SRV Interim Report January–September 2023: Q3 operative operating profit positive, order backlog remains strong – outlook unchanged

SRV GROUP PLC     INTERIM REPORT      26 OCTOBER 2023    AT 08.30 EEST

SRV Interim Report January–September 2023: Q3 operative operating profit positive, order backlog remains strong – outlook unchanged
 

July–September 2023 in brief:

• Revenue amounted to EUR 146.9 (186.8) million.

• Operative operating profit amounted to EUR 4.6 (3.9) million with an operating profit of EUR -4.9 (5.5) million. The divestment of SRV Russia Oy had a EUR -9.5 million impact on operating profit, of which EUR -9.3 million consisted of the recognition of translation differences in income.

• Cash flow from operating and investment activities totalled EUR -4.6 (4.5) million.

• New agreements valued at EUR 132.5 (135.0) million were signed in July–September.
   

January–September 2023 in brief:

• Revenue amounted to EUR 428.3 (588.9) million.

• Operative operating profit amounted to EUR -1.3 (18.7) million with an operating profit of EUR -9.9 (-70.1) million. The divestment of SRV Russia Oy had a EUR -9.5 million impact on operating profit, of which EUR -9.3 million consisted of the recognition of translation differences in income.

• The result before taxes was EUR -16.4 (-69.1) million.

• Cash flow from operating and investment activities totalled EUR -13.6 (-12.7) million.

• The equity ratio fell to 34.9 per cent (36.3% 9/2022) and gearing rose to 84.8 per cent (59.3% 9/2022). Excluding the impact of IFRS 16, the equity ratio was 49.5 (48.6) per cent and gearing was 5.1 (-5.4) per cent.

• At period-end, the order backlog stood at EUR 995.6 (717.1) million. New agreements valued at EUR 528.3 (337.3) million were signed in January–September. The sold share of the order backlog was 92.1 (87.8) per cent.

• Earnings per share were EUR -1.0 (-6.5).
   

Outlook (unchanged)

During 2023, SRV's revenue and result will be affected by several factors in addition to general economic trends, such as: the timing and amount of income recognition for SRV's own projects, which are recognised as income upon delivery; the margin of the order backlog and its development; the start-up of new contracts and development projects; the war that Russia started against Ukraine, including its related direct and indirect effects, such as material costs and the availability of materials and labour; and changes in demand. Higher interest rates and inflation have a negative impact on demand for housing and business premises among consumers and investors, and thus pose uncertainty with respect to the estimated start-ups of new projects.  

Revenue in 2023 will mainly be generated by cooperative contracting and development projects sold to investors. At the beginning of 2023, the order backlog was strongly weighted towards cooperative contracting, which involves fewer risks but lower margins. The company therefore expects the largest proportion of its full-year earnings to be generated in the end of the year. The share of revenue accounted for by developer-contracted housing production will remain small in 2023. 

• Full-year consolidated revenue for 2023 is expected to decrease in comparison to 2022 (revenue in 2022: EUR 770.1 million).

• Operative operating profit is expected to be positive, but lower than in 2022 (operative operating profit in 2022: EUR 18.9 million.
   

Significant events after the period

There were no significant events after the end of the review period.
 

President & CEO's review

"Market conditions continued to be challenging in the third quarter of 2023, and we do not expect a significant change for the better in the short term. Demand for housing construction has almost come to a halt, and demand for real estate investments has weakened considerably as a result of the rapid rise in interest rates. Public construction remains strong, and there have been favourable developments in demand for industrial investments in terms of both volume and operating models. Our own development is strong in relation to the market, thanks to our net debt-free status, the low number of unsold apartments, and an order backlog that has strengthened since the end of last year, particularly in business construction. Our operational controllability has developed favourably over the past two years, which is reflected in our improved occupational safety, adherence to schedules, improved financial performance and, I’m delighted to say, also customer satisfaction. 

