SRV’s financial statement release January–December 2020: Positive trend in profitability and strong cash flow, result burdened by revaluation

SRV GROUP PLC     FINANCIAL STATEMENT RELEASE     4 FEBRUARY 2021      8:30 EET

SRV’s financial statement release January–December 2020: Positive trend in profitability and strong cash flow, result burdened by revaluations

January-December 2020 in brief:

• Revenue declined by 8.1 per cent to EUR 975.5 million (1,060.9 1−12/2019). Revenue declined mainly because fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 515 (833).
• Operative operating profit amounted to EUR 5.8 (-96.8) million. Operative operating profit was improved particularly by construction sites’ favourable earnings trends. Operative operating profit was significantly negatively impacted by changes in the valuation of balance sheet items in the Investments segment, which had a combined net impact of around EUR -12.3 million. The decrease in rental income from shopping centres due to the coronavirus pandemic also had a negative impact on operative operating profit. Operative operating profit for the comparison period was burdened by impairments of EUR 96.5 million, the weakening of margins by EUR 11 million and other exceptional items amounting to EUR 7.9 million.
• Operating profit was EUR 1.5 (-93.0) million. Operating profit was influenced by the change in the exchange rate of the rouble, which had a net impact of EUR -4.4 (3.8) million. The exchange rate impact, which largely had no effect on cash flow, was caused by the valuation of the euro-denominated loans of associated companies in roubles, hedging expenses and changes in the market value of hedges.
• The result before taxes was EUR -28.0 (-122.4) million. This includes currency exchange rate losses with no cash flow impact of EUR -18.0 million (exchange rate gains of 11.9). In addition, the result includes a total of EUR -13.8 million in revaluations with no cash flow impact.
• Cash flow from business and investment activities totalled EUR 73.0 (-16.7) million. Cash flow was improved particularly by the positive cash flow from the construction business, the realisation of holdings in both REDI and the Tampere Deck and Arena as well as the release of capital due to the sale of contract sites to investors.
• Earnings per share were EUR -0.15 (-1.52). The comparison figure has been adjusted for share issues.
• At period-end, the order backlog stood at EUR 1,153.4 (1,344.2) million. New agreements valued at EUR 707.1 (487.6) million were signed in January–December, a year-on-year increase of 44.2 per cent. The sold share of the order backlog was 86.4 (80.5) per cent.
• In spite of the coronavirus pandemic, we have been able to keep our construction sites running during the pandemic. The construction sites have progressed mainly as planned. That said, precautionary measures against the pandemic have caused additional costs. The pandemic slowed down housing sales in the second quarter, but sales recovered towards the end of the year. The restrictions imposed by the Russian authorities on shopping centre operations impacted on the result for the review period.
• During the first half of the year, the company carried out a significant number of measures to improve its balance sheet and liquidity as part of its recovery programme. These measures improved both the equity ratio and gearing. Rouble exchange rate movements and revaluations in turn weakened the equity ratio and gearing. The equity ratio was 22.6 (21.2) per cent and gearing was 159.7 (240.3) per cent. Excluding the impact of IFRS 16, equity ratio was 27.8 (26.4) per cent and gearing was 82.1 (151.2). Equity ratio in accordance with the loan covenant calculation was 28.7 per cent. The equity ratio level was affected by the high amount of cash and cash equivalents on the balance sheet date, EUR 96.7 million. The company can improve its equity ratio by using cash and cash equivalents to repay debts.

14. The company publishes alternative key figures that have been adjusted to remove the impact of IFRS 16 Leases on the balance sheet and result. The company also discloses its operative operating profit, which is determined by deducting the calculated rouble exchange differences included in financial items and their potential hedging impacts from operating profit.

October–December 2020 in brief: 

• Revenue in October-December amounted to EUR 292.5 (403.8) million. Revenue declined mainly because fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 235 (532).
• Operative operating profit amounted to EUR -6.8 (-87.2) million. Operative operating profit was improved particularly by construction sites’ favourable earnings trends. Operative operating profit was negatively impacted by changes in the valuation of balance sheet items in the Investments segment, which had a combined negative impact of around EUR -12.3 million. The decrease in rental income from shopping centres due to the coronavirus pandemic also had a negative impact on operative operating profit. The operative operating profit for the comparison period was burdened by EUR 92.9 million in impairments.
• Operating profit was EUR -8.0 (-86.8) million.
• The year-on-year decrease in new contracts recognised in the order backlog was 1.5 per cent, amounting to EUR 140.7 (142.9) million.

