SRV reports strong growth in order backlog and continued improvement in profitability: SRV's interim report 1 January–31 March 2014

SRV GROUP PLC     INTERIM REPORT     7 MAY 2014, at 8:30 AM    

Reporting period 1 January–31 March 2014 in brief:
• SRV's revenue was EUR 138.5 million (EUR 158.4 million 3/2013), change -12.6%
• Operating profit was EUR 4.4 million (EUR 1.2 million), change +269%
• Profit before taxes was EUR 2.2 million (EUR 0.7 million), change +208%
• Earnings per share were EUR 0.01 (EUR -0.03)
• The order backlog at the close of the review period was EUR 880.2 million (EUR 726.7 million), change +21.1%.
• Equity ratio was 39.0 per cent (34.3%)

SRV's outlook for 2014 remains unchanged. The Group's full-year revenue is expected to be on a par with the previous year (EUR 679.4 million 1-12/2013) and profit before taxes to amount to EUR 10–20 million (EUR 22.8 million 1-12/2013).

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

CEO Jukka Hienonen comments on SRV's result:

During the early part of 2014, the construction market overall in Finland has contracted and sector volume is projected to decline by around 1% compared with the previous year. A flexible operating model is SRV’s strength and in these conditions we have focused on improving profitability. SRV’s revenue declined by 13%, but at the same time our profitability improved – operating profit more than tripled. Behind this is our determined focus on higher value added projects, in which SRV has been able to increase its own-development share. The order backlog has strengthened both from March last year and since the turn of the year. In a contracting market, this can be considered a good achievement.

A particularly good trend was evident in the profitability of Domestic Operations. Although revenue declined by just under 8%, profitability nearly doubled. No exceptional items assisted in this; the improved profitability was based on disciplined action and a business structure in line with our strategy.

Housing sales have remained subdued for a second year. Demand dropped sharply in March last year when a badly timed increase in capital transfer tax put the brakes on housing sales just as consumer confidence faltered.

When comparing this quarter with the first quarter of last year, it is important to remember that last year housing sales returned record figures in January–February, so the comparison period was very strong. The housing sales for consumers remain sluggish and in these conditions SRV has not, for example, started a single new housing project directed at consumers in the Helsinki Metropolitan Area for a year. A significant part of housing demand currently comes from housing funds, for which new projects continue to be launched.

Despite the news overshadowing the Russian economy, our International Operations have made good progress. Visitors to the Pearl Plaza shopping centre, which opened last August, are rising steeply. Both retailers and consumers consider the centre to be a great success. Construction, which began in late summer last year, at the site of the Okhta Mall shopping centre has proceeded according to plan. Although we have had to restructure the project’s financing solutions, we are very comfortable with current plans.

The uncertainty created by events in Ukraine has not been significantly reflected in our operations in Russia, but we naturally must be prepared for a change in the situation. The weaker rouble has in the short term even had a positive impact on our situation, as our construction costs are calculated in roubles and business premises rents in euros. Our biggest threats relate to the changing operating environment as a result of sanctions as well as a long-term downward trend in the rouble.

We are continuing to develop our projects in Russia long term, and in Finland are preparing for the launch of our large projects while at the same time attending to the disciplined and profitable management of around 80 other construction sites.

  
Overall review

SRV's order backlog and the value of new agreements showed clear year-on-year growth. The Group's order backlog amounted to EUR 880.2 million (EUR 726.7 million 3/2013) and the value of new agreements to EUR 184.7 million (EUR 40.0 million 1-3/2013).

Due to a decline in revenue from both domestic and international operations, the Group's revenue decreased by 12.6 per cent to EUR 138.5 million (EUR 158.4 million 1-3/2013). The Group's operating profit improved to EUR 4.4 million (EUR 1.2 million) following continued positive developments in the profitability of domestic construction. The operating profit margin was 3.2 per cent (0.8%). 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 project development nature of operations. The Group's profit before taxes was EUR 2.2 million (EUR 0.7 million). Financial income for the comparison period was increased by interest income from SVR's associated company Etmia II, which during Q2/2013 refinanced its construction funding obtained from SRV with a long-term project loan of about EUR 33 million. Interest expenses for the review period increased due to the fixed-interest bond issued in December 2013.

The Group's equity ratio was 39.0 per cent (34.3%). Profitability improvement, together with the decrease in total assets, contributed to the increase in equity ratio.

