SRV's financial statement release, January–December 2015: Full-year revenue grows, order backlog nearly doubles

SRV GROUP PLC     FINANCIAL STATEMENT RELEASE 18 FEBRUARY 2016 at 8:30 AM     

SRV's financial statement release, January–December 2015: Full-year revenue grows, order backlog nearly doubles – good housing sales and result in the fourth quarter

January–December 2015 in brief:
• SRV's revenue totalled EUR 719.1 million (EUR 684.4 million 1-12/2014). Construction of the REDI shopping centre and parking facility began, contributing to this growth in revenue.
• Operating profit remained at the same level as in the previous year: EUR 24.4 (24.9) million.
• The result before taxes was EUR 17.6 (18.5) million. This includes a EUR -3.3 million fair value revaluation of a ten-year interest rate hedge in July.
• Earnings per share were EUR 0.25 (EUR 0.30).
• At year-end, the order backlog stood at EUR 1,583.4 (860.4) million. The order backlog rose to a record high, primarily due to the start-up of REDI and several other large-scale projects.
• The equity ratio stood at 42.5 (43.0) per cent and gearing at 83.3 (91.6) per cent.
• The proposed dividend is EUR 0.10 (0.07).

October–December 2015 in brief:
• SRV's revenue was EUR 226.6 million (EUR 193.8 million Q4/2014). Revenue increased due to the recognition of developer-contracted housing production.
• The operating profit also improved due to the recognition of developer-contracted housing production, totalling EUR 17.0 (9.6) million.
• The result before taxes was EUR 14.9 (7.2) million.
• Earnings per share were EUR 0.27 (EUR 0.11).
• New orders worth EUR 286.9 (108) million were received.

Events after the end of the reporting period:
• Advance marketing for the first REDI residential tower, Majakka, got off to a flying start in January. About 200 of the tower's 283 apartments have already been reserved.
• The City of Tampere chose a group formed by SRV to continue implementation of the Tampere Central Deck and Arena project worth EUR 500 million. Negotiations with several interested investors are ongoing, and the final decision on implementation will most likely be made in summer 2016.
• SRV's Board of Directors approved the updated vision, three strategic objectives, and six strategic development projects stated in the company’s strategy for 2016–2020
• SRV will implement the Aalto University’s new campus building in Otaniemi, Espoo and commercial premises in the Metro Centre, the total value of the project EUR 101 million

Outlook for 2016:
• Full-year revenue for 2016 is expected to grow and operating profit to improve on 2015 (revenue EUR 719 million and operating profit EUR 24.4 million).
• Due to the completion schedules of SRV's developer contracting housing projects, a significant proportion of the company's operating profit will be made in the second half of the year.

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

President & CEO Juha Pekka Ojala

2015 can be summed up in a couple of words – renewal and growth. The year brought many significant achievements in the company's history. Finland's largest – and also SRV's largest – ever construction project, REDI, finally reached full speed in April. Construction is progressing as planned and the project has been very well received in general. The best example of this is advance marketing of the first residential tower, Majakka, started in January. Already about 200 of the tower's almost 300 apartments have been reserved.

Another historic achievement has been the status of our order backlog throughout the year. New records were broken every quarter, and by the end of the year our order backlog stood at a staggering value of just under EUR 1.6 billion. Although several projects were completed during the fourth quarter, our order backlog still grew by almost EUR 300 million. Some major new projects worth mentioning are HKScan's new production facility in Rauma and a residential block in the Tikkurila district of Vantaa. Although growth cannot be expected to continue at this rate in 2016, there are no signs of it slowing down either.

In 2015, SRV finally proved that it has taken a permanent position at the forefront of residential construction. SRV is currently one of the capital city area's largest residential constructors. At the turn of the year, SRV had almost 1,900 housing units under construction, which is over 200 units more than a year ago. At the same time, we have increasingly been switching our focus to developer-contracting projects (apartments directly targeted at the consumer market), which can be seen as improved profitability. Our housing sales also deserve a special mention. 76 per cent of the units under construction at the turn of the year have been sold. This means we will be able to recognise income from these units as soon as they are completed in 2016–2017.

While work continues at full throttle on our about 80 construction sites, numerous new projects are also under development. One of the projects under development at the end of the year was Bunkkeri, in which we are helping to give a brand-new lease of life to a warehouse building in the Jätkäsaari district of Helsinki. This new entity comprises a swimming hall and sports facilities, as well as apartments rising above them, offering amazing views. In early 2016, we also announced our involvement in the development of the Kivenlahti Metro Centre and the Keilaniemi Ring Road I project, in which the Ring Road will be moved into a concrete tunnel and a green deck will be built above it. In Tampere, we will proceed with the unique EUR 500 million Tampere Central Deck and Arena project. We also have numerous other projects under development, especially along the Western Metro line and around other growth-centre traffic nodes.

