SRV GROUP PLC FINANCIAL STATEMENT RELEASE 4 FEBRUARY 2021 8:30 EET
SRV’s financial statement release January–December 2020: Positive trend in profitability and strong cash flow, result burdened by revaluations
January-December 2020 in brief:
October–December 2020 in brief:
Events after the period
Outlook for 2021
During 2021, SRV’s revenue and result will be affected by several factors in addition to general economic trends, such as: the timing and amount of income recognition for SRV’s own projects, which are recognised as income upon delivery; the part of the order backlog that is recognised as income over time mainly consists of contracting; trends in the order backlog’s profit margins; the start-up of new contracts and development projects; and the rouble exchange rate and the development of the Russian economy. To date, the impacts of the pandemic have been moderate on the whole, but its effects on the construction market are unclear and cause uncertainty regarding the outlook for the future. The result for 2021 is also affected by the fact that the company has not been able to start up developer-contracted housing projects in line with the target schedule of the recovery programme. In 2021, the company continues to focus on reducing its debt-to-equity ratio and strengthening strong cash flow.
SRV will revise the definition of operative operating profit in order to improve comparability and transparency in reporting in 2021. The old definition of operative operating profit has been used in this financial statement release, with the exception of the outlook for 2021:
The new definition of operative operating profit also adjusts items affecting comparability. The new definition used in providing the outlook for 2021 is:
Operative operating profit = Operating profit +/- exchange rate gains and losses of associated companies and joint ventures as well as income and expenses from currency hedging +/- items affecting comparability
Items affecting comparability = Impairments of asset items and their reversal, gains and losses from exceptional handovers of asset items, and income and expenses due to changes in the Group structure
Operative operating profit’s reconciliation table
|SRV (IFRS, EUR million)||1-12/2020|
|-/+ exchange rate gains and losses of associated companies and joint ventures and -/+ income and expenses from currency hedging||-4.4|
|+/- Items affecting comparability|
|-/+ Impairments of asset items and their reversal||-12.3|
|-/+ gains and losses from exceptional handovers of asset items||2.3|
|-/+ income and expenses due to changes in the Group structure||0.0|
|Items affecting comparability in total||-9.9|
|Operative operating profit in accordance with the new definition||15.8|
SRV will publish the comparison data for 2020 in a separate release during the first quarter.
In 2020, we worked hard and got things done. Thanks to the successful implementation of our recovery programme, we significantly bolstered our balance sheet and financial position, and confidence in SRV improved substantially during the report year. The controllability and profitability of construction improved. In spite of the difficult pandemic situation, the sales figures of the Russian shopping centres recovered almost to the same level as in 2019 when restrictions were relaxed in the latter part of the year. After the end of the review period, we completed our strategy work. We published the results of these efforts and our revised financial objectives for 2021-2024 in connection with these annual results.
Our operational activities developed well during the year, but we still have much to gain in the improvement of profitability, especially in housing construction in the Capital Area and boosting efficiency throughout our chain of operations. The earnings trend in construction remained favourable during the review period and our ongoing projects progressed largely in line with plans. However, operative operating profit was impacted by changes in the valuation of balance sheet items in the Investments segment, which had a combined negative impact of around EUR -12 million. These changes in value consist of a decrease in the value of the additional sales price of the REDI shopping centre, the reclassification of the Pearl Plaza shopping centre and changes in the value of two other asset items.
In the fourth quarter, we recognised a school project, three rental housing projects, one office and retail premises project and a hydroelectric power plant in our order backlog. Our intake of new agreements during the review period outperformed the previous period. Although our order backlog declined, it remains strong in both business and housing construction. Of our new projects, the Helsinki Upper Secondary School of Languages will be implemented as a lifecycle project, with SRV taking on responsibility for the design, implementation, maintenance and upkeep of the property for 20 years. It is the fourth lifecycle project that we have won in a short period of time. This is exactly the kind of expertise that our concept of lifecycle-wise construction is based on. In the next phases, we will offer lifecycle-wise construction to our customers in projects sold to investors and in cooperative contracts.
Towards the end of the year, housing sales continued to be extremely strong and the number of unsold completed housing units has remained moderate. In Finland, there are 92 unsold housing units, while the remaining units in Russia were sold in 2020. Sales of our largest projects – Loisto in Helsinki and Wallesmanni in Tampere – are progressing in line with plans. We started up the construction of a developer-contracted housing project in Helsinki that had been on hold for around a year and a half. These apartments will be recognised as income in 2022. Where possible, we are seeking to increase the number of good developer-contracted projects alongside projects sold to investors in a controlled manner so that our product offering is a better match for both demand and our financial objectives.
