SRV´s interim report January-March 2018: Good intake of new orders in the beginning of the year, but revenue and operative operating profit declined

SRV GROUP PLC     INTERIM REPORT    26 APRIL 2018, 08:30 AM

SRV´s interim report January-March 2018: Good intake of new orders in the beginning of the year, but revenue and operative operating profit declined

January-March 2018 in brief:

  • Revenue declined to EUR 215.7 (223.7 1−3/2017) million (down 3.6%). Revenue development was impacted above all by the decline in revenue generated by business construction in Finland and the seasonal nature of construction, while revenue from housing construction continued to rise.

  • Operative operating profit1) amounted to EUR -5.1 (2.7) million. Operative operating profit was weakened by longer delivery periods and a rise in material and labour costs due to the market situation. The higher-than-expected costs of certain projects that are under construction are also evident in operative operating profit. The most significant of these projects is the REDI shopping centre which will be completed this year.

  • Operating profit decreased to EUR -8.8 (7.3) million. Operating profit was weakened by the decline in the operating profit of International Operations to EUR -5.4 (3.2) 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 -3.7 (4.6) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses.

  • The result before taxes was EUR -12.2 (7.3) million.

  • Earnings per share were EUR -0.19 (0.09).

  • At period-end, the order backlog stood at EUR 1,653.0 (1,722.0) million. New orders to the value of EUR 284 (155) million were recognised in January-March.

  • Equity ratio was 32.5 (36.4) per cent and gearing was 134.3 (103.4) per cent. In addition to the loss-making result, an increase in net debt due to seasonal growth in invested capital and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.

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 1,114.4 million). Operative operating profit is expected to be lower than in 2017 (operative operating profit EUR 27.0 million.)

  • After 2018, an atypical year, the company anticipates that it will achieve its strategic earnings level by the end of 2022.

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

CEO's review

The year 2018 has started well with regard to our order backlog. In the early part of the year, new orders totalling around EUR 300 million were received, the largest being Siltasairaala Hospital in Helsinki. We cannot be satisfied with the level of revenue and operative operating profit. Higher than expected costs have been encountered for some projects under construction, the most significant of these being REDI. The project as a whole has been more demanding than anticipated. Massive infrastructure work and tower foundations have tied up our capital significantly, and high financing expenses are still negatively impacting our result. The final earnings impact of REDI will not become clear until the shopping centre is sold and all of the residential towers are completed. Amid all of the challenges, there have been no comprises on quality; REDI will be a fine complex down to the last detail, of which the builders, customers and tenants can be proud. REDI shopping centre will open its doors on 20 September.

Material and labour costs have been rising for a long time now. We are concerned about how potentially expanding strike and industrial action will ultimately impact the progress of our projects and therefore the second-quarter result. It is clear that constantly rising costs will not benefit anyone in the end. We hope that the issue of pay increases can be mutually resolved soon.

Earnings in Russia during the first quarter were weak due to the rouble, but when business is examined from the perspective of shopping centre operations, the trend remains good. Our sales in roubles are still on the rise and visitor numbers are also clearly increasing. 

One of our major achievements in the first months of the year was the renewal of our EUR 75 million bond on even better terms. This provides us with a solid foundation for moving ahead with future projects.

Although 2018 did not start the way we would have wanted it to, we still believe that we will achieve the targets set for the year. However, it is clear that there is much to be done to improve our financial performance. We have taken and we are further taking many steps to enhance operational efficiency.