Events after the period

• SRV announced its new strategy and long-term financial objectives for 2021-24 on 4 February 2021. 
• On 14 January 2021, SRV appointed Jouni Forsman as Senior Vice President, Business Premises in the Helsinki metropolitan area and as a member of the Corporate Executive Team.
• On 13 January 2021, SRV specified its estimate of operative operating profit for 2020 due to changes in the valuation of certain balance sheet items in the Investments segment.

Outlook for 2021

During 2021, 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 part of the order backlog that is recognised as income over time mainly consists of contracting; trends in the order backlog's profit margins; the start-up of new contracts and development projects; and the rouble exchange rate and the development of the Russian economy. To date, the impacts of the pandemic have been moderate on the whole, but its effects on the construction market are unclear and cause uncertainty regarding the outlook for the future. The result for 2021 is also affected by the fact that the company has not been able to start up developer-contracted housing projects in line with the target schedule of the recovery programme. In 2021, the company continues to focus on reducing its debt-to-equity ratio and strengthening strong cash flow.

SRV will revise the definition of operative operating profit in order to improve comparability and transparency in reporting in 2021. The old definition of operative operating profit has been used in this financial statement release, with the exception of the outlook for 2021:

• Consolidated revenue for 2021 is expected to amount to EUR 900 – 1,050 million (revenue in 2020: EUR 975.5 million). 
• Operative operating profit is expected to improve on 2020 and to amount to EUR 16-26 million (operative operating profit for 2020 in accordance with the new definition: EUR 15.8 million). 

The new definition of operative operating profit also adjusts items affecting comparability. The new definition used in providing the outlook for 2021 is:

Operative operating profit = Operating profit +/- exchange rate gains and losses of associated companies and joint ventures as well as income and expenses from currency hedging +/- items affecting comparability

Items affecting comparability = Impairments of asset items and their reversal, gains and losses from exceptional handovers of asset items, and income and expenses due to changes in the Group structure

Operative operating profit’s reconciliation table

SRV will publish the comparison data for 2020 in a separate release during the first quarter.

CEO's review

In 2020, we worked hard and got things done. Thanks to the successful implementation of our recovery programme, we significantly bolstered our balance sheet and financial position, and confidence in SRV improved substantially during the report year. The controllability and profitability of construction improved. In spite of the difficult pandemic situation, the sales figures of the Russian shopping centres recovered almost to the same level as in 2019 when restrictions were relaxed in the latter part of the year. After the end of the review period, we completed our strategy work. We published the results of these efforts and our revised financial objectives for 2021-2024 in connection with these annual results.

Our operational activities developed well during the year, but we still have much to gain in the improvement of profitability, especially in housing construction in the Capital Area and boosting efficiency throughout our chain of operations. The earnings trend in construction remained favourable during the review period and our ongoing projects progressed largely in line with plans. However, operative operating profit was impacted by changes in the valuation of balance sheet items in the Investments segment, which had a combined negative impact of around EUR -12 million. These changes in value consist of a decrease in the value of the additional sales price of the REDI shopping centre, the reclassification of the Pearl Plaza shopping centre and changes in the value of two other asset items.

In the fourth quarter, we recognised a school project, three rental housing projects, one office and retail premises project and a hydroelectric power plant in our order backlog. Our intake of new agreements during the review period outperformed the previous period. Although our order backlog declined, it remains strong in both business and housing construction. Of our new projects, the Helsinki Upper Secondary School of Languages will be implemented as a lifecycle project, with SRV taking on responsibility for the design, implementation, maintenance and upkeep of the property for 20 years. It is the fourth lifecycle project that we have won in a short period of time. This is exactly the kind of expertise that our concept of lifecycle-wise construction is based on. In the next phases, we will offer lifecycle-wise construction to our customers in projects sold to investors and in cooperative contracts.

