Revenue and order backlog at a healthy level: SRV’s Interim Report 1 January – 31 March 2013

Reporting period 1 January–31 March 2013 in brief:

  • SRV’s revenue was EUR 158.4 million (EUR 140.7 million in Q1/2012), change +12.6%
  • Operating profit was EUR 1.2 million (EUR 1.8 million), change -31.5%
  • Result before taxes was EUR 0.7 million (EUR 0.3 million)
  • The order backlog at the close of the review period was EUR 726.7 million (EUR 760.7 million), change -4.5 %
  • Equity ratio was 34.3 per cent (31.9%) 
  • Earnings per share were EUR -0.03 (EUR -0.01)     

SRV’s outlook for 2013 remains unchanged. The Group’s full-year revenue is estimated to reach at least the same level as in the previous year (EUR 641.6 million) and the result before taxes is forecast to exceed that of the previous year (EUR 2.8 million), even if planned sales of office properties do not occur this year.   

This interim report has been prepared in accordance with IAS 34. The disclosed information is unaudited.

CEO Jukka Hienonen comments on SRV’s result:  

The construction market has followed a downward trend in the early part of the year. The outlook was unpromising at the turn of the year, and the spring has not brought any significant signs of improvement. The number of granted building permits suggests that construction volume this year will be around three per cent down on last year.   

Activity in January–February was buoyed by a change in the asset transfer tax on home sales and business volume in the two months was at a record high. From the beginning of March, business as expected took a downturn, but the deteriorating economic climate and tax decisions that reduce buying power have also undermined consumers’ enthusiasm to make purchases. It remains to be seen whether the situation will return to normal during the early summer.   

In construction, the first quarter is usually modest in terms of financial performance, as every effort is made to complete projects and recognise then as income before the turn of the year. We fell short of last year’s result, however, which is explained by write-downs of EUR 3.4 million made in the quarter on receivables from construction projects completed in previous years.  

SRV’s order backlog at the turn of the year was a record EUR 825 million. This will also act as a buffer in the current uncertain economic situation. Progress with the construction of projects has resulted in a net reduction of around EUR 100 million in our order backlog, and intake of new orders has been typically weak in the first quarter of the year. There are signs however, of a pick-up in orders during May and June.   

Our stock of new completed housing units is smaller than usual. Our housing stock under construction has also been well sold in advance. Many funds specialising in housing investment have entered the market. SRV has made agreements with these funds for the sale of both whole housing corporations and separate housing units. Although on the housing front business has slowed, we do not consider that there is cause for concern with respect to the situation of our unsold housing stock.  

The Finnish government has adopted a number of policies aimed at easing the shortage of rental housing and changing regulations in order to reduce the price of apartments, particularly in the Helsinki Metropolitan Area. Nevertheless, increasing the asset transfer tax and also extending it to housing corporation loans as well as raising value-added tax by one percentage point are having the effect of increasing house prices. We estimate that after these changes, the proportion of indirect and direct taxes in the price of a new home will rise this year to 45 per cent.   

In domestic business, most of our projects have advanced according to plan, but setbacks in a number of projects have spoiled our result. On the other hand, losses in our international business have been continually falling for two years now.   

SRV has long made great efforts to improve the profitability of international business. We have increasingly focused our strategy on building and developing shopping centres, particularly in St. Petersburg and Moscow. The Pearl Plaza shopping centre, which opens its doors in August 2013, is an excellent example of this. Leasing and construction of the shopping centre have proceeded according to plan.   

We believe that we will be able to replicate the experience we have acquired also in the Septem City project, which is next on the planning table. We aim to launch the construction of Septem City immediately after the opening of Pearl Plaza. We believe that we will achieve a positive result for the full year in our international business. We also expect this year’s result for SRV as a whole to exceed last year’s level.    

Overall review  

SRV’s order backlog remained strong at EUR 726.7 million (EUR 760.7 million on 31 March 2012), and its margin improved.   

Due to growth in revenue from both domestic and international operations, the Group’s revenue grew by 12.6 per cent to EUR 158.4 million (EUR 140.7 million Q1/2012). The Group’s operating profit was EUR 1.2 million (EUR 1.8 million). Profitability has been impacted by the project development nature of operations and the composition of the order backlog, which mainly contains low-margin contracting. The profitability of international operations improved, while the operating profit of domestic operations decreased. The Group’s profit before taxes was EUR 0.7 million (EUR 0.3 million). The result for the period was favourably affected by a fall in financial expenses and an increase in financial income.   

The Group’s equity ratio was 34.3 per cent (31.9%). The EUR 45 million hybrid bond that SRV issued on 28 December 2012 contributed to this growth in the equity ratio.    Revenue from Domestic Operations was EUR 135.0 million (EUR 120.7 million Q1/2012) and the operating profit was EUR 3.4 million (EUR 5.4 million Q1/2012). Operating profit was impacted by EUR 3.4 million of profit margin decrease recognised for one ongoing and three completed projects. The domestic order backlog rose to EUR 686.9 million (EUR 658.3 million). In order to improve profitability, the company will now be focusing on increasing developer contracting and negotiated contracts. Fixed-price contracting now accounts for a smaller percentage of the order backlog, and the order backlog’s mean margin has increased.     

Favourable trends were seen in housing sales in Finland and SRV sold a total of 223 units (133 Q1/2012). SRV currently has 1,633 rental and owner-occupied units under construction (2,188 on 31 March 2012). The volume of competitive contracting has been decreased and over half of SRV’s output was developer contracting or rental housing units that were sold to investors. 83 per cent of residential units under construction have been sold, and 68 per cent of production consists of rental and right-of-occupancy units. SRV has 517 developer-contracted residential units under construction.  Based on advance marketing, the decision has been made to initiate the construction of 117 additional residential units.   

