Revenue still growing, operative operating profit improves
SRV GROUP PLC INTERIM REPORT 26 OCTOBER 2017, AT 8.30
Revenue still growing, operative operating profit improves
January–September 2017 in brief:
- Revenue increased to EUR 776.9 (555.5 1−9/2016) million (up 40%). Revenue improved because of the revenue growth in Operations in Finland and the greatest revenue growth was seen in housing construction in Finland.
- Operative operating profit* amounted to EUR 14.5 (10.9) million (up 33%). Revenue growth in Operations in Finland and the recognition of more developer-contracted housing than in the comparison period had a favourable impact on the operative operating profit. Operative operating profit was weakened by a rise in the costs of certain projects that are under construction and the cost impact of one project that has already been completed.
- Operating profit decreased to EUR 5.7 (11.4) million. Operating profit was weakened by the decline in the result of International Operations to EUR -13.2 (-1.4) million. The result of International Operations was impacted above all by the change in the rouble exchange rate, which had an effect of EUR -8.9 million.
- The result before taxes was EUR -4.7 (-3.1) million.
- Earnings per share were EUR -0.13 (-0.11).
- At period-end, the order backlog stood at EUR 1,535.7 (1,888.1) million. The order backlog decreased as many large projects, such as the Nova Hospital in Central Finland, were recorded in the order backlog during the comparison period.
- Equity ratio was 34.0 (37.8) per cent and gearing was 123.4 (99.7) per cent. The weaker exchange rate of the rouble and the increase in net debt due to growth in invested capital contributed to the change in the equity ratio and gearing.
*In order to improve comparability in the case of actual earnings, as from 20 July 2017 SRV has adopted the new concept of “operative operating profit”. It differs from the IFRS definition of operating profit in a way that it eliminates the calculated currency exchange differences and their potential hedging impacts included in financial items in Russian operations.
July–September 2017 in brief:
- Revenue increased to EUR 268.3 (193.1 7−9/2016) million. Revenue improved because of the revenue growth in Operations in Finland and the greatest revenue growth was seen in housing construction in Finland.
- Operative operating profit rose to EUR 9.0 (6.7) million. The recognition of income from 213 (26) developer-contracted housing units had a particularly great impact on increasing operating profit.
- Operating profit was EUR 7.7 (7.3) million. Operating profit was weakened by the result of International Operations, with the rouble exchange rate having an impact of EUR -1.3 million.
- The result before taxes was EUR 3.3 (3.9) million.
- Earnings per share were EUR 0.04 (0.04).
Events after the period
- In October, SRV announced that it will sell the Wood City office building to be constructed in Jätkäsaari, Helsinki, and a considerable part of the parking facilities to Supercell. The final contracts are required before the transaction can be completed. It is expected that they will be signed in the first quarter of 2018. Construction work can be started in spring 2018 at the earliest. The final sale price will not be published.
- The Tampere Central Deck and Arena project developed by SRV took another important step towards its final realisation in October, when SRV and the project’s investment partners, LocalTapiola and OP Financial Group’s insurance and pension insurance companies, signed a joint venture agreement. At the same time and on behalf of the project company, SRV signed a shareholder agreement for the multi-purpose arena with the City of Tampere. The project’s investment partners will become shareholders in the project company when the final investment decision has been made. Nordea, OP Tampere, Handelsbanken and LocalTapiola (Yritysrahoitus I Ky) are on board as financiers of the arena. As previously announced, the shareholder agreement is conditional on the approval of a state subsidy and the fulfilment of the other preconditions. On 17 October 2017, in its third supplementary budget of the year, the Government proposed granting a subsidy to the project. In October Lapland Hotels was also named as the hotel operator and restaurant services will be managed by Restamax. In addition, the Finnish Elite League ice hockey teams Tappara and Ilves signed a cooperation agreement with the Deck and Arena project.
- SRV announced on October 26th that it has developed a new living concept that aims to ensure that monthly living expenses in these homes will be lower than rent levels in the area where the homes will be built. The first modelhouse is going to be build in Keimolanmäki in Vantaa.That new living concept targets families with children in particular.
Outlook for 2017
- Full-year consolidated revenue for 2017 is expected to grow compared with 2016 (revenue
EUR 884 million). If the rouble exchange rate remains at the level prevailing at the end of the second quarter of 2017, operating profit is expected to weaken, but operative operating profit to improve, compared with 2016 (operating profit EUR 27.7 million and operative operating profit EUR 26.3 million). A profitability level in accordance with strategy will not be attained, however, until the end of the strategy period 2019−2020.
- Although developer-contracted housing will be completed on a steadier schedule than in 2016, a significant part of operating profit will still be made in the second half of the year. Based on current schedules, SRV estimates that a total of 816 developer-contracted housing units will be completed during 2017.
- The operating currency of all of SRV’s subsidiaries and associated companies in Russia was changed to the rouble in September 2016. This accounting change makes SRV more susceptible to fluctuations in the rouble exchange rate, which may impact full-year operating profit.