After coronavirus restrictions were relaxed in Russia, the sales volumes of the country’s shopping centres recovered vigorously, almost reaching the same level as a year ago. The company’s holding in the Pearl Plaza shopping centre was previously designated as an asset held for sale. The second wave of the pandemic was the main reason why the sales negotiations ended without reaching an agreement. We are now focusing on developing the operations of the shopping centre and will look into its potential sale when the market situation improves.
The exceptional arrangements implemented to prepare for the coronavirus pandemic in construction operations ushered in some additional costs during the fourth quarter as well, but we have avoided the most serious consequences and our sites have remained in operation in spite of the unusual circumstances. To date, 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.
We will continue to develop our business and will start executing our revised strategy with our renewed Corporate Executive Team. I believe that the wide variety of expertise and new perspectives represented on the Corporate Executive Team, combined with the strong skills of our employees, will substantially bolster our customer focus, improvement of profitability and execution of our new strategy.
We have outlined in our strategy that our objective is to create a new lifecycle-wise reality, where decisions related to construction ensure well-being, value and profitability – for years and generations to come. The strategy aims to develop a long-term competitive advantage, an excellent customer experience, open up opportunities for lifecycle services, and improve profitability and reduce indebtedness. I would like to warmly thank our customers, financiers, all partners and employees for your strong commitment and excellent work. Together towards a lifecycle-wise reality!
Saku Sipola, President & CEO
Group key figures (IFRS, EUR million)
|1−12/ 2020||1−12/ 2019||change||change, %||10-12/2020||10-12/2019|
|Operative operating profit1)||5.8||-96.8||102.6||-6.8||-87.2|
|Operative operating profit, %||0.6||-9.1||-2.3||-21.6|
|Operating profit, %||0.2||-8.8||-2.8||-21.5|
|Operating profit, excl. IFRS 162) *)||-2.7||-94.3||91.6||-9.5||-84.6|
|Operating profit, %, excl. IFRS 162)||-0.3||-8.9||-3.3||-21.0|
|Financial income and expenses, total**)||-29.4||-29.3||-0.1||-6.5||-10.4|
|Profit before taxes||-28.0||-122.4||94.4||-14.5||-97.2|
|Net profit for the period||-25.1||-103.6||78.5||-10.6||-83.4|
|Net profit for the period, %||-2.6||-9.8||-3.6||-20.6|
|Order backlog (unrecognised)3)||1,153.4||1,344.2||-190.9||-14.2|
|*) net effect of currency exchange fluctuations||-4.4||3.8||-8.1||-1.3||0.4|
|**) derivatives included in financial income and expenses||-1.9||-3.7||1.9||-0.2||1.6|
1. Operative operating profit for 2020 is determined by deducting the calculated rouble exchange differences included in financial items and their potential hedging impacts from operating profit. Net exchange rate differences during the review period amounted to EUR -4.4 (3.8) million, of which the effect of currency hedging was EUR 5.5 (-3.8) million.
2. The figure has been adjusted to remove the impacts of IFRS 16.
3. The Group’s order backlog consists of the Construction business.
Construction January-December 2020
Revenue from Construction decreased to EUR 970.0 million (1,057.7 1–12/2019) in the January–December period. Revenue from housing construction was down 23.4 per cent. Revenue declined mainly because fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 515 (833).
Construction’s operating profit rose to EUR 27.4 (7.0) million. Operating profit was improved particularly by construction sites’ favourable earnings trends. The profitability trend was particularly favourable in business construction. On the other hand, fewer apartments were completed and recognised as income than in the comparison period, which had a negative impact on operating profit. Operating profit for the comparison period was burdened by the weakening of margins by EUR 11 million and other exceptional items amounting to EUR 7.9 million.
Construction’s order backlog stood at EUR 1,153.4 (1,344.2) million. Several of the new projects entered into the order backlog during the January–December period were for investors and public-sector organisations of good financial standing, and none of SRV’s capital will be tied up in these projects. The company has enhanced its project selection process in the manner described in the recovery programme. Although the order backlog has declined, it remains at a good level, and 86.4 (80.5) per cent of the order backlog has been sold. New agreements valued at EUR 707.1 (487.6) million were recognised in the order backlog in January–December.
The most significant projects recorded in the order backlog in the fourth quarter of the year were a school project in Helsinki, three rental housing projects in Tampere, an office and retail premises project in Tikkurila and the Kuhankoski hydroelectric power plant. Projects entered into the order backlog in the third quarter included premises for the Finnish Security and Intelligence Service, a design contract for the Uusikaupunki education and wellness campus, and a housing project with 47 units for Tampereen Vuokra-asunnot. Major projects recognised in the second quarter were the basic renovation of operating theatres at HUS Jorvi Hospital, the Siuntio education and wellness campus, which will be implemented as a lifecycle project, the Jousenkaari school in Espoo, the Hovirinta school in Kaarina, the Ojanko bus depot in Vantaa and the residential buildings Lumo One and Piispanristi for Kojamo. The basic renovation project for the Finnish National Theatre was recognised in the first quarter. Work on the basic renovation project of the Finnish National Theatre has begun in phases. The renovation of the section completed in the 1950s is ongoing. Due to a complaint lodged with the Administrative Court about the deviation decision concerning the building permit of the project, the startup of work on the section completed in the 1930s has been postponed until the complaint has been resolved.
