SRV improves profitability and retains a strong order backlog — SRV's Interim Report 1 January – 30 June 2012

SRV GROUP PLC                                   INTERIM REPORT 8 August 2012, 8.30 a.m. EET                                         

Reporting period 1 January–30 January 2012 in brief:

• SRV’s revenue was EUR 310.4 million (EUR 269.2 million in January-June 2011), change +15.3 %
• Operating profit was EUR 4.9 million (EUR 0.7 million), change 604.6 % positive
• Profit before taxes was EUR 2.8 million (EUR 0.0 million)
• The order backlog at the close of the review period was EUR 746.3 million (EUR 673.5 million), change +10.8 %

• Equity ratio was 29.7 per cent (31.7 %)
• Earnings per share were EUR 0.03 (EUR -0.01)

SRV’s outlook for 2012 remains unchanged. 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). The Group's profit before taxes is estimated to exceed the level of the previous year (EUR 10.8 million).

Second quarter 1 April – 30 June 2012 in brief:

• Revenue amounted to EUR 169.7 million (EUR 136.6 million in 4-6/ 2011)
• Operating profit was EUR 3.1 million (EUR -0.3 million)
• Profit before taxes was EUR 2.5 million (EUR -1.7 million)
• 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:

Our revenue and order book grew in January-June by double-digit percentage figures. Our operating profit clearly improved from last year, despite a write-down of just over one million euros, but it still remains well below our target level. We expect our profit level to continue to improve in the latter part of the year and revenue to be at least at last year’s record level.

Global and European economic problems are continually showing new signs of chronic deterioration. The cyclical fluctuation of our industry has lost its predictability. It appears that we will have to learn to operate in a new environment in which we cannot expect a boost to our business from economic growth. We in SRV have therefore begun to examine our projects more critically than before against different scenarios and to ensure sufficient room for manoeuvre as economic and market situations fluctuate.

The housing market continues to be favourable, enhanced by low interest rates. A third of our over 2,000 apartment production is on a developer-contracting basis and the remainder are rental or right-of-occupancy apartments for sector operators. The improvement of our result in the early part of the year was based particularly on increased housing production, where sales have remained buoyant. We are one of the biggest housing builders in the Helsinki Metropolitan Area.

On the business premises side, we are proceeding cautiously. We have no substantial developer-contracting business premises projects under way in addition to the future head office property. We will take controlled risks, however, particularly in logistics properties, where committed capital is low and our feel for the market is more concrete. In contracts, competition has become unhealthy in places. Due to our flexible structure, however, we can voluntarily refrain from participating in unprofitable contracts.

In international business our focus is on Russia, where we are proceeding according to plan in the Pearl Plaza shopping centre project both in terms of construction and commercialisation. The shopping centre jointly owned with a Chinese partner, will be completed next year and more than half of the area has already been rented.

This decade, our operations will be marked by substantial area projects, such as the Kalasatama Centre and the Keilaniemi towers. In these, the construction and commercialisation schedules have been planned to be flexible so that we can phase the projects according to the market situation. As we improve our cost efficiency, we will simultaneously shift our production focus to developer-contracting projects in order to improve the profitability of projects.

Overall review

The trends in SRV’s revenue and order backlog remained favourable in the review period. The order backlog grew by 10.8 per cent and came to EUR 746.3 million (EUR 673.5 million on 30 June 2011). Due to growth in revenue from both domestic and international operations, the Group’s revenue grew by 15.3 per cent to EUR 310.4 million (EUR 269.2 million 1-6/2011).

The Group’s operating profit was EUR 4.9 million (EUR 0.7 million in 1-6 2011). Positive development in domestic business had a positive impact on operating profit. Operating profit was taxed by EUR 1.1 million non-recurring depreciation recorded in January in International Business as a result of a fire that destroyed a warehouse building.  The Group's profit before taxes was EUR 2.8 million (EUR 0.0 million 1-6/2011). 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 271.4 million (EUR 255.1 million 1-6/2011) and operating profit was EUR 11.3 million (EUR 7.7 million). Domestic order backlog grew to EUR 661.7 million (EUR 564.8 million on 30 June 2011).

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 grew to EUR 325.4 million (EUR 233.3 million on 30 June 2011).

Revenue for domestic housing construction grew and profitability improved. Sales volumes in developer-contracted housing production rose considerably in the second quarter (154 units in 4-6/2012) from the first quarter (98 units in 1-3/2012). SRV has increased both its rental and owner-occupied housing production, making the company a major housing constructor in its operating areas. SRV’s ongoing housing construction amounted to 2,060 housing units (2,243 on 30 June 2011). 82 per cent of housing units under construction have been sold, and 71 per cent of production consists of rental and right-of-occupancy units. SRV has 596 developer-contracted housing units under construction. Based on advance marketing, the decision has been made to initiate the construction of 203 additional housing units. The order backlog for housing construction came to EUR 336.4 million (EUR 331.5 million).

Revenue from International Operations grew to EUR 39.0 million (EUR 13.7 million). Construction of the Pearl Plaza shopping centre, owned 50% 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.

Group’s second-quarter revenue amounted to EUR 169.7 million (EUR 136.6 million) and operating profit EUR 3.1 million (EUR -0.3 million). The growth of revenue and operating profit was affected especially by completion of domestic housing production projects.

SRV’s own project development operations pave the way to increasing operating volume in Finland. These projects require long-term development work and are 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, whose implementation agreement was signed in August 2011.

1) In calculationg 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 target 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 review period, an appeal seeking a change to a Helsinki City Council decision on the Kalasatama Centre city plan was filed with the Helsinki Administrative Court. SRV and the City of Helsinki will review if the appeal has an impact on the current timetable of the Kalasatama Centre project.

The project extends over a lengthy period of time and it is estimated that the possible delay will not have an impact on SRV’s full-year guidance or the overall timetable of the project. On 30 June 2012, around EUR 20 million was committed to the Centre’s preliminary construction works.

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.

The Group’s full-year revenue is estimated to be at least on a par with the previous year level (EUR 672.2 million 1-12/2011). The Group's profit before taxes is estimated to exceed the level of the previous year (EUR 10.8 million).

Media conference

The interim report will be presented to the media and analysts at the press conference which will take place 08 August 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 7 August 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