Juha Pekka Ojala, President and CEO

Overall review


Group key figures
(IFRS, EUR million)
1−3/ 20181−3/ 2017changechange, %1−12/ 2017
Revenue215.7223.7-8.0-3.61,114.4
Operative operating profit1)-5.12.7-7.8 27.0
Operative operating profit, %-2.41.2  2.4
Operating profit*-8.87.3-16.1 15.3
Operating profit, %-4.13.3  1.4
Financial income and expenses, total **)-3.40.0-3.4 -10.7
Profit before taxes-12.27.3-19.5 4.6
Net profit for the period-10.76.5  5.8
Net profit for the period, %-5.02.9  0.5
Order backlog1,653.01,722.0-69.0-4.01,547.9
New agreements284.4155.4129.083.0771.4
      
 *) net effect of currency exchange fluctuations-3.74.6-8.2 -11.7
 **) of which accounted for
by derivatives
0.10.5-1.7-362.10.3

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 -3.7 (4.6) million, with hedging expenses of EUR -0.5 (-0.9) million.


January–March 2018

The Group's revenue declined to EUR 215.7 (223.7 in 1-3/2017) million (down 3.6%). Revenue was impacted above all by the decline in revenue generated by business construction in Finland and the seasonal nature of construction. The completion of several larger projects in 2017, such as Niitty Shopping Centre and the Kalasatama Health Care and Wellness Centre, also contributed to the decline in revenue. Revenue from housing construction in turn saw further growth of about 8 per cent.

The Group’s operative operating profit amounted to EUR -5.1 (2.7) million. Operative operating profit was weakened by longer delivery periods and a rise in material and labour costs due to the market situation. The higher-than-expected costs of certain projects that are under construction are also evident in operative operating profit. The most significant of these projects is the REDI shopping centre which will be completed this year. Slightly fewer developer-contracted housing units were recognised than in the comparison period, a total of 70 (76).

The Group’s operating profit declined to EUR -8.8 (7.3) million. Operating profit was weakened by the decline in the operating profit of International Operations to EUR -5.4 (3.2) 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 -3.7 (4.6) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses. 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.

At period-end, the Group’s order backlog stood at EUR 1,653.0 (1,722.0) million. The order backlog remains at a good level. New agreements valued at EUR 284 (155) million were signed in January-March.  The Siltasairaala Hospital in Helsinki was recognised in the order backlog in January 2018. 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, and Wood City.

The Group's profit before taxes totalled EUR -12.2 (7.3) million.

The Group's earnings per share were EUR -0.19 (EUR 0.09).

The Group’s equity ratio stood at 32.5 (36.4) per cent and gearing at 134.3 (103.4) per cent. In addition to the loss-making result, an increase in net debt due to seasonal 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 interim report, 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 company is considering changing its segment reporting as from the beginning of 2019 and will begin providing additional information on the capital invested in these and the return on investment 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 business 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.

Group key figures
(IFRS, EUR million)
1−3/20181−3/2017changechange, % 

1−12/2017
Equity ratio, %32.536.4  35.5
Net interest-bearing debt355.4311.044.414.3297.6
Gearing ratio, %134.3103.4  105.0
Return on investment, %-5.26.5  3.1
Return on investment, construction, %-2.215.3  7.4
Return on investment, property development, %-6.16.6  -4.8
Invested capital650.0653.0-3.0-0.5604.5
Invested capital, construction327.1288.638.413.3276.6
Invested capital, property development322.9364.3-41.4-11.4327.9
Return on equity, %-15.78.8  2.0
Earnings per share, EUR-0.190.09-0.28 0.05
Equity per share, EUR3.724.32-0.60-13.94.03
Share price at end of period, EUR2.904.40-1.50-34.13.60
Weighted average number of shares outstanding, millions59.659.5  59.5

Espoo, 25 April 2018

Board of Directors

All forwarding-looking statements in this report are based on management’s current expectations and beliefs about future events, and actual results may differ significantly from the expectations and beliefs such statements contain.

Invitation to a press conference: SRV Group Plc’s Q1 2018 result

The interim report will be presented to the media and analysts at the press conference which will take place on Thursday 26 April at 12.00 pm at the 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. The webcast will be in Finnish. The presentation material will be published both in Finnish and in English at the company’s website after the press conference.

For further information, please contact:

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

www.srv.fi

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