SRV's half-year report January-June 2019: Order backlog remains strong, the company’s financial position improved after issuing hybrid bond
SRV GROUP PLC HALF-YEAR REPORT 17 JULY 2019 8.30 EET
SRV's half-year report January-June 2019: Order backlog remains strong, the company’s financial position improved after issuing hybrid bond
January-June 2019 in brief:
- Revenue declined by 4.8 per cent to EUR 430.0 million (451.5 1−6/2018). Revenue was down in both business construction and housing construction. Revenue from housing construction declined because fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 185 (202). Revenue from business construction contracted, largely due to the completion of the REDI shopping centre’s construction.
- Operative operating profit totalled EUR -2.6 (-8.5) million. The trend in operative operating profit was impacted by the recognition of losses on the construction of the REDI shopping centre during the comparison period. Operative operating profit was weakened by the decline in the revenue of Construction and year-on-year decline in housing units recognised as income. In addition, earnings were reduced by the weaker margins of three projects that will be completed this year, in a total amount of EUR 6.8 million. The result includes expense entries in the first quarter for water damage at REDI Majakka and the dissolution of the VTBC fund as well as impairment losses on inventories, amounting to EUR 3.8 million in total.
- Operating profit rose to EUR 0.1 (-14.2) million. The change in the rouble exchange rate had the biggest impact on the operating profit of the Investments segment, which totalled EUR -1.9 (-8.4) million. The net effect of the change was EUR 2.8 (-5.7) million. The exchange rate impact, which had no effect on cash flow, was caused by the conversion of euro-denominated loans to roubles and hedging expenses.
- The result before taxes amounted to EUR -11.2 (-21.9) million, including the EUR -3.9 (-1.1) million fair value revaluation of interest rate derivatives.
- Earnings per share were EUR -0.2 (-0.34).
- At period-end, the order backlog stood at EUR 1,667.2 (1,716.7) million. In January-June, the order backlog saw a year-on-year decline of 2.9 per cent. The sold share of the order backlog was 84.0 (86.2) per cent. New agreements valued at EUR 221.4 (566.7) million were signed in January–June.
- SRV issued a EUR 58.4 million hybrid bond. EUR 20.5 million of the proceeds were used for early repayment of the existing hybrid bond and EUR 37.9 million for early repayment of current notes. In June, SRV extended its current long-term revolving credit facility by one year.
- The equity ratio was 28.5 (29.7) per cent and gearing 178.9 (140.8) per cent. While the adoption of IFRS 16 weakened the equity ratio and gearing, the loan arrangement carried out in May improved them. The comparable figures (without the impact of IFRS 16) were 35.1 (29.7) per cent for the equity ratio and 114.0 (140.8) for gearing.
The company publishes specific alternative key figures that have been adjusted to exclude the impact of the IFRS 16 Leases standard on the balance sheet and result. SRV is applying a simplified approach to adopting this standard, which is why the figures for the comparison period have not been adjusted to comply with the standard.
April-June 2019 in brief:
- Revenue in April-June amounted to EUR 207.4 (235.7) million. Revenue contracted due to the decrease in revenue from both business and housing construction.
- Operative operating profit amounted to EUR -3.1 (-3.4) million. The operative operating loss was decreased by the low number of housing units recognised as income and the weaker margins of projects.
- Operating profit was EUR -3.2 (-5.4) million.
- Significantly fewer agreements were recorded in the order backlog than last year, EUR 71.7 (282.3) million.
Events after the period
- On 9 July 2019, the Supreme Administrative Court overturned the complaint lodged against the Keilaniemi towers. Construction may begin no earlier than in 2020.
CEO's review
In terms of earnings, the first half of the year was disappointing due to weaker margins and certain non-recurring items. In addition, slightly fewer housing units were completed and recognised as income than in the comparison period. On the other hand, during the spring and early summer, we strengthened our financial position. Extending the credit facility, together with the hybrid bond issue in May and the early repayment of loans, improved the company’s financial position and contributed to the development of our operations, earnings performance and other financing.
