SRV's order backlog grew to a record level - SRV's Interim Report 1 January - 30 September 2011

SRV GROUP PLC           INTERIM REPORT  2 September 2011, 8.30 a.m. EET                                                     

Reporting period 1 January–30 September 2011 in brief:

• SRV’s revenue was EUR 405.5 million (EUR 326.3 million in January–September 2010), change +24.3%
• Operating profit was EUR 0.9 million (EUR 6.6 million), change -86.3%
• Loss before taxes was EUR 1.6 million (profit of EUR 3.8 million)
• The order backlog at the close of the review period was EUR 862.3 million (EUR 604.4 million), change +42.6%
• New contracts EUR 615.4 million (EUR 439.9 million), change +39.9%

• The equity ratio was 30.9 per cent (35.1%)
• Earnings per share were EUR -0.07 (EUR 0.09)

Third quarter 1 July-30 September 2011 in brief:

• Revenue was EUR 136.3 million (EUR 115.2 million in July-September 2010)
• Operating profit was EUR 0.2 million (EUR 3.5 million)
• Loss before taxes was EUR 1.5 million (profit of EUR 3.8 million)
• Earnings per share were EUR -0.06 (profit of EUR 0.08)

The interim report has been prepared in accordance with IAS 34. The disclosed information is unaudited.

Outlook for 2011

SRV adjusts its outlook for the last quarter of 2011 regarding operational profitability. Revenue for the year 2011 is estimated to total EUR 650 million (EUR 484.4 in January-December 2010). Profitability of both domestic and international operations is estimated to improve during the second half of the year compared to the first half of 2011. Profit before taxes for the fourth quarter is estimated to exceed EUR 10 million and the profit for the whole year 2011 is expected to exceed the previous year’s level (EUR 7.9 million).

The President and CEO Jukka Hienonen comments on SRV’s result:

In the first four months of the year, we have witnessed swings of sentiment in the global economy, which have also been partly reflected in our industry. In the early part of the year, there were many encouraging signs of recovery from the recession. In the construction industry, housing construction was already buoyant and in business premises construction, too, a positive turn was perceptible.

News on the state of the euro area has become more volatile as autumn advances. Nevertheless, housing sales are on a fairly reasonable level and new start-up decisions are being made both in SRV and in other construction companies. Start-up criteria, however, have tightened to some extent.

SRV currently has a record number of housing units under construction. The 2,500 housing units under construction make SRV one of the top constructors in the Helsinki Metropolitan Area. Of this production, 85 per cent has been sold. Most of our developer contracting production will be completed in the final quarter. Due to the recognition practice based upon delivery, a positive impact on our result will also be evident at that time.

The Group’s order backlog is at a record high. The order backlog is strong in domestic business premises and housing construction, but also in our international business operations. At the site of the Pearl Plaza shopping centre project in St. Petersburg, work advanced from the preparatory stage to construction in September after we received a building permit.

The Kalasatama Centre project in Helsinki was initiated in August when key contracts relating to the project were signed with the City of Helsinki. We will build in the area throughout this decade. There are also plans to build for the City of Helsinki a social services and health care station, business premises and a significant number of housing units. We will be able to adjust the pace of construction to the market situation at the time in question. We estimate that the project will generate for SRV a total of one billion euros in revenue during the entire construction period.

The European banking crisis has tightened up the availability of finance generally, but particularly in the field of real-estate development. To expand the financing potential of our Russian project development while simultaneously diversifying our financing risks, we are, in addition to other measures, cooperating with investment companies active in Russia. In September we founded, in collaboration with Finnish institutions, the company Russia Invest. The VTBC Fund, established earlier, has concluded an agreement on the purchase of its first site in Moscow.

We have raised our revenue significantly during the first nine months of the year. Unfortunately, volume growth has not been evident to the same degree in our profitability. SRV’s project development expertise is strong both in Finland and in neighbouring countries. To improve our profitability structure, we will increase the proportion of developer contracting projects in our business operations. In Finland and Russia, we have a number of substantial development projects which have already been launched or will be initiated in the near future.
 

