Robust development in Finland continued: SRV’s Financial Statement Release 1 January–31 December 2014

SRV GROUP PLC     FINANCIAL STATEMENT RELEASE     11 February 2015 at 8:30 AM    

Robust development in Finland continued: SRV’s Financial Statement Release 1 January–31 December 2014

Reporting period 1 January–31 December 2014 in brief:
• SRV's revenue was EUR 684.4 million (EUR 679.4 million 12/2013), change +0.7%
• Operating profit was EUR 24.9 million (EUR 26.4 million), change -5.5%
• Profit before taxes was EUR 18.5 million (EUR 22.8 million), change -18.7%
• Earnings per share were EUR 0.33 (EUR 0.43)
• The order backlog at period-end was EUR 860.4 million (EUR 825.8 million), change +4.2%
• Equity ratio was 43.0 per cent (36.4%)
• Proposed dividend per share is EUR 0.12 (0.12)

The fourth quarter 1 October–31 December 2014 in brief:
• Revenue was EUR 193.8 million (EUR 171.6 million 10–12/2013)
• Operating profit was EUR 9.6 million (EUR 4.6 million).
• Profit before taxes was EUR 7.2 million (EUR 3.6 million)
• Earnings per share were EUR 0.13 (EUR 0.02)

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). The profit before taxes is forecast at EUR 10–20 million (EUR 18.5 million 1–12/2014). 

The Board of Directors confirmed that the business segment Domestic Operations is renamed as Operations in Finland. The content of the business operations remains exactly the same.

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

President & CEO Juha Pekka Ojala:

SRV’s performance last year was satisfactory in respect of the competitive situation and our profitability trend was positive, despite a deteriorating outlook for the sector and the weakening of the rouble exchange rate. The Group’s euro-denominated earnings improved in every quarter, our financial position strengthened and our equity ratio rose to 43%.

In Operations in Finland, which represent over 90% of Group revenue, the profitability trend was clearly positive. As revenue rose in Operations in Finland by 9%, profitability improved by 40%. The operating profit margin was nearly 5% and in the final quarter nearly 6%, which is the target level for the Group’s operating profit margin. Behind this is a significant number of measures that have improved the Group’s efficiency and lowered cost levels. In many projects, our customers have also benefited from cost savings.

Of revenue in Finland, nearly two thirds comes from business premises projects and just over one third from housing projects. Business premises have been built particularly for the public sector, where hospitals, for example, have played a key role. Of these, the construction of a new additional emergency unit in Jorvi, Espoo, the New Children’s Hospital to be built in Meilahti, Helsinki, and the additional building project at TAYS Central Hospital, Tampere, are good examples of demanding hospital construction projects. The order backlog grew by 4% compared with the previous year, which is a fine achievement in the prevailing market situation.

In housing construction, based on advance marketing demand we increased the number of start-ups towards the end of the year, the first time since the downturn a couple of years ago. Projects implemented for housing investment funds and other institutional investors have supported housing demand in otherwise difficult conditions. Rental housing for mid- and high-income customers in good locations and next to good transport connections increasingly constitutes demand complementary to the owner-occupied housing market.

Our International Operations, consisting mainly of activities in Russia, were overshadowed last year by the Ukraine crisis and its consequences. Despite this, the profitability of International Operations developed positively, particularly in the latter part of the year. The main challenges have been the availability of financing and the decline in consumers’ purchasing power caused by the depreciation of the rouble. The euro-denominated financing of the Okhta Mall shopping centre, which was at the negotiation stage last spring, was finalised on competitive terms by the autumn. A positive effect of the weakening of the rouble has been a reduction in construction costs. Despite a general decline in consumer confidence in Russia, our Pearl Plaza shopping centre, which opened in St. Petersburg a year ago, has continually achieved new visitor records.

We start this year with enthusiasm, because we believe that the REDI project, planned for Kalasatama in Helsinki and delayed by a zoning appeal, will be launched this spring. Last year’s milestone in the project was the assembly of a domestic investor group. REDI will start with the construction of the shopping centre and will continue with residential towers, the first of which will be completed together with the shopping centre in 2018. Espoo will see the launch of the Niittykumpu metro centre project, which also consists of commercial services and housing. In addition, we aim to launch the Wood City quarter project in Jätkäsaari, Helsinki.

Our large-scale projects will place considerable demands on us in terms of expertise and financial resources. In accordance with our business model, we have built partner networks in a various fields that, together with our own experts, will help us take our projects forward stage by stage. I am hopeful for the coming year. Our financial key figures are robust and our order backlog is in excellent shape.

¹⁾ SRV Group Plc has changed the way to calculate the earnings per share figure. The change of the way to calculate it is presented in the interim report’s preparation principles.
 

Overall review

Thanks to growth in new contractor agreements, the Group's order backlog increased to EUR 860.4 million (EUR 825.8 million 12/2013). 85 per cent of the order backlog has been sold, a total of EUR 729 million. The unsold share of the order backlog decreased to EUR 132 million (EUR 208 million 12/2013). The value of the Group's new contracts rose to EUR 700.3 million (EUR 600.7 million 12/2013).

The Group's revenue increased to EUR 684.4 million (EUR 679.4 million 1–12/2013). Revenue from business construction in Finland grew when the sale of the Derby Business Park – a developer-contracted office property in Perkkaa, Espoo – was completed in the third quarter. Revenue from housing production for the consumer market declined as the number of completed units (249) fell to under half the number completed during the previous year (539 1–12/2013). In International Operations, the revenue for the comparison period was boosted by the sale of a 55 per cent holding in the Okhta Mall shopping centre project in June 2013, and also by construction volume for the final stage of the Pearl Plaza shopping centre.