In autumn 2015, we also started our strategy work. The final result contains a new vision, three strategic objectives and six strategic development programmes, and it is an excellent mark of our current management's and the entire organisation's ability to cooperate and achieve renewal. The majority of our development programmes are already fully underway, and we will be closely monitoring their progress. Our main focal points during 2016 will be profitability and the customer experience, responsibility, and personnel development.

The situation in Russia faces a lot of uncertainty, but we have a firm belief in our strategy for Russia. The Okhta Mall in St Petersburg will open its doors in August and leasing is progressing according to schedule – 32 per cent of the premises have already been leased, and negotiations are ongoing for over 20 per cent of the premises. The Pearl Plaza shopping centre, which has already been open for several years, attracted over a million more visitors in 2015 than in 2014, and sales in roubles were also up by 25 per cent. It's obvious that we won't actively be seeking new projects in the current climate; but focus on the construction of existing projects and our strengths in shopping centre management.

At SRV, we are entering 2016 in a positive and motivated frame of mind. This can be seen in the results of our latest personnel survey, in which SRV was nominated as the 11th Most Inspiring Finnish Workplace in Corporate Spirit's classification, already in its first year of participation.  Committed shareholders played a significant role last year, and will do so again this year. Late summer's share issue was a resounding success. One way in which we thank our shareholders for their commitment is stable dividend policy during the past years. By applying a combination of committed shareholders, skilled and motivated personnel, and our updated strategy to our many challenging – yet therefore even more rewarding – construction projects, we can expect 2016 to be a busy, interesting and, above all, successful year. A big thank you to everyone for 2015!

SRV Group Plc interim report, 1 January–31 December 2015

*) Comparative data is share issue adjusted.

Overall review

At the end of December, the Group's order backlog stood at EUR 1,583.4 (860.4) million thanks to new contractor agreements, the major ones being the REDI project and the Health and Wellbeing Centre in the Kalasatama district of Helsinki, Niittykumpu Metro Centre, the renovation of Helsinki City Theatre, the expansion of Tampere University Hospital, and HKScan's production facility investment. 80 per cent of the order backlog has been sold, a total of EUR 1,261 million. The value of the Group's new contracts rose to EUR 1,393.5 (700.3) million.

The Group's revenue increased to EUR 719.1 (684.4) million. The start-up of the REDI shopping centre and parking facility project in particular contributed to this rise in revenue, as quarrying and other infrastructure work completed before the contractor agreement was signed was recognised as revenue in accordance with the level of completion. A fall in revenue from housing production weakened the company's total revenue. The comparison figures for revenue in 2014 contain the sale of the Derby Business Park in the Perkkaa district of Espoo.

The Group's operating profit totalled EUR 24.4 (24.9) million, generating an operating margin of 3.4 (3.6) per cent. Developer-contracted housing projects completed in late 2015 and the increased profitability of projects had a favourable impact on SRV's operating profit, while a rise in the percentage of low-margin business contracting had a negative impact. Numerous large-scale projects started up in 2015, such as the REDI project in Kalasatama and the Niittykumpu Metro Centre, and the rise in the fixed costs incurred by their construction reduced SRV's operating profit. The comparison figures for operating profit in 2014 contain rental income from the Derby Business Park, which was sold during the third quarter.

Operating profit and its relative level is reduced by the elimination of a share equivalent to SRV's ownership from the profit margins of three shopping centre projects (Okhta Mall, Daily and REDI), which will be recognised as income only when the investment is sold.

Several factors contribute to the quarterly variation in SRV's 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; and the nature of the company's operations (project development).

Net financial expenses were EUR -6.8 (-6.4) million. Net financial expenses were improved by a fall in general interest rates, growth in interest income, exchange rate differences resulting from changes in the value of the rouble, and the recognition of EUR 1.4 million in credit loss provisions. In addition to an increase in net debt, net financial expenses were weakened by a EUR -3.3 million fair value revaluation of a ten-year interest rate hedge in July.

The Group's profit before taxes was EUR 17.6 (18.5) million. Net profit for the reporting period was EUR 14.0 (15.4) million. Income taxes totalled EUR -3.6 (-3.2) million. Earnings per share were EUR 0.25 (EUR 0.30). In spite of SRV's record-breaking order backlog and considerable investments made in the REDI project, the Group's equity ratio remained almost unchanged at 42.5 (43.0) per cent thanks to positive cash flow and a share issue during the reporting period.

Fourth-quarter revenue totalled EUR 226.6 (193.8) million, generating an operating profit of EUR 17.0 (9.6) million. The completion of 225 developer-contracted housing units during the quarter, and the subsequent recognition of income from sold units in the income statement, had a particularly favourable impact on SRV's operating profit. The improved profitability of several construction projects also contributed favourably to operating profit. However, a rise in the percentage of lower-margin business contracting and fixed costs incurred by several large-scale projects had a negative impact. The Group's result before taxes was EUR 14.9 (7.2) million, including a EUR -0.5 million fair value revaluation of a ten-year interest rate hedge in July.

