SRV’s order backlog remains robust – profitability improves significantly: SRV’s financial statement release 1 Jan – 31 Dec 2013

SRV GROUP PLC     FINANCIAL STATEMENT RELEASE     14 FEBRUARY 2014, 8:30 a.m. EET 

Reporting period 1 January – 31 December 2013 in brief:

• SRV’s revenue was EUR 679.4 million (EUR 641.6 million 1-12/2012), change +5.9%
• Operating profit was EUR 26.4 million (EUR 6.9 million), change +283.3%
• Profit before taxes was EUR 22.8 million (EUR 2.8 million), change +718.2%
• The order backlog at the close of the review period was EUR 825.8 million (EUR 827.8 million), change -0.2%
• Equity ratio was 36.4 per cent (34.7%)
• Earnings per share were EUR 0.39 (EUR 0.02)
• Proposed dividend per share is EUR 0.12 (EUR 0.06)

Fourth quarter 1 October – 31 December 2013 in brief:

• Revenue amounted to EUR 171.6 million (EUR 175.4 million 10-12/2012)
• Operating profit was EUR 4.6 million (EUR 2.4 million)
• Profit before taxes was EUR 3.6 million (EUR 2.2 million)
• Earnings per share were EUR 0.01 (EUR 0.03)
 

CEO Jukka Heinonen comments on SRV’s result:
 
Our result clearly moved in the right direction last year. The take-off of our Russian projects, the improved profitability of our operations in Finland and Russia, and the fruit of correct strategic choices can be seen in the result. The difficult operating environment underlines the value of the financial performance we achieved last year. The situation in our industry turned out to be more difficult than we had expected at the beginning of the year.
 
In early months of the year, housing production directed at consumers was selling well, but thereafter a significant slowdown took place as the year progressed. We have also shifted the emphasis of our housing production towards SRV-developed rental housing projects, built for housing investment funds and other institutional investors. We succeeded well in this; in 2013 we signed with investors negotiated contracts for a total of 404 residential units. This is the highest figure for investor sales in our history. In addition, we are awaiting the start of construction on 164 investor-sold residential units, which have not yet been entered in our order book. We reduced the level of our developer-contracting housing production directed at consumers by halving the number of housing starts. The sales risk of our own production has been reduced; at the turn of the year, SRV had 360 residential units on sale (455 units in 12/2012). We have continued to respond critically to competitive contracting projects.
 
We started last year with a strong order backlog. Through hard work, we have managed to maintain our order backlog at the same level as last year. Most of last year’s business premises projects came from the public sector, because around 20 per cent of private business premises are vacant in the Helsinki Metropolitan Area and demand for new premises is much reduced. This situation has been partly addressed by converting business premises for residential use.
 
We continued the development of our tower projects in Helsinki and Espoo. Our REDI project at Kalasatama in Helsinki has advanced positively after a delay caused by a planning appeal. An underground waste station and a new metro bridge ordered by the City of Helsinki were completed in summer 2013. We are negotiating with the City of Helsinki on a change to the city plan that will facilitate the further development of a social services and health station to correspond best to the required changes planned by the city. We expect that construction of the first stage of the private part of the project, the REDI shopping centre and parking facility, will begin this year when multi-lateral investor and financing negotiations are completed.
The SRV’s goal in the investor negotiations is to retain a 50% ownership of REDI, and we have strengthened our capital structure and financial reserves significantly. Tenant interest in REDI, which will open in 2017, has been positive. Negotiations are already under way on 70% of the shopping centre’s commercial space.
 
Last year was a notable turning point in SRV’s Russian operations. We opened the Pearl Plaza Shopping Centre in St. Petersburg. The number of visitors to the centre has exceeded even our boldest expectations. In addition, construction also began on the Septem City project, a product of long development work. The first phase of the project consists of the Okhta Mall Shopping Centre, which will open in spring 2016. Around one third of the centre’s premises have already been leased.
 
Our investor partner in this project is Russian Invest, a real-estate investment company consisting of financially sound Finnish partners. This is the investment model that we will use in projects in the Russian market in future. In Russia we have focused on shopping centre construction in St. Petersburg and Moscow, where we are not only a developer and builder of the properties but also an owner and shopping centre operator.
 