This interim report has been prepared in accordance with IAS 34, and the disclosed information is unaudited.
CEO's review
The operative operating profit in the January-September period improved but the operating profit declined due to the ruble exchange rate compared to the comparison period. Our objective has been to increase the share of revenue generated by our housing construction in Finland, and housing comprised a robust cornerstone of our result. We are currently building in 38 various locations, a total of 3,346 units. During the third quarter, we recognised a total of 213 housing units as income. More than 800 units will be recognised as income in 2017. Thus, as in 2016, we will rack up our largest haul in the last quarter of the year, when 360 units will be recognised as income.
We are constantly developing our housing business to cater to the needs of people and cities. The strong housing sales is reflected in the market situation. Small apartments built in city centres are still in particularly high demand in housing sales to consumers. Different housing funds and institutional investors have also been active in the housing market. The most important factor behind housing purchase decisions is still the price of the apartment. For this reason, SRV has developed a new housing concept that targets families with children in particular. Our aim is to ensure that monthly living expenses in these homes will be lower than rent levels in the area where the homes are located.
Revenue from our International Operations declined again, as expected, as we have completed our shopping centres and are now shifting our operations to shopping centres management. Changes in the calculated currency exchange rate of the rouble have significantly cut into our earnings this year. The second quarter in particular was truly challenging. That said, operations at the shopping centres have continued to improve, as both sales and visitor numbers have increased.
After the end of the review period, we received good news about two of the large-scale projects we are developing. The Tampere Central Deck and Arena project took another important step towards its final realisation when we and our investor partners signed a joint venture agreement and a shareholder agreement for the city’s multi-purpose arena on behalf of the project company.
Another positive development was that the complaint lodged against the Keilaniemi project was dismissed by the administrative court. Although construction of the tower buildings can only commence when the Ring Road I tunnel project has been completed in 2019, Keilaniemi is another unfortunate example of the Finnish culture of complaining. It’s important for people to be able to express their opinions when projects are being prepared and zoned. At the same time, it should be kept in mind that even a single complaint impacts on the service offerings of an entire area and thus on the lives of thousands of people. REDI is a good example – if a complaint had not been lodged against it, the thousands of people living in that area would already have been able to enjoy the wide-ranging services of the shopping centre for some time.
The Kalasatama Health and Wellness Centre, built right next to REDI, is one of the projects we handed over after the period in October. It’s another excellent addition to SRV’s strong portfolio in hospital and wellness construction, which accounts for about 16 per cent of our revenue. In addition to the large hospital projects we currently have under construction, such as TAYS Etupiha, Nova in Jyväskylä and the New Children’s Hospital in Helsinki, we are already accepted to participate in the last phase of the competition to make an offer for a two new hospital projects: SRV is competing for the extension of the Vaasa Central Hospital and a new healthcare service centre for the Kanta-Häme Hospital District. The total value of these two projects, which will be decided on in January 2018, is close to EUR 400 million.
Once again, we will generate the largest share of our full-year earnings in the fourth quarter. I believe that we can reach our project objectives in the final months of the year and achieve the new objectives outlined in the previous interim report.
Juha Pekka Ojala, President and CEO
Overall review
| Group key figures (IFRS, EUR million) | 1−9/ 2017 | 1−9/ 2016 | change | change, % | 7−9/ 2017 | 7−9/ 2016 | 1−12/ 2016 | previous 12 mo. |
| Revenue | 776.9 | 555.5 | 221.4 | 39.9 | 268.3 | 193.1 | 884.1 | 1,105.5 |
| Operative operating profit | 14.5 | 10.9 | 3.6 | 33.2 | 9.0 | 6.7 | 26.3 | 30.0 |
| Operative operating profit, % | 1.9 | 2.0 | 3.4 | 3.5 | 3.0 | 2.7 | ||
| Operating profit*) | 5.7 | 11.4 | -5.8 | -50.4 | 7.7 | 7.3 | 27.7 | 21.9 |
| Operating profit, % | 0.7 | 2.1 | 2.9 | 3.8 | 3.1 | 2.0 | ||
| Financial income and expenses, total**) | -10.4 | -14.5 | 4.1 | -4.4 | -3.4 | -11.3 | -7.2 | |
| Profit before taxes | -4.7 | -3.1 | -1.6 | 3.3 | 3.9 | 16.4 | 14.7 | |
| Order backlog | 1,535.7 | 1,888.1 | -352.5 | -18.7 | 1,758.5 | |||
| New agreements | 458.5 | 829.9 | -371.5 | -44.8 | 162.6 | 54.9 | 1,013.1 | 641.7 |
| Net profit for the period | -5.6 | -2.6 | 3.3 | 3.3 | 14.4 | 11.4 | ||
| Net profit for the period, % | -0.7 | -0.5 | 1.2 | 1.7 | 1.6 | 1.0 | ||
| *) net effect of currency exchange fluctuations | -8.9 | 0.5 | -9.4 | -1.3 | 0.6 | 1.3 | -8.0 | |
| **) of which derivative expenses fair value revaluation | 1.6 | -7.8 | 9.4 | 0.3 | -1.2 | -4.7 | 4.7 |
*) Operative operating profit is determined by deducting the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts from operating profit. Exchange rate differences during the review period amounted to EUR -8.9 (0.5) million and hedging expenses to EUR -0.4 (0.0) million.
