SRV’s half-year financial report January-June 2023: Strong growth in the order backlog continues, low volume of housing construction weakens the result – outlook unchanged

SRV GROUP PLC     HALF-YEAR FINANCIAL REPORT      20 JULY 2023 AT 08:30 EEST

SRV’s half-year financial report January-June 2023: Strong growth in the order backlog continues, low volume of housing construction weakens the result – outlook unchanged

January–June 2023 in brief:

• Revenue amounted to EUR 281.4 (402.1) million.
• Operative operating profit amounted to EUR -5.9 (14.7) million with an operating profit of EUR -5.0 (-75.6) million.
• The result before taxes was EUR -9.9 (-74.8) million.
• Cash flow from operating and investment activities totalled EUR -9.0 (-17.2) million.
• Equity ratio rose to 34.3 (33.3 6/2022) per cent and gearing grew to 83.3 (64.2 6/2022) per cent. Excluding the impact of IFRS 16, the equity ratio was 48.8 (43.9) per cent and gearing was 1.6 (-3.1) per cent.
• At period-end, the order backlog stood at EUR 993.1 (745.9) million. In January-June, new agreements valued at EUR 395.8 (202.4) million were signed. The sold share of the order backlog was 92.1 (91.1) per cent.
• Earnings per share were EUR -0.5 (-8.7). The 40:1 reverse share split has been taken into account in the calculation of the comparison figure.

April–June 2023 in brief:

• Revenue amounted to EUR 143.1 (211.4) million.
• Operative operating profit amounted to EUR -3.9 (9.8) million with an operating profit of EUR -3.0 (10.1) million.
• Cash flow from operating and investment activities totalled EUR 7.8 (8.6) million.
• New agreements valued at EUR 245.9 (72.3) million were entered into the order backlog.
• In April, the company signed a committed, unsecured revolving credit facility (RCF) amounting to EUR 40 million with its key lenders. The RCF matures in two years with an optional one-year extension.

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 the year, the order backlog will focus strongly on cooperative contracting, which involves fewer risks but lower margins, due to which the largest share of earnings in 2023 is expected to be generated in the latter part of the year, especially in the fourth quarter. In 2023, the share of revenue accounted for by developer-contracted housing production will remain small.

• Full-year consolidated revenue for 2023 is expected to decrease compared with 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 and CEO's review
 

“The market environment remained challenging throughout the first half of 2023. High inflation, rising interest rates and tighter availability of loan financing have significantly reduced demand for construction in most customer segments. The impacts are most strongly evident in the historic slump in housing construction. Housing sales to consumers are still at an extremely low level and investor demand for housing projects is cautious. We expect that the housing market will remain difficult and that the number of new housing project start-ups will remain at an exceptionally low level even in the latter half of the year, although demand will most likely recover gradually. In the market for business construction, there is demand for leases for user-centred, lifecycle-wise properties in good locations, but the threshold for starting up projects is high due to the cautiousness of investors and the availability of financing. The public sector is still investing relatively strongly, and industry has investment projects in the pipeline. In this market situation, I think it is to our advantage that we have few unsold residential units that have been completed or are under construction, and that our order backlog is focused on cooperative business premises contracting. In spite of the challenges posed by the market environment, our operations are on a solid footing thanks to the structure of our order backlog.

Our revenue grew on the second quarter compared to the first quarter, as expected, but fell clearly short of the comparison period. Our operative operating profit was weak during the review period largely due to low revenue, especially in housing construction. We expect that the largest share of our earnings in 2023 will be accrued towards the end of the year, especially in the fourth quarter, as projects with positive order intake in the first part of the year, other expected projects and the moderate recovery in residential sales we anticipate will increase revenue and generate profit.