Revenue from the International Operations segment rose to EUR 23.5 million (EUR 20.1 million). Construction of the Pearl Plaza shopping centre, 50%-owned by SRV, generated most of the revenue. Profitability noticeably improved, even though the result remained in the red due the project development nature of this business. Operating profit was EUR -0.8 million (EUR -2.6 million). In the future, SRV will be focusing on shopping centre development projects in St Petersburg and Moscow. To support financing for these projects, the company will be harnessing the investment potential of the investment firm Russia Invest and the investment fund VTBC Ashmore.   

SRV’s major international projects include the construction of the Pearl Plaza shopping centre in St Petersburg, which is already in full swing. The shopping centre is scheduled for completion in August 2013 and over 90 per cent of its premises have either been leased or a lease is in the final stages of negotiation. Projects in Finland include the construction of the Derby Business Park in the Perkkaa district of Espoo. The second phase of this project is scheduled for completion in August 2013 and 90 per cent of the premises have been leased.   

SRV’s own project development operations are paving the way for increased operating volumes in Finland. These projects require long-term development work and are being carried out over the course of several years. Many of SRV’s projects are so-called landmark projects – innovative new solutions for the needs of sustainable regional construction. Such projects include, for example, the Keilaniemi Towers residential project, the Kalasatama Centre in Helsinki, and a project to develop the area adjacent to the Niittykumpu metro station in Espoo.  

Group key figures
(EUR million)
1-3/ 2013 1-3/ 2012 change, MEUR change,% 1-12/ 2012
Revenue 158.4 140.7 17.7 12.6 641.6
Operating profit 1.2 1.8 -0.6 -31.5 6.9
Financial income and expenses, total -0.5 -1.5 1.0   -4.1
Profit before taxes 0.7 0.3 0.4 152.5 2.8
           
Order backlog 726.7 760.7 -34.0 -4.5 827.8
New agreements 40.0 65.5 -25.5 -38.9 594.5
           
Operating profit, % 0.8 1.2     1.1
Net profit, % 0.1 -0.3     0.1
           
Equity ratio, % 34.3 31.9     34.7
Net interest-bearing debt 277.7 259.5       18.21           7.0 267.9
Gearing, % 135.6 156.9     126.2
           
Return on investment, % 1) 1.7 2.1     2.2
Return on equity, % 1) 0.3 -1.0     0.5
           
Earnings per share, EUR -0.03 -0.01       -0.02   0.02
Equity per share, EUR 4.50 4.56       -0.07 -1.5 4.62
Share price at end of period, EUR 3.36 4.23       -0.87 -20.6 3.26
Weighted average number of shares outstanding, millions 35.5 35.5   0.0 35.5

1) In calculating the key ratio, only the profit for the period has been annualised.

Financial targets  

On 12 February 2013, SRV’s Board of Directors confirmed the Group’s strategy for 2013–2017. The Group’s strategic targets are defined as follows:

  • During the strategic period, SRV will focus on improving profitability rather than on growth.
  • International Operations will account for more than 20 per cent of Group revenue.
  • The operating profit margin will reach 6 per cent.
  • The return on equity will be at least 15 per cent.
  • The equity ratio will remain above 30 per cent. 
  • A dividend payment equalling 30 per cent of the annual result, taking into account the capital needs of business operations.     

For the set targets to be achieved, a significant increase in the number of developer-contracted projects is required.   

Outlook for 2013  

SRV reiterates its outlook for 2013.   

The volume and the completion schedules of developer-contracted housing production, trends in the order backlog margin, the number of new construction contracts, and the realisation of planned project sales will all have an effect on revenue and profitability in 2013. Developer-contracted housing production is recognised upon delivery. Based on current completion schedules, SRV estimates that a total of 505 developer-contracted residential units will be completed during 2013. SRV’s full-year performance can be significantly affected by the timing of the sales of the Etmia II office property in Moscow and the Derby Business Park in Espoo. The general uncertainty seen in the financial markets has also been unfavourably reflected in real estate markets.   

The Group’s full-year revenue is estimated to reach at least the same level as in the previous year (EUR 641.6 million). Even if planned sales of office premises do not occur in 2013, the Group’s pre-tax profit is expected to exceed the previous year’s level (EUR 2.8 million).   

Press conference  

The interim report will be presented to the media and analysts at the press conference which will take place on 7 May 2013 at 10.30 a.m. at conference room Espa at Hotel Scandic Simonkenttä, Simonkatu 9, Helsinki. The press conference will be held in Finnish. CEO Jukka Hienonen and Executive Vice President, CFO Hannu Linnoinen will be present, among others.  

The presentation material of the press conference will be published in Finnish and English on the company website www.srv.fi after the conference.  

Disclosure procedure  

SRV Group Plc follows the disclosure procedure enabled by Standard 5.2b published by the Finnish Financial Supervision Authority. This is a summary of SRV’s Interim report and the complete report is attached as a pdf-file to this release and is also available on our website at www.srv.fi.    

Espoo, 6 May 2013    

Board of Directors    

All forward-looking statements in this review are based on management’s current expectations and beliefs about future events, and actual results may differ materially from the expectations and beliefs such statements contain.  

For further information, please contact  

Jukka Hienonen, President and CEO, +358 (201) 455 213
Hannu Linnoinen, Executive Vice President, CFO, +358 (201) 455 990, +358 (50) 523 5850
Taneli Hassinen, Vice President, Communications, +358 (201) 455 208, +358 (40) 504 3321    

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