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 and uncertainties (Interim report 1-9/2022)
SRV’s most significant risks and uncertainties concern negative changes in the company’s and its customers’ operating environment, capital employed in SRV’s major projects, the availability of financing for SRV and its projects, the rise in construction costs and SRV’s earnings trend, key project implementation risks, and currently especially the consequences of Russia’s war against Ukraine, the availability and rising prices of energy, and the impacts of the general weakening of the economic situation. It is difficult to estimate how long the Russian invasion of Ukraine will last, but the further prolongation and potential expansion of the war would further increase the likelihood and impact of numerous risks. The risks posed by the coronavirus pandemic have decreased as the situation has eased off.
The Russian Federation’s invasion of Ukraine on 24 February 2022 and the related sanctions, countersanctions and weakening of the market situation caused substantial impairments to the company’s operations in Russia in the first quarter. After write-downs, the total value of holdings in Russia in the company’s balance sheet as at 30 September 2022 was only EUR 4.0 million. As a result of the impairments, the company executed a comprehensive restructuring of financing during the second quarter of 2022, which strengthened the company’s equity ratio and reduced its net interest-bearing debt substantially.
Due to sanctions and the tightening economic situation, SRV’s risks in Russia – in addition to the remaining balance sheet item – are posed by the profitability of managing the operations of shopping centres if the company or personnel are subjected to harassment or Russian sanctions, and by the fulfilment of the covenant terms of the loan agreements of the companies that own the shopping centres. SRV has decided to exit its Russian operations and holdings.
Many of the risk positions involved in the construction industry have increased significantly due to the impacts of the war and the general weakening of the economy, also in Finland. Although the economy has been recovering from the consequences of the coronavirus pandemic, uncertainty about future development has increased substantially due to the war. Many forecasting institutions have downgraded their estimates for near-term economic growth that they have issued during the year. Economic uncertainty is negatively reflected in the confidence of both companies and consumers, and thereby also on construction and housing sales. High inflation and rising interest rates increase the risks further. Concerns about the potential spread of the crisis into Russia’s neighbouring countries might also decrease interest in Finland as an attractive business area and investment. Furthermore, the availability of certain raw materials, labour and especially energy throughout Europe may hamper the production and availability of construction materials following the tightening of the sanctions imposed by western countries and Russia as well as the extensive reconstruction of Ukraine, thereby further increasing construction costs. Cyberattacks and hacking of telecommunications, IT systems and the functionality of other infrastructure might also increase, causing disruptions in the operations of SRV and its customers and implementation partners.
On 4 February 2022, SRV announced that it will exit its holding in Fennovoima and sell it to RAOS Voima Oy. The completion of the contractual arrangement was subject to approval by the Ministry of Economic Affairs and Employment. However, the preconditions for the granting of approval and the implementation of the contracts were not fulfilled due to reasons such as the decision taken by Government on 9 June 2022 whereby the processing of the building permit application for the Hanhikivi 1 nuclear power plant lapsed as well as other significant changes in the Hanhikivi 1 project. On 8 August 2022, SRV announced that the completion of the set of conditional agreements signed on 4 February 2022 between SRV and RAOS Voima Oy, which would have led to SRV’s exit from its ownership in Fennovoima, will not be realised. The company has written down its holding in Fennovoima.
Uncertainty posed by the coronavirus pandemic has decreased as the number of those who have had the illness and been vaccinated has risen. Finland has lifted its restrictions, easing the general economy and situation in construction in that respect. However, the future development of the pandemic still involves risks, especially with respect to new variants of the virus. In addition, potential coronavirus shutdowns in China, for example, may have negative impacts on global delivery chains and thereby on the availability of materials and construction costs.
SRV has suspended the construction of the Torihotelli contract in Oulu due to the payment difficulties of the client. Trade receivables in the contract involve credit loss risks. At the end of September, SRV had about EUR 16.0 million in trade receivables due from this contract, secured by a mortgage on the property under construction and pledges on certain other assets. In March, the company initiated legal proceedings to realise the collateral. In order to accelerate the realisation of the mortgaged property, SRV filed an application on 27 June 2022 to declare the client company bankrupt. As a result, the District Court of Oulu declared the company developing the hotel, Kiinteistö Oy Oulun Torihotelli, bankrupt on 26 August 2022.
More detailed information about the company’s business risks and risk management has been provided in the 2021 Notes to the Financial Statements and Annual Review, which have been published on the company’s website: www.srv.fi/en/investors/releases-and-publications/annual-reviews-financial-statements/. In addition, SRV has published a separate Corporate Governance Statement, which includes a general description of the company’s risk management as part of its report on operations. It is available on the company’s website at: www.srv.fi/en/investors/cg/.