SRV's order backlog at strong level

Last autumn’s economic uncertainty has been reflected in our sector less than we might have expected at the time based on the gloomiest forecasts. Problems inEurope’s crisis economies have been contained through rescue packages assembled with great effort. The sensitivity of the situation is also evident within SRV, in terms of the caution being exercised in starting projects implemented at own risk. This year, construction volume in Finland is expected to decline by around two per cent from the previous year.

The housing market has been reasonably buoyant throughout the winter, aided significantly by the low level of interest rates. Interest rates are expected to remain low for the foreseeable future, which is encouraging house buyers to act. SRV’s housing construction is at an all-time high. We have around 2,200 residential units under construction, of which one third is our own production, the remainder being produced on balance sheets of other operators.

In our revised strategy published in February, we outlined that our operational focus will shift from low-margin competitive contract projects to negotiated contracts and own production, i.e. to projects in which the added value we generate is higher.

In housing construction, we have managed to maintain the level of own production relative to contracting, while keeping the overall volume at all time high. This year our target is to start 500 developer-contrangting housing units. This is good, because in commercial construction the shift of focus to developer-contracted projects will take more time.

InFinland, we have initiated as a developer-contracted business premises project theDerbyBusinessParkoffice complex, to which SRV’s own head office will move in August. Kalasatama Centre, where a start has now been made on infrastructure construction, is a one billion euro SRV project for this decade and we are now devoting all of our energy to developing the capital structure of the project.

We believe that we will find future revenue growth above all in the Russian market. We are currently building thePearlPlazashopping centre inSt. Petersburgin cooperation with a Chinese partner. Also under development inSt. PetersburgisSeptemCity, for which we have great expectations during this decade. We have sought additional financial flexibility in the form of a Russia-oriented real-estate investment company, which we have founded with domestic institutional investors.

We will focus on improving production efficiency and on prudently laying the foundations for the projects of future growth years. Some of the projects we have developed have matured to sales readiness and we have initiated sales assignments at our Moscow Etmia office property and Espoo Derby Business Park projects.

Our revenue, operating profit and order book grew in the early part of the year. The result for the quarter was adversely affected, however, by changes that took place in the structure and level of financial expenses. We expect our full-year revenue at least to match last year’s record level and our full-year result to improve.

General review

The trends in SRV’s revenue and order backlog remained favourable in the review period. The order backlog grew by 8.3 per cent to EUR 760.7 million (EUR 702.2 million). Due to growth in revenue from international operations, the Group’s revenue grew by 6.2 per cent to EUR 140.7 million (EUR 132.6 million 1-3/2011).

Revenue from domestic operations was EUR 120.7 million (EUR 123.9 million 1-3/2011) and operating profit was EUR 5.4 million (EUR 4.4 million 1-3/2011).

Domestic commercial construction volumes declined, and the profitability of this sector was impacted by the order backlog consisting mostly of low-margin contracted construction projects. In order to improve profitability, SRV aims to move its focus to own project development. InFinland, competition for new commercial construction orders is fierce. The order backlog for commercial construction grew to EUR 329.4 million (EUR 277.7 million on 31 March 2011).

Market developments in domestic housing construction continue to be positive. SRV has increased both its rental and owner-occupied housing production, making the company a major housing contractor in these sectors. SRV’s ongoing housing construction grew to 2,188 housing units (1,956 on 31 March 2011). 84 per cent of housing units under construction have been sold, and 75 per cent of production consists of rental and right-of-occupancy units. SRV has 547 developer-contracted housing units under construction.  Based on advance marketing, the decision has been made to initiate the construction of 185 additional housing units.

Revenue from International Operations grew to EUR 20.1 million (EUR 8.4 million). Due to the project development nature of this business area, its result remained in the red. SRV aims to tap into the market potential in Russia through developer-contracted property development projects financed with the support of the Russia Invest investment company and the investment potential of the VTB and Ashmore property funds.

Of SRV’s major international projects, construction of thePearlPlazashopping centre inSt. Petersburgis already in full swing. Financing for the construction of the site has been secured, with total investment amounting to approximately EUR 135 million. The shopping centre will be completed in 2013, and its commercialisation has already begun. Approximately 35 per cent of the shopping centre premises have already been leased out to four anchor tenants.

The Group’s operating profit was EUR 1.8 million (EUR 1.0 million). Operating profit levels were impacted by the positive trend in operations in Finland, growth in the volume of international operations, and the non-recurrent depreciation of EUR 1.1 million, made in January for the International business area as a result of a fire that destroyed a warehouse building.

The Group's profit before taxes was EUR 0.3 million (EUR 1.7 million) The result of the reference period improved due to gains from both interest rate swaps and currency fluctuations, as well as affiliate-derived financial income.

SRV’s own project development operations pave the way to increasing operating volume inFinland. 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, theKeilaniemiTowershousing project, the development project for the vicinity of the Niittykumpu metro station inEspoo, and the Kalasatama development project inHelsinki, whose implementation agreement was signed in August 2011.

Jukka Hienonen
CEO and President
SRV

Espoo, 8 May 2012