SRV's financial statement release, January–December 2017: Revenue exceeds the one billion euro milestone, operative operating profit improves

SRV GROUP PLC     FINANCIAL STATEMENT RELEASE    16 FEBRUARY 2018, 8:30 AM

SRV's financial statement release, January–December 2017: Revenue exceeds the one billion euro milestone, operative operating profit improves

January-December 2017 in brief:

• Revenue grew to a new all-time high at EUR 1,116.1 (884.1 1−12/2016) million (up 26%). Revenue growth was driven by an increase in the revenue of Operations in Finland. Business construction in Finland posted the greatest growth, while in percentage terms the highest increase was seen in the housing business.
   
• Operative operating profit* amounted to EUR 28.7 (26.3) million (up 9.1%). Revenue growth in Operations in Finland and the recognition of almost twice as many developer-contracted housing units than in 2016 had a favourable impact on operative operating profit. Operative operating profit was weakened by longer delivery periods and a rise in costs due to the market situation, which led to lower-than-expected margins in certain projects that are under construction as well as by the cost impact of one project that has already been completed.
   
• Operating profit decreased to EUR 17.1 (27.7) million. Operating profit was weakened by the decline in the operating profit of International Operations to EUR -18.4 (-4.2) million. The operating profit of International Operations was impacted above all by the change in the rouble exchange rate, which had a net effect of EUR -11.7 million. The exchange rate impact is caused by the conversion of euro-denominated loans to roubles and because of the hedging expenses.
   
• The result before taxes was EUR 4.6 (16.4) million.
   
• Earnings per share were EUR 0.05 (0.15).
   
• At period-end, the order backlog stood at EUR 1,547.9 (1,758.5) million. The order backlog declined slightly because many large projects, such as the Nova Hospital in Central Finland, were recorded in the order backlog during the comparison year.
   
• Equity ratio was 35.5 (38.3) per cent and gearing was 105.0 (83.4) per cent. The growth in net debt due to invested capital and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.
   
• Proposed dividend per share is EUR 0.06 (EUR 0.10).

*In order to improve comparability in the case of actual earnings, as from 20 July 2017 SRV has adopted the new concept of “operative operating profit”. It differs from the IFRS definition of operating profit in that it eliminates the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts.

October–December 2017 in brief:

• Revenue increased to EUR 339.3 (328.7 10–12/2016) million. Revenue improved thanks to an increase in the revenue of Operations in Finland; the largest growth was seen in business construction in Finland.
   
• Operative operating profit decreased to EUR 14.2 (15.4) million. Operating profit was weakened by longer delivery periods and a rise in costs due to the market situation which led to lower-than-expected margins in certain projects that are under construction and the cost impact of one project that has already been completed.

• Operating profit was EUR 11.4 (16.2) million. Operating profit was weakened by the operating profit of International Operations, with the rouble exchange rate having an impact of EUR -2.8 million. The exchange rate impact is caused by the conversion of euro-denominated loans to roubles and because of the hedging expenses.

• The result before taxes was EUR 9.3 (19.4) million.
   
• Earnings per share were EUR 0.18 (0.26).

Outlook for 2018

• Fewer developer-contracted housing units will be completed in 2018 than in the comparison period. It is estimated that a total of 526 housing units will be completed in 2018 (782 in 2017). Although housing will be completed on a steadier schedule in 2018 than in the previous year, a significant part of operating profit will still be made in the second half of the year. In addition, earnings in 2018 will be impacted by the lower-than-expected margins of certain ongoing projects.
   
• Full-year consolidated revenue for 2018 is expected to decline compared with 2017 (revenue EUR 1,116.1 million). Operative operating profit is expected to be lower than in 2017 (operative operating profit EUR 28.7 million).
   
• After 2018, an atypical year, the company anticipates that it will achieve its strategic earnings level by the end of 2022.

CEO's review

In 2017, SRV’s revenue rose to over one billion euros for the first time in its history. Growth in recent years has been driven by the positive trend in our entire industry and above all by the numerous large projects that we have developed and built. Operative operating profit improved slightly in 2017, but it is clear that we still have much work to do to reach our operating profit target. The construction market is hot, which contributed to boosting the costs of both raw materials and labour. However, we managed to ensure that our production chain runs smoothly and also maintained quality at a high level. Full-year earnings were impacted by the lower-than-expected margins of some of our projects that are under construction.

After several record-breaking quarters, our order backlog has settled at around EUR 1.5 billion. Our largest new projects are the Siltasairaala Hospital in Helsinki - the biggest hospital project in the history of the Hospital District of Helsinki and Uusimaa HUS - and the Tampere Central Deck and Arena project, which was greenlit in early 2018. In addition to Tampere, our own project development includes the Pressi project in Vantaa, which we announced after the review period in February.Talking about projects under construction, in REDI the work is progressing on schedule and the shopping centre will open its doors this coming autumn, as planned. The residents of Majakka, the first residential tower, can move into their new homes in spring 2019.