The adjustments we have made to our strategy have produced results. In terms of the mix of different forms of contract, we are now in a healthier situation, which is evident in an improvement in our margins. At the same time, we have specified more precisely the kind and size of projects in which we wish to participate. We are also more selective in terms of the location of projects.
 
Our strong order backlog provides us with a good foundation for 2014. We will continue to focus on launching our own projects, and we will develop further long-term target holdings for SRV. Of course, the practice of income recognition on transfer means that an even greater part of construction-related margin remains unrecognised to await future sales, but we believe that future rental income during the period of ownership as well as the proceeds of sales will confirm that our chosen approach has been correct.

SRV GROUP PLC’S FINANCIAL STATEMENT RELEASE 1 JANUARY – 31 DECEMBER 2013

Overall review

SRV’s order backlog and the value of new agreements remained on a par with the comparison year. The Group’s order backlog amounted to EUR 825.8 million (EUR 827.8 million 12/2012) and the value of new agreements to EUR 600.7 million (EUR 594.5 million 1-12/2012).

Thanks to growth in revenue from International Operations, the Group’s revenue grew by 5.9 per cent to EUR 679.4 million (EUR 641.6 million 1-12/2012). The Group’s operating profit improved to EUR 26.4 million (EUR 6.9 million) following year-on-year growth in operating profit in both International Operations and Domestic Operations. The operating profit margin was 3.9 per cent (1.1%). Several factors contribute to the quarterly variation in the operating profit and operating profit margin: SRV’s own projects are recognised as income upon delivery, the part of the order backlog that is continuously recognised as income mainly consists of low-margin contracting, a share equivalent to the ownership of SRV’s associated companies is eliminated from the profit margins of construction carried out for these companies, and the project development nature of operations. The Group's profit before taxes was EUR 22.8 million (EUR 2.8 million). Financial expenses decreased, which also had a positive effect on the result for the financial year.

The Group's equity ratio was 36.4 per cent (34.7%). Profitability improvement contributed to the growth in equity ratio.

Revenue from Domestic Operations was EUR 574.8 million (EUR 568.3 million 1-12/2012) and operating profit was EUR 21.4 million (EUR 14.8 million). Revenue and operating profit growth was driven by the increase in revenue from developer contracting of housing as well as the positive trend in the revenue and profitability of housing and commercial contracting in the third and fourth quarters. The level of operating profit was also affected by the fact that the order backlog recognised as income mainly consisted of low-margin contracting, and a EUR 5.3 million profit margin decrease was recognised for one ongoing and four completed projects, primarily in the first quarter. The domestic order backlog was EUR 645.8 million (EUR 774.4 million). In order to improve profitability, the company has shifted the focus of operations to increasing developer contracting and negotiated contracts.

On the whole, housing sales developed favourably in Finland, with SRV selling a total of 701 units (745 1-12/2012) to consumers and investors. In addition, SRV has made preliminary agreements for the sale of 164 housing units to investors under negotiated contracts. These units will be built on plots owned by SRV. The units to be built under the preliminary agreements are not included in either the domestic order backlog or total housing sales. As sales to consumers slackened after the first quarter due to growing economic uncertainty and the transfer tax hike, the focus has been shifted to rental housing development projects, and the volume of developer contracting has been scaled down.

SRV had 1,054 rental and owner-occupied units under construction (1,849 on 31 December 2012), of which 249 were developer-contracted. Based on advance marketing, decisions have been made to initiate the construction of 22 additional housing units. 83 per cent of housing units under construction have been sold, and 76 per cent of production consists of rental and right-of-occupancy units. The volume of housing contracting has been reduced, and 68 per cent of production (48%) consisted of developer-contracted production or rental housing development projects sold to investors.

Revenue from International Operations rose to EUR 104.7 million (EUR 73.1 million). Most of the revenue was generated by the construction of the Pearl Plaza shopping centre, 50%-owned by SRV, and the sale in June of a 55 per cent stake in the Okhta Mall shopping centre project in St. Petersburg to investment company Russia Invest. Operating profit was EUR 10.0 million (EUR -3.2 million). Growth in the level of activity, the sale of the holding in the shopping centre project, and the implementation of cost-savings measures contributed to the improvement in operating profit. Other contributing factors included the EUR 8.3 million change in the fair value of the holding in the Okhta Mall shopping centre following the surrender of SRV's controlling interest in a transaction carried out in June and the subsequent measurement of its remaining holding at fair value based on the sale of the majority holding.