We are a pioneer in urban construction. This year, too, we are involved in the development of living environments for many city dwellers. A good example of this is the Ring Road I tunnel, which was opened to traffic at the beginning of June. This 460-metre tunnel is the longest concrete-structure tunnel in Finland. It is part of larger-scale urban environment development efforts in Keilaniemi, Espoo. Work on landscaping and the park deck will continue until the last months of the year. Construction started in 2016.
Housing start-ups will decline both this year and the next. Demand for housing outside of Tampere and the Greater Helsinki Area is waning compared to previous years. Private housing investors are also more cautious in their purchase decisions. Apartments in good locations – particularly small units – are selling well. At the end of June, we had 70 unsold completed residential units in Finland.
Our order backlog remains strong. During the first half of the year, we booked new orders valued at EUR 221 million. We are currently working on numerous school projects, the latest of which is a wooden Finnish-Russian school valued at EUR 23 million, as well as large hospital projects in Helsinki, Tampere and Jyväskylä, the Deck and Arena project in Tampere and the Terminal 2 expansion project at Helsinki Airport.
The occupancy rates of shopping centres in Russia are at a good level and visitor numbers saw year-on-year growth. Negotiations on the sale of the Pearl Plaza shopping centre are ongoing. In June, we signed a deal-related cooperation agreement with the Russian Sperbank.
In the future, SRV’s long-term commitment to the creation of a new kind of urban environment will continue under new leadership. I would like to wish luck and success to my successor Saku Sipola at this great company! I would like to thank all our customers, partners and SRV employees for our shared journey.
Juha Pekka Ojala, President and CEO
Overall review
| Group key figures (IFRS, EUR million) | 1−6/ 2019 | 1−6/ 2018 | change | change, % | 4−6/ 2019 | 4−6/ 2018 | 1−12/ 2018 | previous 12 months |
| Revenue | 430.0 | 451.5 | -21.5 | -4.8 | 207.4 | 235.7 | 959.7 | 938.2 |
| Operative operating profit1) | -2.6 | -8.5 | 5.8 | -3.1 | -3.4 | -10.0 | -4.2 | |
| Operative operating profit, % | -0.6 | -1.9 | -1.5 | -1.4 | -1.0 | -0.4 | ||
| Operating profit*) | 0.1 | -14.2 | 14.3 | -3.2 | -5.4 | -19.8 | -5.5 | |
| Operating profit, % | 0.0 | -3.1 | -1.5 | -2.3 | -2.1 | -0.6 | ||
| Operating profit, excl. IFRS 162) *) | -2.1 | -14.2 | 12.1 | -19.8 | -0.1 | |||
| Operating profit, %, excl. IFRS 162) | -0.5 | -3.1 | -2.1 | 0.0 | ||||
| Financial income and expenses, total**) | -11.3 | -7.7 | -3.6 | -7.7 | -4.3 | -17.5 | -21.1 | |
| Profit before taxes | -11.2 | -21.9 | 10.7 | -10.8 | -9.8 | -37.3 | -26.5 | |
| Net profit for the period | -8.6 | -19.2 | 10.5 | -9.0 | -8.4 | -31.2 | -20.7 | |
| Net profit for the period, % | -2.0 | -4.2 | -4.3 | -3.6 | -3.3 | -2.2 | ||
| Order backlog (unrecognised)3) | 1,667.2 | 1,716.7 | -49.5 | -2.9 | 1,816.0 | |||
| New agreements | 221.4 | 566.7 | -345.3 | -60.9 | 71.7 | 282.3 | 1,133.0 | 787.7 |
| *) net effect of currency exchange fluctuations | 2.8 | -5.7 | 8.5 | -148.3 | 0.0 | -2.1 | -9.8 | -1.3 |
| **) derivatives included in financial income and expenses | -3.9 | -1.1 | -2.8 | -1.9 | -1.2 | -2.2 | -5.0 |
- Operative operating profit is determined by deducting the calculated rouble exchange differences included in financial items and their potential hedging impacts from operating profit. Exchange rate differences during the review period amounted to EUR 2.8 (-5.7) million, of which the effect of hedging was EUR -2.8 (-0.3) million.