In spite of the challenging market situation, our revenue continued to experience slight quarter-on-quarter growth, driven by business construction. However, due to poor demand for housing construction, revenue fell short of the comparison period.  

As expected, our operative operating profit for the quarter was relatively good in view of the circumstances: EUR 4.6 million. The Group’s profit before taxes was EUR 3.0 million before items relating to the divestment of SRV Russia Oy. Translation differences, which mainly stemmed from old exchange rate losses, were recognised in the income statement in conjunction with this transaction, and resulted in a loss, although without affecting the key figures in the balance sheet. We expect that the greatest proportion of our full-year earnings will be accrued during the second half of the year, as the favourable order intake during early 2023, along with other expected projects, will increase revenue and generate profit.  

Our order backlog remained strong in the third quarter of 2023, and was 39% better than in the comparison period. The order backlog will lead to increased revenue starting from the last quarter of this year when projects get up to full speed. The annex to the National Museum of Finland in Helsinki and the Rajamäki Campus in Nurmijärvi were entered into our order backlog in July–September. After the development phase, we also entered a large Kerto timber mill into our order backlog. This mill is being built for Metsä Wood in Äänekoski and will be implemented as a cooperative project management contract. An increasing proportion of industrial projects are being carried out as cooperative contracts, which have proven to be effective in numerous challenging public-sector projects. The growth in our order backlog, coupled with its weighting towards cooperative business premises contracts, will take us through this challenging market situation.

The divestment of our Russian holdings proceeded during the review period, and in August we sold the share capital of our subsidiary SRV Russia Oy to the Cypriot real estate investment company Geomare Investments Limited. This transaction included SRV’s Russian subsidiaries and associated companies (complete with their personnel) and the rest of SRV’s plot holdings in Russia, which are owned by these companies, as well as a minority interest in the 4Daily shopping centre located close to Moscow. After this transaction, our only remaining asset in Russia is a 50 per cent holding in the Pearl Plaza shopping centre in St Petersburg. We will actively continue negotiations aimed at selling the last of our Russian holdings.  

In October, SRV and the City of Helsinki jointly announced that we had begun the process of terminating the preliminary agreement for the Jätkäsaari Bunkkeri real estate transaction due to a lack of investor demand arising from the market situation. Both parties consider it important for the City to begin exploring a new solution for its planned sports facilities without delay. The divestment of this project is also part of our risk management, as we must ensure that our capital is used efficiently in a challenging market.  

I see our favourable development continuing for the rest of the year, although we do not expect any particular traction from the market. Looking further ahead, I believe the trends for urbanisation and regional concentration will continue in Finland, and demand will gradually recover. If the market situation improves slightly, our strengthened position may open up opportunities for profitable growth over the coming years. We are well-placed to react quickly, thanks to both our financial position and the ready-to-start project portfolio produced by project development."

Saku Sipola
 

Key Figures

1.The figure has been adjusted to remove the impacts of IFRS 16.

2. The key figure for the comparison period  has been adjusted, taking the 2022 share issues and reverse share split into account.

Business Review

The SRV Group’s Corporate Executive Team is the chief operating decision-maker of the Group as defined in IFRS 8 Operating Segments. The Corporate Executive Team reviews business as a single operating segment. The new segment structure was introduced as from 1 January 2023.

January–September 2023

The Group’s revenue declined by EUR 160.6 million to EUR 428.3 million (588.9 1–9/2022). Revenue from business construction rose by EUR 40.9 million to EUR 355.9 million, while revenue from housing construction was down EUR 178.5 million to EUR 72.4 million. The comparison figure for revenue includes the effect of the dissolution of construction profit margin eliminations amounting to EUR 14.5 million. 

The Group’s operative operating profit decreased to EUR -1.3 (18.7) million. Operative operating profit was weakened by a significant decrease in the volume of housing construction.