Our order backlog swung to growth in the last quarter of 2022 and saw further growth in both the first and second quarters of 2023. The order backlog for business construction is robust. I am particularly pleased that in the face of declining demand for housing, we have succeeded in rapidly increasing the order backlog for business construction so that our revenue will turn to growth in the coming quarters. In April–June, we recognised many new business construction projects in our order backlog, such as the order for the first implementation phase of the Laakso Joint Hospital in Helsinki, the Inkeroinen multipurpose building in Kouvola, a new building for the Rajamäki campus in Nurmijärvi, premises for the National Repository Library in Kuopio, and the most environmentally friendly European galvanisation plant in Lieto, Turku. 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, Helsinki for the City of Helsinki’s Housing Production (ATT). In May, we announced that we had agreed on the main terms and conditions of a contractor agreement for a large office tower in Keilaniemi, Espoo with a consortium formed by Ilmarinen Mutual Pension Insurance Company and HGR Property Partners Oy. We expect that the contractor agreement will be finalised and signed in the coming months. In addition, previously won contracts and projects under preliminary contracts will be recognised in our order backlog later this year, with a value of around EUR 1.2 billion.

In the prevailing market situation, it is especially significant that our balance sheet is healthy and our financing is in good shape. In April, we agreed with our main financier banks on a new financing agreement that bolsters our liquidity and lengthens the maturity of financing.

We are actively continuing to engage in negotiations in order to exit the last of our holdings in Russia.

We expect market conditions to remain largely unchanged in the latter half of 2023. The steep fall in demand for housing construction has a strong negative impact on our result, but it accounts for a small share of our revenue and the number of our unsold residential units is so small that it does not pose a significant financial risk to us. We anticipate that housing sales and investor demand will pick up cautiously during the second half of the year. Based on this, we expect to start up some new development and developer-contracted housing projects towards the end of the year. We have a robust order backlog in cooperative contracting, which is strategically important to us, and this will carry us over the most difficult period. We will continue to make outlays on project development, as I consider it important for us to maintain our ability to rapidly increase the share of our portfolio accounted for by higher-margin development and developer-contracted projects immediately once the market recovers.”

Saku Sipola
 

Key figures

1. The figure has been adjusted to remove the impacts of IFRS 16. 
2. The 40:1 reverse share split has been taken into account in the calculation of the key figures for 1-6/2022 and 4-6/2022.  

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–June 2023

The Group’s revenue declined by EUR 120.7 million to EUR 281.4 million (402.1 1-6/2022). Revenue from business construction grew by EUR 5.7 million and revenue from housing construction was down EUR 106.3 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 and amounted to EUR -5.9 (14.7) million. The primary reason behind the weakening of the operative operating profit was the strong decrease in revenue from housing construction and the correspondingly low recognised margin. In addition, operative operating profit was impacted by the fact that a greater share of revenue in business construction was recognised from lower-margin contracting.

The Group’s operating profit was EUR -5.0 (-75.6) million. 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 -101.0 million.

At period-end, the Group’s order backlog stood at EUR 993.1 (745.9) million. The sold share of the order backlog was 92.1 (91.1) per cent. New agreements valued at EUR 395.8 (202.4) million were signed in January–June. The most significant new business construction projects were the first implementation phase of the Laakso Joint Hospital in Helsinki, the Okmetic factory building in Vantaa, the Horisontti office skyscraper in Kalasatama, Helsinki, the multipurpose Sammontalo Building in Lappeenranta 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, Helsinki for the City of Helsinki’s Housing Production (ATT).

April–June 2023

The Group’s revenue declined by EUR 68.3 million to EUR 143.1 million (211.4 4-6/2022). Revenue from business construction decreased by EUR 9.9 million and revenue from housing construction was down EUR 53.8 million.

The Group’s operative operating profit decreased and amounted to EUR -3.9 (9.8) million. Operative operating profit was negative due to the low revenue from housing construction and the correspondingly low margin.

The Group’s operating profit was EUR -3.0 (10.1) million. 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.
 

Espoo, 20 July 2023

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.

Briefing, webcast and presentation materials

A briefing for analysts, investors and media representatives will be held on 20 July 2023, starting at 11:00 EEST as a webcast. 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