The Russian property market picked up significantly in 2017. As a result, after the end of the review period, we announced in February 2018 that we will investigate the possible sale of the Pearl Plaza shopping centre.  Generally, shopping centres achieve their target rent level three to four years after opening, and Pearl Plaza has performed in line with those expectations. The premises in this shopping centre have been fully leased almost continuously since it opened in 2013. It has broken visitor records year after year and the recent trend in its rent levels has also been favourable.

Looking at 2017 as a whole, we can state that we are heading in the right direction in many ways. We successfully stepped up the share of revenue accounted for by our housing production, thereby bolstering the amount and earnings trend of our housing construction. Almost twice as many housing units were recognised as income in 2017 than in the previous year. The number of completed housing units will decline in 2018 due to the lower number of start-ups in 2016. In 2017, we once again stepped up our production of housing units, which will give a boost to our earnings in the future. Our housing business was also upbeat thanks to excellent sales of housing throughout 2017 and our announcement, made today, that the advance marketing of Loisto, the second REDI residential tower, will begin in April 2018.

Recently, there has been much public discussion about the pricing of apartments and the availability of loans. We wish to contribute to meeting demand, and in the future we will offer at all of our housing locations two different pricing principles, depending on whether or not the buyer wishes to use a housing corporation loan. In addition to improving customers’ freedom of choice and transparency, we aim through the change to do what we can to reduce the participation of RS lending. The availability of RS financing is, in the short term, an even greater bottleneck than the availability of building land.

Our theme for the year 2018 is to to improve profitability and lighten the balance sheet. We still believe that our strategic measures will yield results and that we will reach our profitability targets towards the end of the current strategy period in 2022.

Finally, I would like to thank our wonderful personnel for 2017!

Juha Pekka Ojala, President and CEO

Overall review

¹⁾ Operative operating profit is determined by deducting the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts from operating profit. Exchange rate differences during the review period amounted to EUR -11.7 (1.3) million, with hedging expenses of EUR -2.5 (-8.8) million.

January-December 2017

The Group’s revenue grew to a new all-time high at EUR 1,116.1 (884.1 in 1−12/2016) million (up 26%). Revenue growth was driven by an increase in the revenue of Operations in Finland. Business construction in Finland posted the greatest growth, while in percentage terms the highest increase was seen in the housing business. Large business premises projects, such as the construction of hospitals and shopping centres, also increased revenue. The recognition of income from twice as many developer-contracted housing units than in 2016, a total of 825 (499), particularly contributed to revenue growth.

The Group’s operative operating profit amounted to EUR 28.7 (26.3) million (up 9.1%). Revenue growth in Operations in Finland and the recognition of more developer-contracted housing than in the corresponding period of the previous year had a favourable impact on the operative operating profit. Operative operating profit was weakened by longer delivery periods and a rise in costs due to the market situation, which led to lower-than-expected margins in certain projects that are under construction as well as by the cost impact of one project that has already been completed.

The Group’s operating profit declined to EUR 17.1 (27.7) million. Operating profit was weakened by the decline in the operating profit of International Operations to EUR -18.4 (-4.2) million. The result of International Operations was impacted above all by the change in the rouble exchange rate, which had an effect of EUR -11.7 million. The exchange rate impact is primarily caused by the conversion of euro-denominated loans to roubles. Exchange rate differences vary in each financial statement in line with fluctuations in the exchange rate of the rouble. The difference has no impact on cash flow.

The Group’s order backlog stood at EUR 1,547.9 (1,758.5) million. The order backlog declined because many large projects, such as the Nova Hospital in Central Finland, were recorded in the order backlog in 2016. Several new agreements valued at a total of almost EUR 771.4 million were signed in January-December 2017. In the last quarter, Phase I agreements valued at a total of EUR 210 million for the Tampere Central Deck and Arena were recognised in the order backlog. After the review period, many other new projects have already been included in the order backlog in early 2018, such as the Siltasairaala Hospital in Meilahti, Helsinki, recognised in January. Other projects that are expected to be included in the order backlog later in 2018 include the remaining Phase 1 agreements for the Tampere Central Deck and Arena, the expansion of Helsinki Airport and the renovation of its Terminal 2.

The Group’s profit before taxes totalled EUR 4.6 (16.4) million.

The Group's earnings per share were EUR 0.05 (EUR 0.15). The earnings per share for the comparison period were impacted by, for instance, the non-recurring cost of repaying the hybrid bond.

The Group’s equity ratio stood at 35.5 (38.3) per cent and gearing at 105.0 (83.4) per cent. An increase in net interest-bearing debt due to growth in invested capital and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.

SRV has added the capital invested in the construction and property development businesses to its financial statement release, as well as the returns on these investments. By nature, SRV’s businesses consist of construction and related property development, as well as investment in SRV’s own projects. As these two businesses differ in nature, the segment reporting is considered to be changed from the beginning of 2019 and begin providing additional information about the capital invested in these and the return on investmen already during 2018.