- The impacts of IFRS 16 in 2019 have been adjusted out of the figure. Due to this adjustment, the figure is comparable with the figures for 2018.
- The Group’s order backlog consists of the Construction business. The unrecognised margin corresponding to the holding is no longer included in the order backlog comparison figures.
| Group key figures (IFRS, EUR million) | 1−6/ 2019 | 1−6/ 2018 | change | change, % | 1−12/ 2018 |
| Equity ratio, %1) | 28.5 | 29.7 | 28.5 | ||
| Equity ratio, %, excl. IFRS 16 2) | 35.1 | 29.7 | 28.5 | ||
| Net interest-bearing debt1) | 480.2 | 355.7 | 124.4 | 35.0 | 282.8 |
| Net interest-bearing debt, excl. IFRS 162) | 306.6 | 355.7 | -49.2 | -13.8 | 282.8 |
| Net gearing ratio, %1) | 178.9 | 140.8 | 121.1 | ||
| Net gearing ratio, %, excl. IFRS 162) | 114.0 | 140.8 | 121.1 | ||
| Return on investment, % | 1.6 | -3.8 | -2.9 | ||
| Return on investment, %, excl. IFRS 162) | 1.1 | -3.8 | -2.9 | ||
| Capital employed1) | 773.8 | 665.0 | 108.9 | 16.4 | 611.0 |
| Capital employed, excl. IFRS 162) | 600.9 | 665.0 | -64.1 | -9.6 | 611.0 |
| Return on equity, % | -6.9 | -14.3 | -12.1 | ||
| Earnings per share, EUR | -0.20 | -0.34 | 0.14 | -41.2 | -0.56 |
| Equity per share (without hybrid bond), EUR | 3.15 | 3.52 | -0.37 | -10.5 | 3.21 |
| Share price at end of period, EUR | 1.62 | 2.65 | -1.03 | -38.9 | 1.70 |
| Weighted average number of shares outstanding, millions | 59.6 | 59.6 | 59.6 |
- The figures for 2019 are not comparable with the figures for 2018.
- The impacts of IFRS 16 in 2019 have been adjusted out of the figure. Due to this adjustment, the figure is comparable with the figures for 2018.
Earnings trends for the segments
Construction January-June 2019
Revenue from Construction declined to EUR 428.6 million (449.4 1–6/2018) in the January-June period. The revenue decreased in both business and housing construction. Revenue from housing construction was down 5.2 per cent. Revenue from business construction fell by 4.4 per cent due to the completion of the REDI and Karuselli shopping centres.
Construction’s operating profit rose to EUR 6.8 (-4.3) million. Operating profit was positively impacted by the completion of the REDI shopping centre contract, but was reduced by the lower margin forecasts of three projects. The result includes an expense entry of total EUR 3.1 million for REDI Majakka’s water damage and impairment of inventories.
Construction’s order backlog stood at EUR 1,667.2 (1,716.7) million. The order backlog remains at a good level, and 84 per cent of the order backlog has been sold. In January-June, new agreements amounting to EUR 221.4 (566.7) million were recorded, the most significant of which were REDI Loisto in the first quarter and a Finnish-Russian school in the second quarter.
Construction’s capital employed totalled EUR 456.3 (321.8) million. IFRS 16 had an accounting effect of EUR 161 million on this growth in capital employed.
April-June 2019
Revenue from Construction in April-June amounted to EUR 206.7 million (234.6 4-6/2018). Operating profit totalled EUR 2.0 (-1.1) million. New agreements entered into the order backlog in April-June amounted to EUR 71.7 (282.3) million.
Investments January-June 2019
Investments’ revenue totalled EUR 2.8 million in the January–June period (2.4 1–6/2018). It mainly consists of revenue from shopping centre management. The startup of shopping centre management at REDI increased revenue. In accordance with SRV’s operating model, revenue from associated companies’ projects and joint ventures is reported under the Construction segment; one example is the Tampere Deck and Arena project.
