SRV’s order backlog remains strong: SRV’s interim report 1 January–30 September 2014

SRV GROUP PLC     INTERIM REPORT     5 NOVEMBER 2014, at 8:30 AM   

SRV’s order backlog remains strong: SRV’s interim report 1 January–30 September 2014

Reporting period 1 January–30 September 2014 in brief:
• SRV's revenue was EUR 490.6 million (EUR 507.8 million 9/2013), change -3.4%
• Operating profit was EUR 15.3 million (EUR 21.8 million), change -29.7%
• Profit before taxes was EUR 11.3 million (EUR 19.2 million), change -41.1%
• Earnings per share were EUR 0.19 (EUR 0.38)
• The order backlog at the close of the review period was EUR 944.1 million (EUR 911.5 million), change +3.6%
• Equity ratio was 38.9% (39.3%)

SRV revises its outlook for full-year profitability and reiterates its outlook for full-year revenue. 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 14-20 million (EUR 22.8 million 1-12/2013).

Previous outlook: 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).

Third quarter 1 July–30 September 2014 in brief:
• Revenue was EUR 209.0 million (EUR 170.0 million 7-9/2013)
• Operating profit was EUR 6.0 million (EUR 6.9 million)
• Profit before taxes was EUR 5.7 million (EUR 5.2 million)
• Earnings per share were EUR 0.14 (EUR 0.06)

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

CEO Jukka Hienonen:

SRV’s profit development continued to be positive also during the third quarter of this year. We have focused consistently on higher-margin projects and have rigorously improved our cost-efficiency. Due to the positive development of our operational profitability, we have also clarified our outlook on the full-year result.

The entire Group’s profitability has remained stable, even though the Group’s reported operating profit fell short of the corresponding period of last year. The previous year’s figures included a significant capital gain on the sale of a holding in a St. Petersburg shopping centre project as well as a change in the fair value of SRV’s holding. Our investment in customer relationships has yielded results; our order backlog grew to EUR 944 million, and 87% of it, i.e. EUR 817 million, has been sold. This provides a good foundation for the development of our future revenue and profitability.

In Finland, business profitability is clearly at a better level than last year. Of SRV’s revenue, Finland accounts for over 90%, so its weighting in the Group result is significant. The operating result of our International Operations is affected by the timing of the recognition of long projects.

Our interim result must be considered against an environment where the market situation in our industry has been weak. The business premises market has long been subdued due the large number of vacant premises. In the housing market, consumer demand has been low, even though a pick-up in demand has been perceptible this autumn.

Last year and at the beginning of this year we reduced our housing production directed at consumers. In contrast, we have sold and built for institutional investors and housing funds rental housing projects that we developed ourselves. The gradual pick-up of the consumer market has encouraged us to make start-up decisions on new consumer projects in the Helsinki Metropolitan Area and the Tampere Region since last spring. Sales of the new projects have begun on a positive note. There is continuing demand for small apartments. On the other hand, we have built larger family apartments within the framework of minimum square metre regulations, most of which as regulated HITAS production.

The long-prepared Kalasatama REDI project, which halted due to a planning appeal, is advancing towards the launch of full-scale construction. We have assembled a group of investors for the capitalisation and implementation of the REDI shopping centre and parking facility, which has accelerated leasing and bank financing negotiations. Already 20% of REDI has been leased and our goal is to finalise bank loan negotiations during this year. With the start-up of the REDI project in mind, we lightened our balance sheet by selling in Espoo the Derby Business Park, where our head office is also located. The Derby sale, combined with the positive development of our profitability, our strong financing capacity and our nearly 39% self-sufficiency, facilitates our goal of retaining a significant 45% ownership of REDI.

In St. Petersburg, Russia we are continuing the construction of the Okhta Mall shopping centre, which has advanced without delays. With the weakening of the rouble, the project’s cost estimate has fallen by around EUR 20 million. Tenant acquisition at the project has progressed well and project financing has been secured. In St. Petersburg, customer numbers at the Pearl Plaza shopping centre, which we partly own, were nearly 600,000 in August and new records have repeatedly been set.

Our large shopping centre projects in Finland and Russia are proceeding, even though the financial crisis and global political events have placed obstacles in our path. We have made the necessary adjustments and have ensured the advance of the projects. Projects cannot start and stop on the basis of individual economic or political fluctuations; they must be taken forward with a long-term view.

Overall review

The Group's order backlog rose to EUR 944.1 million (EUR 911.5 million 9/2013) thanks to growth in new contractor agreements. The share of the order backlog that has been sold is 87 per cent, which amounts to EUR 817 million in total. The unsold share of the order backlog declined to EUR 127 million (EUR 207 million 9/2013). The value of the Group's new orders increased to EUR 592.3 million (EUR 532.4 million 1-9/2013).