Markets and general review

The positive development with regard to SRV’s revenue and order backlog continued in early 2011. SRV’s order backlog increased by 42.6 per cent to EUR 862.3 million, which is an all-time high for the Group.

In Finland, the competition for new orders for business premises is fierce. SRV's volume of construction of business premises has remained at a good level. However, there is pressure to maintain profitability, as the order backlog consists mainly of contracting activity with a lower profit margin. In addition, construction costs have clearly gone up, particularly in business premises construction, but due to increase in market unstability the trend have already turned into decline. In order to improve profitability, SRV aims to shift the emphasis onto the company’s own project development.

The market development in domestic housing construction has continued the positive progress. SRV has increased the production of both rental and owner-occupied housing. The total amount of SRV’s housing production under construction grew to 2 504 residential units. 85 per cent of production under construction have been sold, 63 per cent of production are rental or right-of-occupancy units. The number of developer contracting housing projects currently under construction grew to 811 residential units. Based on premarketing, the decision on the start-up of 172 additional units has been made. In total, SRV sold 382 residential units to consumers and investors (in comparison to 361 units in January-September 2010). Developer contracting housing production is recognised upon delivery thus affecting more the last quarter of the year.

The financial and real-estate markets in Russia are recovering. SRV seeks to utilizes the market potential in Russia by developing developer contracting real estate projects. In order to strengthen financial reserves a stakeholders’ agreement between SRV, Ilmarinen, Sponda, Etera and Onvest concerning an investment company Russia Invest was signed in September. In addition to continuing the development of its key projects, SRV seeks growth potential by focusing its efforts on the preparation of the first phase investment commitments of the VTB-Ashmore property fund. The fund has signed an agreement to purchase the first property in Moscow.

Amongst the key international projects, the implementation of the Pearl Plaza shopping centre project in St. Petersburg was confirmed in January, when the investment decision for the site and the EUR 100 million development contract with SRV were signed.

SRV’s own project development operations enhance the company’s potential to increase its operating volume. Projects require long-term development work and are carried out over the course of several years. SRV’s projects are often so-called landmark projects – innovative new solutions for the needs of sustainable regional construction. Such projects include, for example, the Keilaniemi Towers housing project, the development project for the vicinity of the Niittykumpu metro station in Espoo, and, as the most recent addition, the Kalasatama development project in Helsinki.

1. In calculating the key ratio only the profit for the period has been annualised

The Group revenue increased especially as the result of the favourable development in the volume of domestic housing construction. The decline in the operating profit was influenced by the weakened profitability of commercial construction brought on by a lower order backlog profit margin and higher construction costs, as well as losses generated by international business operations. Project development expenses also grew from the reference period. The Group’s order backlog grew on account of the increased order backlog of international and domestic housing construction.

The Group’s revenue for the third quarter grew thanks to the favourable development in the residential construction in Finland. Profitability of the business operations in Finland was influenced by the weakened profitability of commercial construction brought on by a lower order backlog profit margin.
 

Disclosure procedure

SRV Group Plc follows from now on the disclosure procedure enabled by Standard 5.2b published by the Finnish Financial Supervision Authority and hereby publishes its Interim Report for January-September 2011 enclosed to this stock exchange release. SRV’s Interim Report for January-September 2011 is attached to this release in pdf format and is also available on the Group’s website at www.srv.fi.

Espoo 1 October 2011

Board of Directors

SRV Group Plc

Taneli Hassinen

Director, Communications and Marketing

For further information, please contact:

Jukka Hienonen, CEO, Tel. +358 201 455 213
Hannu Linnoinen, Senior Executive Vice President, CFO, Tel. +358 201 455 990 or
+358 50 523 5850
Taneli Hassinen, Director Communications, Tel. +358 201 455 208 +358 40 504 3321