 7 November 2012, 8.30 a.m. EET

Reporting period 1 January–30 September 2012 in brief:

• SRV’s revenue was EUR 466.2 million (405.5 in January-September 2011), change +15.0%
• Operating profit was EUR 4.5 million (0.9), change +397.7%
• Profit before taxes was EUR 0.6 million -1.6)
• The order backlog at the close of the review period was EUR 747.1 million (862.3), change -13.4 %
• Equity ratio was 28.5 per cent (30.9%)
• Earnings per share were EUR -0.01 (EUR -0.07)

SRV’s outlook for 2012 remains unchanged. The Group’s result before taxes is expected to show a profit. The Group’s full-year revenue is estimated to be at least on a par with the previous year (EUR 672.2 million 1-12/2011).

Third quarter 1 July – 30 September 2012 in brief:

• Revenue amounted to EUR 155.8 million (136.3 in 7-9/ 2011)
• Operating loss was EUR -0.4 million (0.2)
• Result before taxes was EUR -2.1 million (-1.5)
• Earnings per share were EUR -0.04 (EUR -0.06)

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

  CEO Jukka Hienonen comments on SRV’s result:

The 15 per cent growth in revenue in the early part of the year was the result of success in building our order backlog during the last couple of years, but the third quarter result was a clear disappointment for us. Positive trend was cut short by lowered profit margin estimations from a few fixed price contracting contracts. Our sector’s outlook for the end of this year and for the next year encourages caution.

In the early part of the year Group’s profitability clearly improved compared with the previous year, even though the profit margin was not close to our target level. Revenue from domestic operations grew by 7 per cent, but despite the growth the profitability is still not at satisfactory level while operations are still focused on low-margin contracting.

Competition for fixed-price contracts has intensified in the tighter economic conditions, which has reduced their margin level. In accordance with our strategy, we have focused more clearly on projects where we are best able deliver to customers added value based on our expertise. The change of emphasis among contract types is evident in our current order backlog, and the number of new fixed-price contracts has fallen significantly compared with the previous year.

Revenue in our Russia-oriented international business operations increased by around 150 per cent, but the level of losses remained unchanged. This situation is due to the project-development emphasis of these operations, and repatriation of earnings takes place on the sale of completed projects.

Our Pearl Plaza shopping centre project in the vicinity of St. Petersburg has proceeded encouragingly. The occupancy rate of premises is already over 70 per cent, just less than a year before the shopping centre opens. We are also starting our Septem City project located east of St. Petersburg city centre.

The recovery of Russia’s property market from the recession caused by the financial crisis is promoting the launch of our projects. To safeguard the financing capacity of our Russian projects, we have two financial partnership arrangements.

Housing construction and sales remain at good level in Finland. Early in the year, revenue grew by more than a third. Low interest rates and consumers’ confidence in their own finances have kept the sales of apartments stable, despite the intermittent prevalence of unwelcome economic news.

Our target is to improve profitability by increasing the number of own development projects and decreasing the share of contracts based on competitive tendering. I believe that we can utilize the potential from SRV’s innovative project development also in the weakening economic environment.

Overall review

The trend in SRV’s revenue remained favourable in the review period. Due to growth in revenue from both domestic and international operations, the Group’s revenue grew by 15.0 per cent to EUR 466.2 million (405.5 1-9/2011). Our order backlog remained robust at EUR 747.1 million (862.3 on 30 September 2011).

The Group recorded an operating profit of EUR 4.5 million (0.9in 1-9/2011). Group’s profitability has been affected by the order backlog consisting mainly of low-margin contracting and project development nature of operations. A good performance in domestic business had a positive impact on operating profit. Operating profit was burdened by a weakening of approximately EUR 3 million in the estimated margins of three fixed-price contracts, observed in Operations in Finland in the third quarter, as well as the EUR 1.1 million non-recurring depreciation recorded in January in International Operations, as a result of a fire that destroyed a warehouse building. The Group’s profit before taxes was EUR 0.6 million (-1.6 1-9/2011). Financial expenses grew from the reference period. Financial items in the reference period were affected by gains from interest rate swaps, exchange rate gains and affiliate-derived financial income.