Towards the end of the year, housing sales continued to be extremely strong and the number of unsold completed housing units has remained moderate. In Finland, there are 92 unsold housing units, while the remaining units in Russia were sold in 2020. Sales of our largest projects – Loisto in Helsinki and Wallesmanni in Tampere – are progressing in line with plans. We started up the construction of a developer-contracted housing project in Helsinki that had been on hold for around a year and a half. These apartments will be recognised as income in 2022. Where possible, we are seeking to increase the number of good developer-contracted projects alongside projects sold to investors in a controlled manner so that our product offering is a better match for both demand and our financial objectives.

After coronavirus restrictions were relaxed in Russia, the sales volumes of the country’s shopping centres recovered vigorously, almost reaching the same level as a year ago. The company’s holding in the Pearl Plaza shopping centre was previously designated as an asset held for sale. The second wave of the pandemic was the main reason why the sales negotiations ended without reaching an agreement. We are now focusing on developing the operations of the shopping centre and will look into its potential sale when the market situation improves.

The exceptional arrangements implemented to prepare for the coronavirus pandemic in construction operations ushered in some additional costs during the fourth quarter as well, but we have avoided the most serious consequences and our sites have remained in operation in spite of the unusual circumstances. To date, the impacts of the pandemic have been moderate on the whole, but its effects on the construction market are still unclear and cloud the outlook for the future.

We will continue to develop our business and will start executing our revised strategy with our renewed Corporate Executive Team. I believe that the wide variety of expertise and new perspectives represented on the Corporate Executive Team, combined with the strong skills of our employees, will substantially bolster our customer focus, improvement of profitability and execution of our new strategy.

We have outlined in our strategy that our objective is to create a new lifecycle-wise reality, where decisions related to construction ensure well-being, value and profitability – for years and generations to come. The strategy aims to develop a long-term competitive advantage, an excellent customer experience, open up opportunities for lifecycle services, and improve profitability and reduce indebtedness. I would like to warmly thank our customers, financiers, all partners and employees for your strong commitment and excellent work. Together towards a lifecycle-wise reality!

Saku Sipola, President & CEO

Overall review

1. Operative operating profit for 2020 is determined by deducting the calculated rouble exchange differences included in financial items and their potential hedging impacts from operating profit. Net exchange rate differences during the review period amounted to EUR -4.4 (3.8) million, of which the effect of currency hedging was EUR 5.5 (-3.8) million.
2. The figure has been adjusted to remove the impacts of IFRS 16.
3.  The Group’s order backlog consists of the Construction business.

Construction January-December 2020

Revenue from Construction decreased to EUR 970.0 million (1,057.7 1–12/2019) in the January–December period. Revenue from housing construction was down 23.4 per cent. Revenue declined mainly because fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 515 (833).

Construction’s operating profit rose to EUR 27.4 (7.0) million. Operating profit was improved particularly by construction sites’ favourable earnings trends. The profitability trend was particularly favourable in business construction. On the other hand, fewer apartments were completed and recognised as income than in the comparison period, which had a negative impact on operating profit. Operating profit for the comparison period was burdened by the weakening of margins by EUR 11 million and other exceptional items amounting to EUR 7.9 million.

Construction’s order backlog stood at EUR 1,153.4 (1,344.2) million. Several of the new projects entered into the order backlog during the January–December period were for investors and public-sector organisations of good financial standing, and none of SRV’s capital will be tied up in these projects. The company has enhanced its project selection process in the manner described in the recovery programme. Although the order backlog has declined, it remains at a good level, and 86.4 (80.5) per cent of the order backlog has been sold. New agreements valued at EUR 707.1 (487.6) million were recognised in the order backlog in January–December.

