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CEO’s review

CEO’s review

January–March 2023 Interim Report, 27 April 2023

As 2023 began, the market environment had weakened sharply due to high inflation, rising interest rates and economic uncertainty. The greatest decline has been seen in the demand for housing construction in all customer segments. Demand for business premises among investors is also cautious, which is further weakened by challenges posed by the price and availability of financing. Market development is aptly illustrated by the fact that the fourth quarter of 2022 accounted for only EUR 1.3 billion of the total transactions of EUR 7.3 billion that were made in Finland last year. The volume in the first quarter of this year was only EUR 0.4 billion.

Our revenue for the first quarter fell significantly short of the comparison period due to lower volumes in housing construction. The recognition of income from our order backlog is now strongly focused on cooperative contracting, which is low in risk and generates positive cash flow, but has a relatively modest profit margin. As a result of these factors, especially the low revenue, operative operating profit remained negative. We expect that the largest share of our earnings in 2023 will be accrued towards the end of the year, when new projects that have been entered into the order backlog and expected new projects will increase revenue and generate profit. Due to the structure of the order backlog and the fact that the volume is expected to be lower than last year, we forecast that operative operating profit will fall short of the previous year, but will nevertheless be positive.

Our order backlog swung to growth in the last quarter of 2022 and continued to see slight further growth in the first months of the year. We entered the Sammontalo Building in Lappeenranta, the Okmetic factory building in Vantaa and the Horisontti office skyscraper in Kalasatama, Helsinki into our order backlog. The start-up of our Horisontti development project – one of the few property transactions carried out in Finland during the first quarter – shows that there is demand for our unique tower construction concept even in the prevailing market situation. In April, after the end of the review period, we signed the first order for the Laakso Joint Hospital, underground excavation work – valued at approximately EUR 90 million – into our order backlog after a two-year development phase. We expect that the next orders, such as the interior decoration of underground facilities, such as the construction of a parking facility, and the first implementation phase of the hospital’s main construction will be recognised in the order backlog later this year and at the beginning of 2024. The volume of housing construction will remain low in 2023, but our strong order backlog in business construction will carry us relatively well over challenging times and will enable us to develop our operations.

In the weakening market, it is imperative for our balance sheet to be healthy and our financing to be in good shape. In April, SRV agreed with its main financier banks in good cooperation on a new financing agreement that bolsters our liquidity and secures our financing for the next two years. In the current market environment, it is our clear advantage that very few of our residential units that have been completed and are under construction remain unsold – this means that we do not have significant capital and liquidity committed to unsold units.

This year, we will continue to focus on operating in line with our strategy – for instance, we aim to provide an excellent customer experience. Our efforts to enhance the customer experience were evident in the EPSI Rating survey, published in March, which assesses customer satisfaction in new housing construction – we achieved the greatest improvement in our rating. In the survey, we also received the highest index scores for the design quality of housing projects.

We are actively continuing to engage in negotiations in order to exit the last of our businesses in Russia. As the Investments segment had shrunk to minor significance both financially and strategically, we clarified our reporting structure and going forward will report on the Group as a single segment.

We expect that our revenue and operative operating profit will continue to face challenges in 2023 due to the prevailing market situation. That said, our project portfolio and the controllability of our projects are at a good level – and in our view, once the market recovers, we will be prepared to increase the share of our portfolio accounted for by higher-margin development and developer-contracting projects. Looking further into the future, we can also see that our operations are on a solid foundation, thanks to which we will be well-poised to build profitable growth.

Saku Sipola
President and CEO
SRV Group Plc