The Group’s operating profit was EUR -9.9 (-70.1) million. Most of the company’s remaining business operations in Russia were divested during the review period. The divestment had a EUR -9.5 million impact on operating profit, of which EUR -9.3 million consisted of the recognition of translation differences in income. The recognition of translation differences in income had no effect on the Group’s shareholders’ equity or the key figures in the balance sheet. The repayment of the loan receivable written down in the 2022 financial year had an impact of EUR 0.9 million on operating profit for the review period. The comparison figure for operating profit was impacted by, for instance, substantial write-downs of assets in Russia and the Fennovoima holding, the dissolution of profit margin eliminations and changes in the exchange rate of the rouble, which had a total impact of EUR -91.2 million. 

At period-end, the Group’s order backlog stood at EUR 995.6 (717.1) million. The sold share of the order backlog was 92.1 (87.8) per cent. New agreements valued at EUR 528.3 (337.3) million were signed in January–September. The most significant new business construction projects were the first implementation phase of the Laakso Joint Hospital in Helsinki, a large Kerto timber mill for Metsä Wood in Äänekoski, the Horisontti office skyscraper in Kalasatama, Helsinki, an annex to the National Museum of Finland in Helsinki, the multipurpose Sammontalo Building in Lappeenranta, the Okmetic factory building in Vantaa, and the Inkeroinen multipurpose building in Kouvola.  New housing construction projects included a housing portfolio consisting of two residential buildings for a housing fund managed by eQ and a 101-unit apartment building in Verkkosaari for the City of Helsinki’s Housing Production (ATT). 

July–September 2023 

The Group’s revenue declined by EUR 39.9 million to EUR 146.9 million (186.8 7–9/2022). Revenue from business construction grew by EUR 35.2 million to EUR 130.5 million, while revenue from housing construction fell by EUR 72.3 million to EUR 16.3 million.  

After a loss-making start to the year, the Group’s operative operating profit swung into the black at EUR 4.6 (3.9) million. This improvement in the operative operating profit was supported by increased business construction volumes and better margins. The marked fall in housing construction volumes had a negative impact on operative operating profit. 

The Group’s operating profit was EUR -4.9 (5.5) million. Most of the company’s remaining business operations in Russia were divested during the review period. The divestment had a EUR -9.5 million impact on operating profit, of which EUR -9.3 million consisted of the recognition of translation differences in income. The recognition of translation differences in income had no effect on the Group’s shareholders’ equity or the key figures in the balance sheet.
 

Espoo, 26 October 2023
Board of Directors 
 

All forward-looking statements in this interim report are based on management’s current expectations and beliefs about future events. The company’s actual results and financial position may differ materially from the expectations and beliefs such statements contain due to a number of factors that have been presented in this interim report.

Briefing, webcast and presentation materials 

A briefing for analysts, investors and media representatives will be held as a webcast on 26 October 2023, starting at 11:00 EEST. The webcast can be followed live at www.srv.fi/en/investors. The recording will be available on the website after the presentation. The materials will also be made available on the website. 

For further information, please contact:

Saku Sipola, President & CEO, tel. +358 (0)40 551 5953, saku.sipola@srv.fi
Jarkko Rantala, CFO, tel. +358 (0)40 674 1949, jarkko.rantala@srv.fi
Miia Eloranta, Senior Vice President, Communications and Marketing, tel. +358 (0)50 441 4221, miia.eloranta@srv.fi 

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SRV in brief

SRV is a Finnish developer and innovator in the construction industry. We are building a more sustainable and responsible urban environment that fosters economic value and takes the wellbeing of both the environment and people into consideration. We call this approach lifecycle wisdom. Our genuine engagement and enthusiasm for our work comes across in every encounter – and listening is one of our most important ways of working. We believe that the only way to change the world is through discussion.

Our company, established in 1987, is listed on the Helsinki Stock Exchange. We operate in growth centres in Finland. In 2022, our revenue totalled EUR 770.1 million. In addition to approximately 1,000 in-house staff, we have a network of around 3,800 partners.

SRV – Building for life