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 (Half-Year Report 1-6/2020)
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 2019 Notes to the Financial Statements and Annual Report, which was published on 2 March 2020, and is also available on the company’s website.
The most significant risks concern negative changes in SRV’s and its customers’ operating environment and currently the coronavirus pandemic in particular, capital employed in major projects, SRV’s earnings trend, availability of financing for projects, the development of the situation in Russia, the rouble exchange rate and key project implementation risks.
Demand for SRV’s products and services might be weakened by negative changes in, for instance, general economic development, the business environment of SRV and its customers, the functionality of financial markets and the political operating environment. SRV’s business opportunities would be weakened by the deterioration of the operating conditions of business premises customers, the weakening of corporate and consumer confidence and purchasing power, an increase in interest rates, more difficult availability of financing or financial problems in public administration. In particular, a decline in the need for business premises, growth in the yield requirements of investors, tighter investment criteria, a decrease in the demand for and prices of apartments, and the weakening of investment opportunities in public administration may pose a substantial risk to the company’s financial position and profitability.
The main risk is currently posed by the coronavirus pandemic and its impact not only on the operating conditions and business of SRV, its customers and other partners, but also its broader effects on general economic development. Illness, quarantines and the restrictions imposed by countries have a negative impact on the business performance of various parties because they weaken or prevent access to personnel resources and materials. The uncertainty caused by this situation has also weakened the confidence of companies and private individuals and their outlook for the future. This has reduced investments and consumption, and temporarily put economic development in reverse.
Many countries have started lifting restrictions. However, the extent and duration of these problems is as yet difficult to estimate. The seriousness of the situation will be significantly impacted if the epidemic is prolonged or a second wave begins. Uncertainty among customers means that, at least in the short term, SRV’s development projects will be pushed back, housing and property deals and gaining new contracts will be slowed down and the financial situation will be tighter. In addition, ongoing work at construction sites may be slowed down or even halted temporarily. SRV is closely assessing the developing impacts of the pandemic and is proactively taking the necessary measures to maintain health and wellbeing, prevent the spread of the pandemic and ensure business continuity. However, over the longer term, the population shift into SRV’s main business areas in Finland’s growth centres will continue, laying down a good foundation for operations when the situation returns to normal. The aforementioned risks have been addressed in the accounting principles for this interim report.
SRV’s ongoing major projects and completed shopping centre projects are tying up a great deal of capital, as does developer-contracted construction. The availability and price of financing are critical to the company’s business. As part of its previously announced recovery programme, the company carried out numerous measures, such as divestments of assets, refinancing and two share issues during the first part of the year. As a result, the company’s balance sheet and financing position and liquidity improved significantly by the end of the second quarter.
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 value in the balance sheet. The prolongation of the coronavirus situation and economic uncertainty in Russia might mean that the sales of Russian shopping centres will be postponed.
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 -6.9 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 -5.1 million on SRV’s earnings if the effect of currency hedging were not taken into account. The exact rouble hedging rate varies over time. On the reporting date, the rouble exposure was not hedged due to the stronger balance sheet position. SRV’s transaction risk largely comprises the euro-denominated loans of associated companies that are partly owned by SRV. The remaining exchange rate risk is hedged in accordance with the hedging policy approved by the Board of Directors.
SRV Group Plc’s Russian subsidiary, of which SRV Group Plc indirectly owns 51 per cent, was involved in legal proceedings in Russia. A court of first instance ruled that SRV’s subsidiary must pay EUR 3.1 million in compensation to a counterparty. This sum has been recognised in full as a provision for expenses. The subsidiary has appealed against the decision to the court of second instance.
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. SRV also reports certain key figures without the impact of IFRS 16.
Competitive project operations with products and services comprise a critical success factor for SRV’s business and may be subject to significant risks. SRV seeks to implement profitable contracting projects for developers and to develop profitable developer contracting projects and property projects together with its partners. A key challenge is to ensure that the portfolio consists of viable projects in each economic cycle and market situation.
The company continuously monitors the needs of customers and the market situation, and seeks to react rapidly to changes. Large development projects that tie up a great amount of capital are especially vulnerable to fluctuations and risks. In its own development projects, the company is currently pursuing more projects carried out with partners, and in contracting it seeks to utilise cost-flexible means of implementation that do not require financing from the company. The company might also lose markets to new or growing competitors or business models. SRV seeks to manage these risks by retaining its position as one of the top companies in its field by investing in the development of its systems and own customer-focused, flexible and networked operating model (SRV Approach). The company has substantially improved its challenging financial situation with an effective recovery programme.
Retention of skilled employees, hiring of competent new employees and maintaining a partner network for professional implementation also pose risks to operations. The company takes care of the health and safety of its employees with well-run health services, systematic guidelines and monitoring. In addition, the company continuously offers its personnel opportunities to engage in training, development and communal activities. Efficient and committed action to achieve the company’s objectives also reduces the likelihood that various risks will materialise.
Success in project planning and implementation and the management of the partner network also involve risks related to issues such as operational quality, costs, scheduling, safety and the environment. The operations system that guides SRV’s functions incorporates ISO-certified quality, environmental, occupational health and safety systems as well as a procurement system and the SRV Network Register. Project operations are developed proactively. The key perspectives include not only costs, quality and customer service, but also responsibility and harnessing digitalisation.
The company forecasts that very few projects requiring new RS loans will be launched during 2020. The implementation of new orders recognised in early 2020 will not require any financing from SRV. The company will only consider launching other new projects if there is sufficient demand and the necessary financing can be assured with the aid of the company’s general financial reserves and the sale of project-specific receivables to financial institutions. Receivables can be sold for the purpose of liquidity management only within the limits allowed. During the review period, the company signed an agreement on a new credit facility with another financial institution offering short-term factoring.