Risks and Risk Management
SRV engages in systematic risk management in order to protect itself against factors that might adversely affect its business operations and to promote recognition of new opportunities. The company improves the profitability and stability of its operations by identifying strategic and operational risks and reacting to them in a timely manner. Risk management is part of SRV’s management system. It supports the company’s values, vision, strategy and the achievement of its earnings objectives.
The objective of risk management is to ensure that SRV’s controllable risks do not jeopardise operations. To this end, SRV has a systematic and comprehensive approach to identifying and assessing risks as well as to carrying out the necessary risk management measures and reporting on operations.
Overall responsibility for risk management rests with the company’s Board of Directors and the President & CEO. The Audit Committee goes quarterly through a report on the operational risks and how to prepare for them. The Board of Directors approves the risk management strategy and policy, and assesses the framework for risk management covering the entire company. Line management is in charge of carrying out day-to-day risk management as well as for its steering and supervision. The Group’s risk management function supports the application of risk management principles and develops Group-wide operating practices.
Risks, risk management and and corporate governance (Interim report 1-9/2019)
SRV has published a separate Corporate Governance Statement in its Annual Report and on the company’s website. More detailed information about the company’s business risks and risk management has been provided in the 2018 Notes to the Financial Statements and Annual Report, and is also available on the company’s website.
The most significant operational risks relate to problems arising from the lengthy boom in the industry, capital tied up in major business construction projects, SRV’s earnings trend, availability of construction projects’ financing, the adequacy of liquidity, the development of the Russian situation, and the rouble exchange rate.
According to the latest forecasts, the strong growth that the construction industry has experienced in recent years is now levelling off, or there may even be a downswing in production. This is expected to generate a slow improvement in subcontractor availability and to relieve cost pressures in materials and subcontracting. Coupled with the prudent selection of new projects, it is also expected to improve SRV’s cost-competitiveness. Due to long-term procurement agreements, the decline in input prices may have a delayed effect on SRV’s earnings improvement. SRV’s ongoing major projects and completed shopping centre projects are employing a great deal of capital, and they also have an impact on the availability and price of financing. SRV’s financial position is expected to improve slightly due to positive cash flow and decrease in tied-up capital in the balance sheet if the company receives funding for its planned construction projects.
Net rental income from SRV’s shopping centre investments typically reaches its target level about 3–5 years after opening. Once this occurs, it is SRV’s strategy to sell the investment. Developments in rental income are impacted by factors such as general economic trends, consumer behaviour, successful shopping centre management, the shopping centre’s reputation and, in Russia, also the rouble exchange rate. Weaker-than-planned developments in different factors and the assumptions made, both when starting up shopping centres and on the scheduled sale date, may result in a need to lower the shopping centre’s acquisition-price-based value in the balance sheet.
In its Russian business, fluctuations in the rouble exchange rate expose SRV to translation and transaction risks. A ten per cent weakening of the rouble against the euro on the reporting date would have had an impact of about EUR -9.5 million on the Group’s equity translation differences. A ten per cent weakening in the exchange rate would correspondingly have an impact of about EUR -6.2 million on SRV’s earnings. The exact rouble hedging rate varies over time. SRV’s transaction risk largely comprises the euro-denominated loans of associated companies that are partly owned by SRV. Some of the loans taken out by SRV’s associated companies in Russia were converted to roubles during early 2018, thereby reducing SRV’s exchange rate risk. The remaining exchange rate risk is hedged in accordance with the hedging policy approved by the Board of Directors.
To increase the comparability of operations, the company reports operative operating profit in addition to operating profit. Operative operating profit differs from the IFRS definition of operating profit in that it eliminates the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts. In order to improve the comparability of the balance sheet structure, SRV will also report its 2019 key figures without the impact of IFRS 16.