The Group's operating profit totalled EUR 24.9 million (EUR 26.4 million), generating an operating margin of 3.6 per cent (3.9%). Operating profit from Operations in Finland noticeably improved. The Group's operating profit decreased, as operating profit for the comparison period included capital gains from the sale of a 55 per cent holding in the Okhta Mall shopping centre project in St Petersburg in June 2013. Operating profit for the comparison period was also increased by a EUR 8.3 million change in the fair value of SRV's holding in the Okhta Mall shopping centre following the surrender of the company's controlling interest in the aforementioned June transaction and the subsequent remeasurement of its remaining holding at fair value based on the sale of the majority holding.  

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 nature of the company's operations (project development).

The Group's net financial expenses rose to EUR 6.4 million (EUR 3.6 million). Interest expenses for the review period were raised by the fixed-interest bond issued in December 2013. Financial income for the comparison period increased due to interest income from SRV's associated company Etmia II, which refinanced its construction funding from SRV with a long-term project loan of about EUR 33 million in Q2/2013. Financial income for the review period was also increased in Q3 by the recognition of EUR 1.5 million in interest income adjustment from the Promenade project in Moscow.

The Group's profit before taxes was EUR 18.5 million (EUR 22.8 million). The result for the 1–12/2013 comparison period was improved by capital gains from the sale of a 55 per cent stake in the Okhta Mall shopping centre project in St Petersburg, the EUR 8.3 million change in the fair value of SRV's holding, and financial income from SRV's associated company Etmia II. Net profit for the review period was EUR 15.4 million (EUR 18.3 million). Income taxes totalled EUR 3.2 million (EUR 4.5 million). Earnings per share were EUR 0.33 (EUR 0.43).

The Group's equity ratio improved to 43.0 per cent (36.4% on 31 December 2013) thanks to the favourable result and a reduction in capital invested after the Derby Business Park transaction.

Revenue from Operations in Finland totalled EUR 627.9 million (EUR 574.8 million 1–12/2013). Operating profit improved to EUR 30.0 million (EUR 21.4 million), generating an operating margin of 4.8 per cent (3.7%). This increase in profitability was driven by improved construction margin management, more efficient purchasing, and higher development project volumes. Operating profit was also adversely affected by the fact that the majority of the commercial development order backlog recognised as income consisted of low-margin contracting. The order backlog rose to EUR 723 million (EUR 646 million). In order to improve profitability, the company will now be focusing on increasing developer contracting, development projects, and negotiated contracts.

SRV sold a total of 756 housing units (701 1–12/2013) to consumers and investors. SRV had 1,625 housing units under construction (1,054 on 31 December 2013), of which 330 were developer-contracted. 87 per cent of residential units under construction have been sold, and 80 per cent of production consists of rental and right-of-occupancy units. 62 per cent (68%) of housing units were developed by SRV.

Revenue from International Operations was EUR 56.9 million (EUR 104.7 million).  Operating profit was EUR 1.1 million (EUR 10.0 million). Revenue and operating profit declined due to events during the comparison period, namely the sale of the completed Okhta Mall shopping centre project in St Petersburg and a change in the fair value of SRV's holding. The order backlog was EUR 137.2 million (EUR 180.1 million).

The Group's revenue for the fourth quarter totalled EUR 193.8 million (EUR 171.6 million) with an operating profit of EUR 9.6 million (EUR 4.6 million). The profitability of both Operations in Finland and International Operations continued to improve during the fourth quarter.

One of SRV's major shopping centre projects, the Pearl Plaza shopping centre in St Petersburg, was opened in August 2013. 97 per cent of the shopping centre's premises have been leased and visitor numbers have exceeded targets. At the Okhta Mall shopping centre, which is under construction in St Petersburg, lease agreements or preliminary BTS (business term sheet) lease agreements have been signed for over 50 per cent of the available retail space. An investor solution for the Promenade shopping centre in Moscow has been implemented and construction work has begun. In September, SRV signed an approximately EUR 240 million letter of intent with a group of investors to jointly invest in a major project in Finland, that is, the REDI shopping centre and parking facility.

SRV’s project development activities are paving the way for a significant increase in operating volumes. 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.

Outlook for 2015

During 2015, SRV's revenue and result will be affected by several factors, in addition to general economic trends, 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 construction of the REDI shopping centre, which SRV is developing in Kalasatama, is expected to begin during early 2015. Based on current completion schedules, SRV estimates that a total of 247 developer-contracted housing units will be completed during 2015.

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

Proposal for the distribution of profits

The parent company’s distributable funds on 31 December 2014 are EUR 138,624,233.12
 of which net profit for the financial year is EUR 8,964,662.77

The Board of Directors proposes to the Annual General Meeting that distributable funds be disposed of as follows:

A dividend of EUR 0.12 per share be paid to shareholders, or EUR 4,412,216.16
The amount to be transferred to shareholders' equity is EUR 134,212,016.96

No material changes have taken place in the company’s financial position after the close of the financial year. The company’s liquidity is good and, in the view of the Board of Directors, the proposed dividend payout does not compromise the company’s solvency.

Press conference

The financial statement release will be presented to the media and analysts at a press conference which will take place on 11 February 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.

Espoo, 10 February 2015

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.

Taneli Hassinen
Vice President, Communications
Tel. +358 40 504 3321
taneli.hassinen@srv.fi

For further information:
Juha Pekka Ojala, President & CEO, +358 (201) 455 213
Ilkka Pitkänen, CFO +358 (201) 455 200, +358 (40) 6670906

www.srv.fi