Events after the end of the reporting period

The Keilaniemi project in Espoo progressed in January 2016 when SRV was chosen as the contractor for the Keilaniemi Ring Road I project. The project started up in January, and SRV Infra Ltd is implementing its street and road construction work as head contractor in cooperation with the City of Espoo, the Finnish Transport Agency, and the Uusimaa Centre for Economic Development, Transport and the Environment (ELY Centre). During the project, Ring Road I will be moved into an underground concrete tunnel and a green deck will be built above it. The tunnel will enable the construction of the new towers planned for the area.

Majakka is the first residential tower in Finland's largest urban construction site, the REDI project in the Kalasatama district of Helsinki. Advance marketing for Majakka was launched in January and exceeded expectations. About 200 of the tower's 283 apartments are reserved at the moment. At a height of 132 metres, Majakka will be Finland's tallest residential building when completed in late 2018. Its apartments will be located above the shopping centre on floors 6–35, guaranteeing magnificent views across Kalasatama from every storey. Majakka offers apartments for a variety of needs and different life stages. The apartments vary in size from 33 square metres two-room apartments to the 142.5 square metres luxury apartments on the top floor. There are three different equipment and décor options available, and residents can also choose from three different color palettes.
SRV was chosen to further develop the Tampere Central Deck and Arena project of Tampere City.  The project comprising an indoor arena and office, commercial and hotel premises as well as housing units is worth EUR 500 million. Negotiations with several interested investors are ongoing, and the final decision on implementation will most likely be made in summer 2016. The construction work is scheduled to begin in spring 2017, and to be completed in stages during 2020-2023.

SRV will participate in developing the focal point of Aalto University’s campus by building in Otaniemi a new campus building as well as commercial premises in the Metro Centre. School of Arts, Design and Architecture will move into the building, designed by Verstas Arkkitehdit Oy, after it is completed in stages, in April-June 2018. The total value of the project, to be launched in February, is approximately EUR 101 million.

Another project worth mentioning from after the end of the reporting period is the new Kivenlahti Metro Centre in Espoo and its surrounding residential blocks. The Trade and Competitiveness Division of the Espoo City Board has reserved an area for SRV and VVO to design the Kivenlahti Metro Centre. The Metro Centre will be built around the entrance to the new metro station, and will include office and commercial premises and an extensive area of housing. According to the plan, a total of about 1,200 housing units will be built in the area, covering approximately 76,000 square metres, plus approximately 56,000 square metres of office, commercial and services premises, and a bus terminal and park-and-ride spaces.  The first phase will include construction of the new Metro Centre, the bus terminal and the park-and-ride spaces at the same time as the Western Metro line itself. Construction will be launched once the Kivenlahti city plan has been finalised, most likely in 2017–2018, and the Metro Centre should be completed in the early 2020s.

Outlook for 2016

In addition to general economic trends, SRV's revenue and result will be affected by several factors in 2016, 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 launch of new contracts and development projects. SRV's largest project is the REDI project in the Kalasatama district of Helsinki, which was launched in April. Based on current schedules, SRV estimates that a total of 503 developer-contracted residential units will be completed during 2016.

The Group's full-year revenue for 2016 is expected to grow and operating profit to improve on 2015 (revenue EUR 719 million and operating profit EUR 24.4 million). Due to the completion schedules of SRV's developer contracting housing projects, a significant proportion of the company's operating profit will be made in the second half of the year. The financing costs will increase due to additional financing needed for increasing order backlog.

Press conference

The financial statement release will be presented to the media and analysts at the press conference which will take place on Thursday 18 February at 11.00 a.m. at the new Living Lab –test environment that presents REDI project, Kalasatama area and the housing to be constructed, address Kaasutehtaankatu 1, rakennus 6, 3rd floor, 00540 Helsinki. The press conference will be held in Finnish. CEO Juha Pekka Ojala and CFO Ilkka Pitkänen will be present.

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 will be published both in Finnish and English at the company's website after the press conference.

Proposal for the distribution of profits

The parent company’s distributable funds on 31 December 2015 are          EUR 181,253,044.13
of which net profit for the financial year is                                                      EUR 3,172,825.44

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

A dividend of EUR 0.10 per share be paid to shareholders, or                     EUR 6,049,957.50
The amount to be transferred to shareholders' equity is                               EUR 175,203,086.63

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.

Espoo, 17 February 2016

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:
Juha Pekka Ojala, CEO, +358 (201) 455 213
Ilkka Pitkänen, CFO, +358 (40) 6670906
Päivi Kauhanen, Vice President, Communications, +358 (50) 598 9560

www.srv.fi