Construction’s capital employed totalled EUR 368.8 (372.9) million.
Investments January-December 2020
Investments’ revenue totalled EUR 4.8 million in the January–December period (5.9 1–12/2019). It mainly consists of revenue from shopping centre management. In accordance with SRV’s operating model, revenue from associated companies’ projects and joint ventures is reported under the Construction segment.
The operative operating profit totalled EUR -18.0 (-96.3) million. In addition to SRV’s Group companies, the result contains shares of the results of the associated companies that own the Okhta Mall and Pearl Plaza shopping centres, including not only their operating margin, but also depreciation, financial expenses and taxes. Operative operating profit was significantly negatively impacted by changes in the valuation of balance sheet items in the Investments segment, which had a combined impact of around EUR -12.3 million. Pearl Plaza was reclassified as a holding in associated companies and joint ventures during the fourth quarter when the sales negotiations ended without reaching an agreement. Due to this reclassification, an impairment recognised in 2019 was reversed, with a positive impact of about EUR 6.9 million on operative operating profit for 2020. The value of the additional sales price of the REDI shopping centre was decreased by EUR 13.0 million during the fourth quarter on the basis of an updated cash flow-based forecast. In addition, a write-down of about EUR 5.4 million for SRV’s holding in Okhta Mall and a write-down of EUR 0.8 million for the Ratsumestarinkatu 6 commercial property in Porvoo were recognised in operative operating profit. The company also recognised EUR 0.5 million in income with a cash flow impact due to the final dissolution of the investment in the VTBC fund. The decrease in rental income from shopping centres due to the coronavirus pandemic also had a negative impact on operative operating profit.
In the case of the Russian subsidiary, a EUR 3.1 million provision for expenses that was recognised in the second quarter of the year was dissolved in the third quarter when the court of second instance overturned the ruling on compensation by the court of first instance. The dissolution of the provision had an impact of EUR 2.7 million at the September exchange rate, and thus the euro-denominated result for the review period is burdened by expenses of EUR 0.4 million. The plaintiff has appealed to the court of third instance, but proceedings have not as yet begun. The lawsuit concerned an agreement for an electrical connection that was never implemented.
The coronavirus pandemic that began at the end of the first quarter of 2020 has negatively impacted shopping centre operations by undermining tenants’ ability to do business. The authorities restricted the opening of stores in March-August, which weakened the operational capabilities of shopping centres and reduced their rental income. Shopping centres opened gradually in the third quarter, which was reflected in the rising visitor numbers and sales in August to September. Shopping centres remained open in October-December, but the coronavirus restrictions continued to have an impact on the business of some of the tenants. The decline in rental income has short-term impacts on the liquidity and loan management capabilities of shopping centres. SRV has agreed on arrangements with banks and co-investors in the shopping centres to secure financing for the shopping centres during the period in which the restrictions set by the authorities are in effect.
The coronavirus restrictions imposed in Russia vary from city to city. In St Petersburg, most of the tenants in the shopping centres managed by SRV closed their doors on 28 March, in compliance with official regulations, and only essential services such as pharmacies and grocery stores remained open. Most of the shops could be opened again in July-August. In Moscow, shopping centres closed their doors about one week earlier than in St Petersburg, and the operations of tenants there returned closer to normal earlier than in St Petersburg as restrictions were gradually lifted.
Investments’ operating profit was EUR -22.4 (-92.5) million. The net effect of currency exchange fluctuations was EUR -4.4 (3.8) million, which arose from valuation of the euro-denominated loans of associated companies in roubles and the net impact of currency hedging. Exchange rate differences with no impact on cash flow vary in each interim report in line with fluctuations in the exchange rate of the rouble.
Capital employed totalled EUR 171.9 million (245.7 12/2019). Capital employed was reduced by the divestment of SRV’s holding in REDI and a change in the value of its additional sales price receivable in the last quarter, as well as a decrease in the company’s holding in the Tampere Deck and Arena project in the first quarter. In addition, a capital return of about EUR 7 million from Pearl Plaza in the first quarter reduced capital employed. However, the reclassification of Pearl Plaza in the fourth quarter increased capital employed by around EUR 7 million compared with the previous year. Capital employed was reduced by write-downs of two properties and increased by investments in the Okhta Mall parking facility and Voimaosakeyhtiö SF. In addition, the weakening of the rouble exchange rate also affected capital employed. Capital employed was reduced by a net exchange rate impact of EUR -4.4 million included in operating profit and exchange rate losses on financial expenses amounting to EUR -8.2 million. Translation differences had a total impact of EUR -18.6 million on capital employed. Total capital employed decreased by about EUR 73.8 million compared with the beginning of the year.