Revenue from Operations in Finland was EUR 411.1 million (383.4 1-9/2011) and operating profit was EUR 13.1 million (10.1). The domestic order backlog stood at EUR 676.2 million (745.8 on 30 September 2011). Operational focus has been moved to increase developer contracting and negotiation contracting production. Number of signed new fixed price contracts has fallen to approximately half compared to reference period.

Although revenue from domestic commercial construction fell, profitability improved. Profitability in this sector was impacted by the order backlog, consisting mostly of low-margin projects. To improve profitability, SRV aims to move its focus to own project development. The order backlog for commercial construction fell to EUR 312.1 million (371.5 on 30 September 2011).

Revenue for domestic housing construction grew and profitability improved. SRV’s total housing sales volume was healthy, with sales consisting of a total of 538 housing units (551 in 1-9/2011), 337 (382) of which were developer-contracted housing units and 201 (169) units sold to investors under negotiated contracts. SRV has become a major rental and owner-occupied housing constructor in its operating areas. SRV’s ongoing housing construction amounted to 2,126 housing units (2,504 on 30 September 2011), 81 per cent of housing units under construction have been sold, and 72 per cent of production consists of rental and right-of-occupancy units. SRV has 605 developer-contracted housing units under construction. Based on advance marketing, the decision has been made to initiate the construction of 113 additional housing units. The order backlog for housing construction came to EUR 364.2 million (374.2).

Revenue from International Operations grew to EUR 55.1 million (21.4). Construction of the Pearl Plaza shopping centre, 50%-owned by SRV, generated most of the revenue. Due to the project development nature of this business, 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 third-quarter revenue was EUR 155.8 million (136.3) and operating loss was EUR -0.4 million (0.2). Volume growth in both Finnish and international operations contributed to revenue growth. The decline in operating profit could be attributed especially to the decrease of approximately EUR 3 million in the estimated margins of three fixed-price contracts in Finnish operations.

SRV’s own project development operations are paving the way for 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 housing project, the development project for the vicinity of the Niittykumpu metro station in Espoo, and the Kalasatama development project in Helsinki.

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

Financial targets

On 15 February 2012, SRV’s Board of Directors confirmed the Group’s strategy for 2012–2016. The Group’s strategic targets are defined as follows:

• SRV’s revenue grows faster than the construction industry in general, reaching the level of one billion
• International Operations account for more than 20 per cent of Group revenue
• Operating profit margin will reach 6 per cent
• Return on equity is at least 15 per cent
• Equity ratio will stay above 30 per cent
• The objective 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 end of the reporting period

After the close of the review period, SRV signed an agreement on the construction of the Helsinki Airport station on the Ring Rail Line. Construction work began in October. With a total value of approximately EUR 70 million, the new Airport station is the most significant project on the Ring Rail Line. 

Outlook for 2012 (adjusted on 10 September 2012)

SRV lowered the profit margin estimates of three fixed-price projects by approximately EUR 3 million and consequently adjusted its full-year guidance on 10 September 2012.  

The Group’s result before taxes is expected to show a profit. The Group’s full-year revenue is estimated to be at least on a par with the previous year’s level (EUR 672.2 million 1-12/2011).

SRV’s full-year profit can be significantly affected by the timing of sale of Etmia II office property in Moscow and the Derby Business Park in Espoo. Furthermore, the general uncertainty seen in the financial markets has also had a negative effect on real estate markets. Nonetheless, even if the property sales are not completed during this year, the full-year result before taxes in 2012 is estimated to be positive. SRV does not change estimates given in the Q2 Interim Report regarding development in the housing and business premises markets. 

Outlook for 2012

SRV reiterates the outlook for 2012.

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 2012. 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. SRV’s full-year performance can be significantly affected by the timing of sale of Etmia II office property in Moscow and the Derby Business Park in Espoo. Furthermore, the general uncertainty seen in the financial markets also reflects negatively on real estate markets. Nonetheless, even if the property sales are not completed during this year, the full-year result before taxes in 2012 is estimated to be positive.

The Group’s result before taxes is expected to show a profit. The Group’s full-year revenue is expected to be at least on a par with the previous year’s level (EUR 672.2 million 1-12/2011).

Media conference

The interim report will be presented to the media and analysts at the press conference which will take place 07 November 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 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 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

Espoo 6 November 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, 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