The most significant projects recorded in the order backlog in the fourth quarter of the year were a school project in Helsinki, three rental housing projects in Tampere, an office and retail premises project in Tikkurila and the Kuhankoski hydroelectric power plant. Projects entered into the order backlog in the third quarter included premises for the Finnish Security and Intelligence Service, a design contract for the Uusikaupunki education and wellness campus, and a housing project with 47 units for Tampereen Vuokra-asunnot. Major projects recognised in the second quarter were the basic renovation of operating theatres at HUS Jorvi Hospital, the Siuntio education and wellness campus, which will be implemented as a lifecycle project, the Jousenkaari school in Espoo, the Hovirinta school in Kaarina, the Ojanko bus depot in Vantaa and the residential buildings Lumo One and Piispanristi for Kojamo. The basic renovation project for the Finnish National Theatre was recognised in the first quarter. Work on the basic renovation project of the Finnish National Theatre has begun in phases. The renovation of the section completed in the 1950s is ongoing. Due to a complaint lodged with the Administrative Court about the deviation decision concerning the building permit of the project, the startup of work on the section completed in the 1930s has been postponed until the complaint has been resolved.

Construction’s capital employed totalled EUR 368.8 (372.9) million.

Investments January-December 2020

Investments’ revenue totalled EUR 4.8 million in the January–December period (5.9 1–12/2019). It mainly consists of revenue from shopping centre management. In accordance with SRV’s operating model, revenue from associated companies’ projects and joint ventures is reported under the Construction segment.

The operative operating profit totalled EUR -18.0 (-96.3) million. In addition to SRV’s Group companies, the result contains shares of the results of the associated companies that own the Okhta Mall and Pearl Plaza shopping centres, including not only their operating margin, but also depreciation, financial expenses and taxes. Operative operating profit was significantly negatively impacted by changes in the valuation of balance sheet items in the Investments segment, which had a combined impact of around EUR -12.3 million. Pearl Plaza was reclassified as a holding in associated companies and joint ventures during the fourth quarter when the sales negotiations ended without reaching an agreement. Due to this reclassification, an impairment recognised in 2019 was reversed, with a positive impact of about EUR 6.9 million on operative operating profit for 2020. The value of the additional sales price of the REDI shopping centre was decreased by EUR 13.0 million during the fourth quarter on the basis of an updated cash flow-based forecast. In addition, a write-down of about EUR 5.4 million for SRV’s holding in Okhta Mall and a write-down of EUR 0.8 million for the Ratsumestarinkatu 6 commercial property in Porvoo were recognised in operative operating profit. The company also recognised EUR 0.5 million in income with a cash flow impact due to the final dissolution of the investment in the VTBC fund. The decrease in rental income from shopping centres due to the coronavirus pandemic also had a negative impact on operative operating profit.

In the case of the Russian subsidiary, a EUR 3.1 million provision for expenses that was recognised in the second quarter of the year was dissolved in the third quarter when the court of second instance overturned the ruling on compensation by the court of first instance. The dissolution of the provision had an impact of EUR 2.7 million at the September exchange rate, and thus the euro-denominated result for the review period is burdened by expenses of EUR 0.4 million. The plaintiff has appealed to the court of third instance, but proceedings have not as yet begun.  The lawsuit concerned an agreement for an electrical connection that was never implemented.

The coronavirus pandemic that began at the end of the first quarter of 2020 has negatively impacted shopping centre operations by undermining tenants’ ability to do business. The authorities restricted the opening of stores in March-August, which weakened the operational capabilities of shopping centres and reduced their rental income. Shopping centres opened gradually in the third quarter, which was reflected in the rising visitor numbers and sales in August to September. Shopping centres remained open in October-December, but the coronavirus restrictions continued to have an impact on the business of some of the tenants. The decline in rental income has short-term impacts on the liquidity and loan management capabilities of shopping centres. SRV has agreed on arrangements with banks and co-investors in the shopping centres to secure financing for the shopping centres during the period in which the restrictions set by the authorities are in effect.

The coronavirus restrictions imposed in Russia vary from city to city. In St Petersburg, most of the tenants in the shopping centres managed by SRV closed their doors on 28 March, in compliance with official regulations, and only essential services such as pharmacies and grocery stores remained open.  Most of the shops could be opened again in July-August. In Moscow, shopping centres closed their doors about one week earlier than in St Petersburg, and the operations of tenants there returned closer to normal earlier than in St Petersburg as restrictions were gradually lifted.