The construction business includes all of the capital required for construction and developer contracting for housing production, as well as the required plots of land. The property development business consists of projects for commercial premises in which the company is an investor, and the primary intention is to sell the projects several years after construction is complete and the property has attained a normal occupancy rate and standard. The property development operations report on commercial premises that are under development and completed and where the company acts as a longer-term investor. Plots that the company develops itself and where the expected returns arise from the development are also reported as part of property development.

All of the relevant balance sheet items have been allocated to operations, as well as the operating expenses. The Group’s invested capital is accounted for by the construction and property development operations calculated together, but the difference between them is in the elimination of construction profit margins. This division of the businesses aptly describes the company’s capital requirements and profitability levels. Construction generates a stable operating profit, the requirement for invested capital is lower and the turnover rate is higher. Property development ties up more capital for a longer period. In the construction business, revenue and profit are realised more rapidly than in property development, where profits are usually only obtained when the sites are sold off.

Financial objectives

SRV’s strategy and all of its operations are guided by the 2018–2022 strategic financial objectives that were approved in February 2018: 

• After a phase of rapid revenue growth, SRV primarily seeks to increase annual operative operating profit.
   
• The operative operating profit margin of construction will rise  to 8 per cent. Of this objective, 6 per cent will arise from construction margin and 2 per cent from shopping centre rental income as part of associated company holdings.
   
• Return on equity will be at least 15 per cent by the end of the strategy period
   
• Return on investment will rise to at least 12 per cent by the end of the strategy period
   
• The equity ratio will remain above 35 per cent
   
• The long term objective is to distribute dividend of 30-50 per cent of the annual result, taking into account the capital needs of business operations.

The achievement of these strategic objectives will be based on moderate but steady economic growth in Finland, and Russia’s economy stabilising at a slightly stronger level. Growth in SRV’s developer-contracted projects is also required. SRV seeks to divest shopping centres that are in the management phase when the market situation allows. SRV will continue to develop projects in Russia that can be launched when the Group’s capital structure allows and the financial criteria of the properties are fulfilled.

Reaching the profitability targets requires not only boosting the efficiency of the company’s own operations, but also the more prudent selection of new projects with regard to profitability and capital commitment.

Proposal for the distribution of profits

The parent company’s distributable funds on 31 December 2017 are EUR 169,838,837.83, of which net profit for the financial year is EUR 4,599,761.17.

The Board of Directors proposes to the Annual General Meeting that distributable funds be disposed of as follows: A dividend of EUR 0.06 per share be paid to shareholders, or EUR 3 629974.50. The amount to be transferred to shareholders' equity is EUR 166 208 863.33.

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.
 

Events after the period

• On January 12 2018, the implementation of the Central Deck and Arena, a project developed by SRV in the heart of Tampere was confirmed in January 2018. Construction work has begun in the vicinity of the Tampere railway station. At the same time, the project schedule and total value were specified. Central Deck and Arena is valued at a total of about EUR 550 million and its final sections are currently scheduled to be completed in 2024. The investment agreement for Phase I of the project accounts for about EUR 340 million of the total value. SRV, LocalTapiola and OP Financial Group’s insurance and pension insurance companies comprise the project investor group, with equal shareholdings.
   
• On 5 January 2018, the Hospital District of Helsinki and Uusimaa HUS decided to start up the implementation phase of the Siltasairaala Hospital with SRV. Construction work on the site in Meilahti, Helsinki, started at the beginning of 2018. It is the largest construction project in the history of HUS. The Siltasairaala project will be recognised in SRV’s order backlog valued at its target budget of EUR 243 million.

• On 6 February 2018, SRV’s Board of Directors has decided to investigate the possible sale of the Pearl Plaza shopping centre in St Petersburg with the other owner of the centre, the Chinese company Shanghai Industrial Investment Holdings. SRV does not express detailed views about the probability, date or target price of the potential sale. The refinancing of Pearl Plaza was completed in February 2018 when the real estate company that owns the shopping centre signed a largely rouble-denominated ten-year loan agreement valued at about EUR 95 million. The previous Pearl Plaza loan agreement was denominated in euros. SRV’s transaction risk largely comprises the euro-denominated loans of associated companies that are partly owned by SRV, and thus the new Pearl Plaza loan agreement reduces the risk posed by changes in the rouble exchange rate.

General Meeting

It is planned that the Annual General Meeting of SRV Group Plc will be held on 20 March 2018. The Annual General Meeting will deal with the matters specified in Article 11 of the Articles of Association and any other Board proposals. The Board of Directors will decide on the notice of meeting and the proposals to be included therein at a later date.

15 February 2018, Espoo

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.

Invitation to a press conference: SRV’s financial statement 2017

The financial statement release will be presented to the media and analysts at the press conference which will take place on Friday 16 February 2018 at 12.00 at Living Lab -test environment, 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.

For further information, please contact

Juha Pekka Ojala, CEO, +358 (0)40 733 4173, jp.ojala@srv.fi
Ilkka Pitkänen, CFO, +358 (0)40 667 0906, ilkka.pitkanen@srv.fi
Päivi Kauhanen, SVP, Communications, +358 (0)50 598 9560, paivi.kauhanen@srv.fi

www.srv.fi

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