CEO’s review

CEO’s review

Half-year Financial Report 1-6/2021, 21 July 2021

The first half of the year was concluded as planned, and we made progress towards our strategic objectives. Significant successes during the review period included new financing arrangements, a reduction in indebtedness, and positive cash flow in the second quarter. Favourable earnings trends in operative business also continued. During the review period, we won several new projects, of which the most significant was Laakso Joint Hospital valued at a total of EUR 730 million. However, many of the projects we won will only be entered into our order backlog later, as the contracts are gradually confirmed.

We also completed significant new financing arrangements during the review period. The written procedure to extend the maturity of our two notes was successfully completed, and we agreed on new bank financing in the spirit of good cooperation. Both solutions led to longer loan periods that will enable long-term business development and give us more room to manoeuvre in furthering our strategic objectives. Our indebtedness decreased considerably thanks to both these financing arrangements and positive cash flow in the second quarter.  Excellent progress in housing sales was an essential component in improving cash flow, and also means that the number of completed unsold housing units is at an all-time low and will remain low until the end of the year.

Our ongoing projects mainly progressed according to plan, and favourable trends have continued in profitability. I am very pleased with how our personnel have acted during these exceptional circumstances, and the way they have ensured health security on our construction sites throughout the pandemic. The impacts of the pandemic have been moderate on the whole, but its effects on the construction market are still unclear and cloud the outlook for the future.

Relative profitability will probably weaken slightly during the latter half of the year. The reason for this trend is the high share of generated revenue accounted for by two large low-margin projects, Loisto and Tampere Arena. On the other hand, when Loisto will be recognised as income, it will release a considerable amount of capital and generate significant cash flow. In addition, the lessons learned from the construction and planning solutions we have used in high-rise construction will also be valuable in our future high-rise projects. Also, a sharp rise in the market prices of materials during the spring poses challenges in maintaining our favourable trends in profitability, but we expect the impact to be temporary.

We entered new projects valued at about EUR 260 million into the order backlog in January–June, including both housing projects and the construction and renovation of business premises.  Our order backlog has decreased on the comparison period. However, at the same time, we have won projects that will increase our order backlog in the future, such as the Laakso Joint Hospital project, which will be entered into SRV’s order backlog in stages during 2021–2028. After the review period, we announced the construction of housing projects in the Helsinki Metropolitan Area for DWS Institutional Funds. The total value of these projects is EUR 82 million. This agreement is particularly important for us, as it will enable us to build energy-efficient housing units in accordance with our lifecycle-wise strategy. The agreement also reflects ongoing strong demand for housing units among investors, without which Finland’s urbanisation trend would not continue.

Housing sales have remained brisk and we have only 14 completed unsold units. In June, we sold all of our completed unsold housing units outside the Helsinki Metropolitan Area to a fund managed by S-Bank. The sale of Loisto in Helsinki is proceeding excellently and over 96 per cent of its apartments have now been sold or reserved. During the review period, we launched the construction of four developer-contracted residential projects in Vantaa, Oulu, Kaarina and Tampere. Most of these housing units will be recognised as income in 2022. To ensure that our housing construction is diverse and well balanced, we will also be increasing the number of good developer-contracted projects alongside projects sold to investors in a controlled manner.

Favourable trends were seen in sales at Russian shopping centres during the first half of the year, with sales even exceeding 2019 levels (which is a more relevant comparison year than the pandemic year of 2020). However, the coronavirus pandemic is still being reflected in visitor numbers, which remain lower than before the pandemic. The realisation of risks associated with virus variants will also impact sales and visitor numbers during the latter half of the year.

All in all, we are well-poised to continue developing our operative earnings performance and business in line with our strategy. I would like to thank our personnel for their firm commitment and excellent work. And at the same time, I would like to welcome two new members to SRV’s Corporate Executive Team: Anu Tuomola, Senior Vice President, General Counsel, and Jorma Seppä, Senior Vice President, Housing, Helsinki Metropolitan Area.

Saku Sipola
President and CEO
SRV Group Plc