The operative operating profit totalled EUR -4.7 (-2.7) million. The occupancy rates and rental income of the shopping centres owned by associated companies improved, but earnings were burdened by the fact that the management and financing expenses of recently opened shopping centres were higher than income. The result includes an expense entry of EUR 0.6 million in the first quarter for the dissolution of the VTBC fund. The shares of associated companies’ results included in SRV’s result include not only the projects’ EBITDA, but also depreciation, financial expenses and taxes.
Investments’ operating profit was EUR -1.9 (-8.4) million. Operating profit was improved by the rouble’s strengthening exchange rate. The net effect of currency exchange fluctuations was EUR 2.8 (-5.7) million, which arose from converting euro-denominated loans into roubles. 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 329.3 (328.3) million. Capital employed was increased by investments in REDI and the Tampere Deck and Arena project, as well as the strengthening of the rouble exchange rate. Capital employed was decreased by the sale of the VTBC fund and the sale of SRV’s shareholder loan receivables for the REDI shopping centre to other investors. Total capital employed increased by about EUR 1.0 million. The majority of SRV’s capital employed consists of investments in associated companies.
The return on investment was 2.0 (-4.7) per cent. When calculating the return on investment, the income from interest on loans granted to associated companies is also taken into consideration.
SRV is a co-investor in four 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. For instance, the rental income of Pearl Plaza in St Petersburg, which was opened in 2013, is now stable.
April-June 2019
Investments’ revenue totalled EUR 1.5 million in the April–June period (1.2 4–6/2018). Revenue was generated by shopping centre management. Operative operating profit amounted to EUR -1.9 (-0.8) million.
Changes in the Corporate Executive Team
On 13 May 2019, SRV Group Plc announced that President and CEO Juha Pekka Ojala is leaving the company. On 25 June 2019, SRV Group Plc’s Board of Directors appointed Saku Sipola, M.Sc. (Tech), 50 years old, as President and CEO of SRV Group Plc. He will start in his role by 1 January 2020, with the exact date to be specified later. Sipola joins SRV from SATO Corporation, where he has worked as the President and CEO since 2015.
Outlook for 2019
In addition to general economic trends, SRV’s revenue and result in 2019 will be affected by several factors, such as: the trend in the exchange rate of the rouble; the recognition as income upon delivery of SRV’s own projects; the part of the order backlog that is continuously recognised as income consisting mainly 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 own-development projects. The largest projects are Tampere Deck and Arena, the extension of Helsinki Airport and ongoing hospital projects.
- More developer-contracted housing units will be completed in 2019 than in the comparison period. It is estimated that a total of 809 developer-contracted housing units will be completed in 2019 (526 in 2018).
- SRV makes long-term procurement agreements, due to which the expected reduction in construction costs will not have a significant effect on the company’s earnings performance in 2019. The trend in rental income from shopping centres is positive, but slower than anticipated.
- Full-year consolidated revenue for 2019 is expected to grow compared with 2018 (revenue in 2018: EUR 959.7 million). Operative operating profit is expected to improve compared with 2018 and to be positive (operative operating profit EUR -10.0 million), but to fall short of 2017 (operative operating profit in 2017: EUR 27 million).
Espoo, 16 July 2019
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.
Briefing, audiocast and presentation materials
A briefing for analysts, fund managers, investors and media representatives will be held on 17 July 2019, starting at 10 am as an audiocast and conference call. The audiocast 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:
Ilkka Pitkänen, CFO, tel. +358 (0)40 667 0906, ilkka.pitkanen@srv.fi
Maija Karhusaari, SVP, Communications and Marketing, tel. +358 (0)45 218 3772, maija.karhusaari@srv.fi
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SRV in brief
SRV is a bold developer and innovator in the construction industry. We want to offer the best customer experience as a constructor of urban city centres, while also being the most attractive employer in the industry. Our genuine cooperation and enthusiasm for our work comes across in every encounter. Sustainability is reflected in all our activities.
Established in 1987, we are a publicly listed company since 2007 in Helsinki Nasdaq stock exchange that operates in selected growth centres in Finland and Russia. Our revenue in 2018 was EUR 960 million. Over 1,000 people work for us and we employ a network of almost 4,000 subcontractors in our projects.
SRV - Building for life