The revenue of domestic operations declined to EUR 124.4 million (EUR 135.0 million 1-3/2013) due to a fall in developer-contracted housing volumes. Operating profit totalled EUR 6.6 million (EUR 3.4 million), generating an operating profit margin of 5.3 per cent (2.5%). The increase in profitability was driven by improved construction margin management, more efficient purchasing and higher development project volumes. On the other hand, the level of operating profit was affected by the fact that the commercial development order backlog recognised as income mainly consisted of low-margin contracting. The domestic order backlog was EUR 721.5 million (EUR 686.9 million). In order to improve profitability, the company has shifted the focus of operations to increasing developer contracting, development projects and negotiated contracts.

SRV sold a total of 160 units (223 1-3/2013) to consumers and investors as weaker consumer sales affected total sales. In housing construction, the focus has been shifted to rental housing development projects, and the volume of developer contracting has been scaled down. SRV had 1,185 rental and owner-occupied units under construction (1,633 on 31 March 2013), of which 171 were developer-contracted. 91 per cent of housing units under construction have been sold, and 86 per cent of production consists of rental and right-of-occupancy units. The volume of housing contracting has been reduced, and 62 per cent of production (51%) consisted of developer-contracted production or rental housing development projects sold to investors.

Revenue from International Operations declined to EUR 14.2 million (EUR 23.5 million). Construction of the Okhta Mall shopping centre generated most of the revenue. Operating profit was EUR -0.6 million (EUR -0.8 million). Cost savings measures contributed to the improvement in operating profit.

Of SVR's major international projects, the Pearl Plaza shopping centre in St. Petersburg was opened in August 2013, and the number of visitors has outperformed the target level. All of the shopping centre's premises have either been leased or a lease is in the final stages of negotiation. At the Okhta Mall shopping centre in St. Petersburg, preliminary lease agreements have been signed, or negotiations for preliminary lease agreements are under way, for over half of the retail space. The construction of Okhta Mall is proceeding according to plan.

SRV's large-scale project’s in Finland, the Kalasatama Centre’s, or REDI’s, tenant negotiations are under way for 70 per cent of the premises. This highlights the attractiveness of this SRV-developed project to shopping centre operators. Co-ownership-based investor negotiations for the REDI shopping centre and car park are at the final stage, and SRV intends to maintain a 40–50 per cent holding in the project. In connection with the successful conclusion of the investor and project financing negotiations, a contractor agreement of approximately EUR 350 million will be signed for Phase I of the REDI project.

SRV's own project development operations are paving the way for substantially increasing operating volumes 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 Kalasatama Centre, or REDI, in Helsinki, and a project to develop the area adjacent to the Niittykumpu metro station in Espoo. In St. Petersburg and Moscow, SRV will from now on focus on the development of shopping centre projects. SRV will harness the investment potential of the Russia Invest investment company in order to support the financing of these projects.

Financial targets

On 13 February 2014, SRV's Board of Directors confirmed the Group's strategic goals for 2014–2018. The following strategic targets were set as follows:

• During the strategic period, SRV will focus on improving profitability rather than on growth.
• The average annual revenue of International Operations will rise to more than EUR 150 million
• The operating profit margin will reach 6 per cent.
• The return on equity will be at least 15 per cent.
• The equity ratio will remain above 30 per cent.
• A dividend payment equalling 30 per cent of the annual result, taking into account the capital needs of business operations.

For the set targets to be achieved, the number of developer-contracted projects must be stepped up substantially.

Outlook for 2014 remains unchanged

The quarterly variation and development of revenue and result in 2014 will be affected by several factors, 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, the development of the order backlog's profit margins, the sales volume of developer-contracted housing and the completion schedules of the properties, the number of new contracts, the start-up of own projects, the project development nature of operations, and the realisation of planned project sales. Investor demand for commercial properties in Finland is estimated to remain muted and the outlook for 2014 does not include the sale of the Derby Business Park property. The construction of the REDI shopping centre that SRV is developing in Kalasatama is expected to start in 2014. Based on current completion schedules, SRV estimates that a total of 186 developer-contracted housing units will be completed during 2014.

SRV estimates that its developer-contracting volume will increase in 2014. The recognition of revenue and earnings in 2014 will be affected by the recognition of income upon delivery and the elimination of a share equivalent to SRV's holding from profit margins. The Group's full-year revenue is expected to be on a par with the previous year (EUR 679.4 million 1-12/2013) and profit before taxes to amount to EUR 10–20 million (EUR 22.8 million 1-12/2013).

Press conference

The interim report will be presented to the media and analysts at a press conference which will take place on 7 May 2014 at 10.30 a.m. at conference room Tapiola at Hotel Scandic Simonkenttä, address 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.

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, 6 May 2014

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.

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, +358 (201) 455 208, +358 (40) 504 3321