Investments’ operating profit was EUR -22.4 (-92.5) million. The net effect of currency exchange fluctuations was EUR -4.4 (3.8) million, which arose from valuation of the euro-denominated loans of associated companies in roubles and the net impact of currency hedging. Exchange rate differences with no impact on cash flow vary in each interim report in line with fluctuations in the exchange rate of the rouble.

Capital employed totalled EUR 171.9 million (245.7 12/2019). Capital employed was reduced by the divestment of SRV’s holding in REDI and a change in the value of its additional sales price receivable in the last quarter, as well as a decrease in the company’s holding in the Tampere Deck and Arena project in the first quarter. In addition, a capital return of about EUR 7 million from Pearl Plaza in the first quarter reduced capital employed. However, the reclassification of Pearl Plaza in the fourth quarter increased capital employed by around EUR 7 million compared with the previous year. Capital employed was reduced by write-downs of two properties and increased by investments in the Okhta Mall parking facility and Voimaosakeyhtiö SF. In addition, the weakening of the rouble exchange rate also affected capital employed. Capital employed was reduced by a net exchange rate impact of EUR -4.4 million included in operating profit and exchange rate losses on financial expenses amounting to EUR -8.2 million. Translation differences had a total impact of EUR -18.6 million on capital employed. Total capital employed decreased by about EUR 73.8 million compared with the beginning of the year.

The return on investment was -14.3 (-32.6) per cent. When calculating the return on investment, the income from interest on loans granted to associated companies and changes in the value of loans are also taken into consideration.

SRV is a co-investor in three shopping centre projects through its associated companies. SRV is also responsible for leasing, marketing and managing premises in completed shopping centres. SRV intends to sell its holdings once stable rental income has been achieved or the market situation allows. Stable rental income is usually reached 3–4 years after opening. The coronavirus pandemic that began during the first quarter of 2020 has negatively impacted shopping centre operations by undermining tenants’ ability to do business. This has temporary negative impacts on shopping centres’ rental income. However, as mentioned in the risk section, due to the coronavirus pandemic and economic uncertainty in Russia, it is possible that the sale of Russian shopping centres may be postponed. 

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

2. The comparison figures have been adjusted to reflect share issues.
3. The comparison figures have not been adjusted to reflect share issues.

Financial objectives

SRV’s strategy and all of its operations are guided by the 2021–2024 strategic financial objectives that were approved in February 2021:

• Operative operating profit: 6 per cent by the end of the period.

• Gearing excluding the impact of IFRS 16: 40-60 per cent by the end of the period.
• As the company gradually reduces its indebtedness, SRV expects that it will pay dividends in accordance with its dividend policy no earlier than for the 1 January–31 December 2023 financial year. The longer-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 updated definition of operative operating profit is used in these financial objectives (see Outlook for 2021).

Proposal for the distribution of profits

The parent company’s distributable funds on 31 December 2020 are EUR 262,165,834.13, of which net profit for the financial year is EUR -11,924,838.45. The Board of Directors proposes to the General Meeting that no dividend be paid for the 2020 financial year.

Annual General Meeting

SRV Group Plc’s Annual General Meeting is planned to be held on Monday, 29 March 2021 at 4.00 pm. The Board of Directors will convene the meeting separately in due course.

Espoo, 4 February 2021

Board of Directors

All forward-looking statements in this review 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, and in particular the ongoing coronavirus pandemic.

Financial results briefing

A conference for analysts, fund managers, investors and representatives of the media will be held on 4 February 2021 at 10.00 EET as a webcast. The event will be held in Finnish. A live webcast of the conference will begin at 10.00 EET, available through the company’s website www.srv.fi/en/investors. The presentation will be available on the company's 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 developer and innovator in the construction industry. Our mission is to build, together with our partners, a foundation for a happy life and sustainable society through lifecycle-wise solutions for built environments. Our genuine cooperation and enthusiasm for our work comes across in every encounter. Sustainability is reflected in all our activities.

Our company, established in 1987, is listed on the Helsinki Stock Exchange. We operate in growth centres in Finland and Russia. In 2020, our revenue totalled EUR 975.5 million. In addition to about 1,000 SRV employees, we employ a network of around 4,200 subcontractors.

SRV – Building for life