The Group’s fourth-quarter revenue was EUR 171.6 million (EUR 175.4 million) and operating profit was EUR 4.6 million (EUR 2.4 million). The level of revenue was affected by the lower volume in both Domestic and International Operations in the fourth quarter. The higher profitability of Domestic Operations in turn contributed to operating profit growth.

Of SRV’s major international projects, the Pearl Plaza shopping centre in St. Petersburg was completed and opened in August 2013. All of its premises have either been leased or a lease is in the final stages of negotiation. Leasing of the Okhta Mall shopping centre project in St. Petersburg has progressed well, and its construction has begun. Projects in Finland include the construction of the Derby Business Park in the Perkkaa district of Espoo. Phase II of this project was completed in June 2013, and over 90 per cent of the premises have been leased.

SRV’s own project development operations are paving the way for substantially increasing operating volumes in Finland. These projects require long-term development work and are carried out over the course of several years. Many of SRV’s projects are 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 Kalasatama Centre, or REDI, in Helsinki, and a project to develop the area adjacent to the Niittykumpu metro station in Espoo. In St. Petersburg and Moscow, SRV will from now on focus on the development of shopping centre projects. SRV will harness the investment potential of the Russia Invest investment company in order to support the financing of these projects.

Financial targets

On 13 February 2014, SRV’s Board of Directors confirmed the Group’s strategy targets for 2014–2018. The following strategic targets were set for the Group:

• During the strategic period, SRV will focus on improving profitability rather than on growth
• The average annual revenue of International Operations will rise to more than EUR 150 million
• The operating profit margin will reach 6 per cent
• The return on equity will be at least 15 per cent
• The equity ratio will remain above 30 per cent
• A dividend payment equalling 30 per cent of the annual result, taking into account the capital needs of business operations

For the set targets to be achieved, the number of developer-contracted projects must be stepped up substantially.

Outlook for 2014

The quarterly variation and development of revenue and result in 2014 will be affected by several factors, such as: SRV’s own projects are recognised as income upon delivery, the part of the order backlog that is continuously recognised as income mainly consists of low-margin contracting, the development of the order backlog's profit margins, the sales volume of developer-contracted housing and the completion schedules of the properties, the number of new contracts, the start-up of own projects, the project development nature of operations, and the realisation of planned project sales. Investor demand for commercial properties in Finland is estimated to remain muted and the outlook for 2014 does not include the sale of the Derby Business Park property. The construction of the REDI shopping centre that SRV is developing in Kalasatama is expected to  start in 2014. Based on current completion schedules, SRV estimates that a total of 186 developer-contracted housing units will be completed during 2014.

SRV estimates that its developer-contracting volume will increase in 2014. The recognition of revenue and earnings in 2014 will be affected by the recognition of income upon delivery and the elimination of a share equivalent to SRV’s holding from profit margins. The Group’s full-year revenue is expected to be on a par with the previous year (EUR 679.4 million 1-12/2013) and profit before taxes to amount to EUR 10-20 million (EUR 22.8 million 1-12/2013).

Press conference

The financial statement release will be presented to the media and analysts at the press conference which will take place on 14 February 2014 at 10.30 a.m. at conference room Mansku at Hotel Scandic Simonkenttä, address Simonkatu 9, Helsinki. The press conference will be held in Finnish. CEO Jukka Hienonen and Executive Vice President, CFO Hannu Linnoinen will be present, among others.

A live webcast of the press conference will be available on the company’s website www.srv.fi/en/investors. The webcast will be in Finnish. The presentation material of the press conference will be published in English and Finnish on www.srv.fi/en/investors after the conference.

Disclosure procedure

SRV Group Plc follows the disclosure procedure enabled by Standard 5.2b published by the Finnish Financial Supervision Authority. This is a summary of SRV’s financial statement release and the complete report is attached as a pdf-file to this release and is also available on the company website at www.srv.fi/en/investors.

Espoo, 13 February 2014

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.

For further information, please contact

Jukka Hienonen, President and CEO, +358 (201) 455 213
Hannu Linnoinen, Executive Vice President, CFO, +358 (201) 455 990, +358 (50) 523 5850
Taneli Hassinen, Vice President, Communications, +358 (201) 455 208, +358 (40) 504 3321