January–September 2017
The Group’s revenue rose by 40 per cent to EUR 776.9 (555.5) million. The greatest revenue growth was seen in housing construction in Finland. The recognition of income from significantly more developer-contracted housing units in the first part of the year than in the comparison period, a total of 463 (110), particularly contributed to growth. Large business premises projects, such as the construction of hospitals and shopping centres, also increased revenue.
The Group’s operative operating profit rose to EUR 14.5 (10.9) million. Growth in revenue from Operations in Finland had a positive impact on operative operating profit, although relative profitability weakened. More developer-contracted housing was recognised as income than during the corresponding period of the previous year, and this improved operative operating profit. Operative operating profit was weakened by a rise in the costs of certain projects that are under construction and the cost impact of one project that has already been completed.
The Group’s operating profit declined to EUR 5.7 (11.4) million. Operating profit from International Operations totalled EUR -13.2 (-1.4) million. Operating profit from International Operations was weakened particularly by the weaker rouble exchange rate, which had an impact of EUR -8.9 million on operating profit. The exchange rate impact is primarily caused by the conversion of euro-denominated loans to roubles. Exchange rate differences vary in each financial statement in line with fluctuations in the exchange rate of the rouble. The difference has no impact on cash flow.
The Group’s consolidated order backlog stood at EUR 1,535.7 (1,888.1) million. The order backlog decreased because many large projects, such as the Nova Hospital in Central Finland, were recorded in the order backlog during the comparison period. Several new agreements valued at a total of about EUR 459 million, the largest of which was REDI Majakka, were signed during January-September 2017. In addition, many other new projects valued at a total of more than half a billion euros will be included in the backlog such as the Siltasairaala hospital in Helsinki and the extension of Helsinki Airport and the renovation of its Terminal 2. Both projects will be included in the order backlog in 2018.
The Group’s profit before taxes totalled EUR -4.7 (-3.1) million. The interest rate hedge became positive, which improved financial items.
The Group's earnings per share were EUR -0.13 (EUR -0.11). The earnings per share for the comparison period were impacted by the non-recurring cost of repaying the hybrid bond.
Variation in the Group’s operating profit and operating profit margin is affected by several factors. SRV’s developer-contracted projects are recognised as income upon delivery; projects recognised as income based on the level of completion mainly consist of lower-margin contracting; and the nature of the company's operations (project development).
The Group’s equity ratio was 34.0 (37.8) per cent and gearing was 123.4 (99.7) per cent. The weaker exchange rate of the rouble and growth in net debt due to invested capital contributed to the change in the equity ratio and gearing.
| Group key figures (IFRS, EUR million) | 1−9/ 2017 | 1−9/ 2016 | change | change, % | 1−12/ 2016 |
| Equity ratio, % | 34.0 | 37.8 | 38.3 | ||
| Net interest-bearing debt | 338.7 | 285.0 | 53.7 | 18.8 | 246.3 |
| Gearing ratio, % | 123.4 | 99.7 | 83.4 | ||
| Return on investment, % | 1.7 | 3.3 | 6.1 | ||
| Return on equity, % | -2.6 | -1.3 | 5.0 | ||
| Earnings per share, EUR | -0.13 | -0.11 | -0.02 | 18.3 | 0.15 |
| Equity per share, EUR | 3.88 | 3.81 | 0.07 | 1.8 | 4.25 |
| Share price at end of period, EUR | 4.41 | 4.40 | 0.01 | 0.2 | 5.43 |
| Weighted average number of shares outstanding, millions | 59.5 | 59.3 | 59.3 |
Espoo, 25 October 2017
Board of DirectorsAll 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.
Invitation to a press conference:
SRV’s management will present the result to the media and analysts at a joint press conference, which will be held on Thursday, 26 October at 11.00 a.m at the Living Lab test environment, Suvilahti, address Kaasutehtaankatu 1, 00540 Helsinki.
President & CEO Juha Pekka Ojala, CFO Ilkka Pitkänen and SVP, Housing and Regional Offices Antero Nuutinen will be present at the event. The latest developments in the housing business will also be discussed at the event.
A live webcast of the press conference can be viewed on http://qsb.webcast.fi/s/srv/srv_2017_1026_q3/
For further information, please contact
Juha Pekka Ojala, CEO, +358 (0)40 733 4173, jp.ojala@srv.fi
Ilkka Pitkänen, CFO, +358 (0)40 667 0906, ilkka.pitkanen@srv.fi
Päivi Kauhanen, SVP, Communications, +358 (0)50 598 9560, paivi.kauhanen@srv.fi
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