The return on investment was -14.3 (-32.6) per cent. When calculating the return on investment, the income from interest on loans granted to associated companies and changes in the value of loans are also taken into consideration.
SRV is a co-investor in three shopping centre projects through its associated companies. SRV is also responsible for leasing, marketing and managing premises in completed shopping centres. SRV intends to sell its holdings once stable rental income has been achieved or the market situation allows. Stable rental income is usually reached 3–4 years after opening. The coronavirus pandemic that began during the first quarter of 2020 has negatively impacted shopping centre operations by undermining tenants’ ability to do business. This has temporary negative impacts on shopping centres’ rental income. However, as mentioned in the risk section, due to the coronavirus pandemic and economic uncertainty in Russia, it is possible that the sale of Russian shopping centres may be postponed.
Group key figures (IFRS, EUR million)
|1−12/ 2020||1−12/ 2019||change||change, %|
|Equity ratio, %||22.6||21.2|
|Equity ratio, %, excl. IFRS 16 1)||27.8||26.4|
|Net interest-bearing debt||289.1||422.0||-133.0||-31.5|
|Net interest-bearing debt, excl. IFRS 161)||152.9||271.9||-119.0||-43.8|
|Net gearing ratio, %||159.7||240.3|
|Net gearing ratio, %, excl. IFRS 161)||82.1||151.2|
|Return on investment, %||-0.8||-15.2|
|Return on investment, %, excl. IFRS 161)||-2.0||-17.5|
|Capital employed, excl. IFRS 161)||436.0||479.4||-43.4||-9.1|
|Return on equity, %||-14.1||-50.6|
|Earnings per share, EUR 2)||-0.15||-1.52||1.37|
|Equity per share (without hybrid bond), EUR 2)||0.65||1.31||-0.66||-50.4|
|Share price at end of period, EUR 3)||0.59||1.36||-0.77||-56.6|
|Weighted average number of shares outstanding, millions2)||173.9||72.1||
The figure has been adjusted to remove the impacts of IFRS 16.
SRV’s strategy and all of its operations are guided by the 2021–2024 strategic financial objectives that were approved in February 2021:
Operative operating profit: 6 per cent by the end of the period.
The updated definition of operative operating profit is used in these financial objectives (see Outlook for 2021).
Proposal for the distribution of profits
The parent company’s distributable funds on 31 December 2020 are EUR 262,165,834.13, of which net profit for the financial year is EUR -11,924,838.45. The Board of Directors proposes to the General Meeting that no dividend be paid for the 2020 financial year.
Annual General Meeting
SRV Group Plc’s Annual General Meeting is planned to be held on Monday, 29 March 2021 at 4.00 pm. The Board of Directors will convene the meeting separately in due course.
Espoo, 4 February 2021
Board of Directors
All forward-looking statements in this review are based on management’s current expectations and beliefs about future events. The company’s actual results and financial position may differ materially from the expectations and beliefs such statements contain due to a number of factors that have been presented in this interim report, and in particular the ongoing coronavirus pandemic.
Financial results briefing
A conference for analysts, fund managers, investors and representatives of the media will be held on 4 February 2021 at 10.00 EET as a webcast. The event will be held in Finnish. A live webcast of the conference will begin at 10.00 EET, available through the company’s website www.srv.fi/en/investors. The presentation will be available on the company’s website.
For further information, please contact:
Saku Sipola, President & CEO, tel. +358 (0)40 551 5953, email@example.com
Jarkko Rantala, CFO, tel. +358 (0)40 674 1949, firstname.lastname@example.org
Miia Eloranta, Senior Vice President, Communications and Marketing, tel. +358 (0)50 441 4221, email@example.com
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SRV IN BRIEF
SRV is a developer and innovator in the construction industry. Our mission is to build, together with our partners, a foundation for a happy life and sustainable society through lifecycle-wise solutions for built environments. Our genuine cooperation and enthusiasm for our work comes across in every encounter. Sustainability is reflected in all our activities.
Our company, established in 1987, is listed on the Helsinki Stock Exchange. We operate in growth centres in Finland and Russia. In 2020, our revenue totalled EUR 975.5 million. In addition to about 1,000 SRV employees, we employ a network of around 4,200 subcontractors.
SRV – Building for life