The Group's revenue declined to EUR 490.6 million (EUR 507.8 million 1-9/2013). Revenue from domestic business construction grew when the sale of the developer-contracted Derby Business Park property was completed in the third quarter. Revenue from housing targeted at Finnish consumers decreased as the number of completed residential units (186) fell to under half of the previous year's level (388 1-9/2013). Revenue for International Operations in the comparison period, 1-9/2013, was increased by the sale of the 55 per cent stake in the Okhta Mall shopping centre project in June 2013 and the construction volume of the final phase of the Pearl Plaza shopping centre.

Consolidated operating profit was EUR 15.3 million (EUR 21.8 million) and the operating profit margin was 3.1 per cent (4.3%). The operating profit of Domestic Operations improved substantially. Consolidated operating profit decreased, as operating profit for the comparison period included capital gains from the sale of the 55 per cent holding in the Okhta Mall shopping centre project in St Petersburg in June 2013. In addition, operating profit for the comparison period was increased by 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. 

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 net financial expenses rose to EUR 4.0 million (EUR 2.6 million). Interest expenses for the review period increased due to the fixed-interest bond issued in December 2013. Financial income for the comparison period was increased by interest income from SRV's associated company Etmia II, which during Q2/2013 refinanced its construction funding obtained from SRV with a long-term project loan of about EUR 33 million. Financial income for the review period was increased by the recognition in Q3 of EUR 1.1 million in previously written-down interest income from the Promenade project in Moscow.

The Group's profit before taxes was EUR 11.3 million (EUR 19.2 million). Earnings in the 1-9/2013 comparison period were improved by capital gains from the sale of the 55 per cent stake in the Okhta Mall shopping centre project in St Petersburg, the EUR 8.3 million fair value change of SRV's holding and financial income from the associated company Etmia II. Net profit for the review period was EUR 10.1 million (EUR 16.8 million). Income taxes totalled EUR 1.2 million (EUR 2.4 million). Earnings per share was EUR 0.19 (EUR 0.38).

The Group's equity ratio was 38.9 per cent (39.3% on 30 September 2013).

The revenue of Domestic Operations was EUR 451.9 million (EUR 418.9 million 1-9/2013). Operating profit improved to EUR 19.8 million (EUR 13.4 million), with an operating profit margin of 4.4 per cent (3.2%). The increase in profitability was driven by improved construction margin management, more efficient purchasing and higher development project volumes. The level of operating profit was also affected by the fact that the commercial development order backlog recognised as income mainly consisted of low-margin contracting. The domestic order backlog rose to EUR 777.8 million (EUR 727.8 million). In order to improve profitability, the company has shifted the focus of operations to increasing developer contracting, development projects and negotiated contracts.

SRV sold a total of 550 housing units (584 1-9/2013) to consumers and investors. SRV had 1,612 housing units under construction (1,398 on 30 September 2013), of which 196 were developer-contracted. 92 per cent of housing units under construction have been sold, and 88 per cent of production consists of rental and right-of-occupancy units. 60 per cent (61%) of housing units are production developed by SRV.

Revenue from International Operations was EUR 39.2 million (EUR 89.0 million). Operating profit was EUR -0.7 million (EUR 11.7 million). Revenue and operating profit declined in part due to the sale of the Okhta Mall shopping centre project in St Petersburg and the fair value change of SRV's holding during the comparison period. The international order backlog amounted to EUR 166.2 million (EUR 183.7 million).

Consolidated third-quarter revenue amounted to EUR 209.0 million (EUR 170.0 million) and operating profit to EUR 6.0 million (EUR 6.9 million).

Of SRV's major shopping centre projects, the Pearl Plaza shopping centre in St Petersburg was opened in August 2013, and the number of visitors has outperformed the target level. 97 per cent of the shopping centre's premises have been leased. At the Okhta Mall shopping centre, which is under construction in St Petersburg, lease agreements or preliminary BTS (business term sheet) lease agreements have been signed for about 33 per cent of the retail space. For the Promenade shopping centre in Moscow, an investor solution was accomplished and construction work has started. In September, SRV signed a EUR 240 million letter of intent with a group of investors to jointly invest in the capitalisation and implementation of the large-scale REDI shopping centre and parking facility in Finland.

SRV's own project development operations are paving the way for substantially increasing its development project volume. 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.

Financial targets

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

• 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.

Earlier outlook for 2014

14 February 2014

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).

SRV revises its outlook for 2014

SRV revises its outlook for full-year profitability and reiterates its outlook for full-year revenue. The development of revenue and result in 2014 are 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, and the start-up of new contracts and own projects. The construction of the REDI shopping centre that SRV is developing in Kalasatama is expected to start in late 2014. Based on current completion schedules, SRV estimates that a total of 249 developer-contracted housing units will be completed during 2014.

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 14-20 million (EUR 22.8 million 1-12/2013).

Press conference

The interim report will be presented to the media and analysts at a press conference which will take place on 5 November 2014 at 10.30 a.m. at conference room Espa 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 interim report 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, 4 November 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

www.srv.fi