SRV´s interim report January-June 2018: Order backlog grows to EUR 1.7 billion, REDI project weakens profitability
SRV GROUP PLC INTERIM REPORT 19 JULY 2018, 08:30 AM
SRV´s interim report January-June 2018: Order backlog grows to EUR 1.7 billion, REDI project weakens profitability
January-June 2018 in brief:
- Revenue declined by 11.0 per cent to EUR 451.5 (507.5 1−6/2017) million. This was primarily due to the decline in revenue generated by housing construction and international operations, while revenue from business construction remained steady.
- Operative operating profit amounted to EUR -8.5 (4.6) million. Operative operating profit was significantly weaker due the higher-than-expected costs of the REDI shopping centre, which is being implemented as a fixed-price construction contract and will be completed in September. Excluding the EUR 20.3 million negative profit impact of REDI, SRV’s operative operating profit for January-June would have been EUR 11.8 million.
- Operating profit decreased to EUR -14.2 (-3.0) million. The higher-than-expected costs of the REDI shopping centre contributed to the loss-making result of operations in Finland. The operating profit of International Operations, EUR -8.1 million, was impacted above all by the change in the rouble exchange rate, which had a net effect of EUR -5.7 (-7.6) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses.
- The result before taxes was EUR -21.9 (-8.0) million.
- Earnings per share were EUR -0.34 (-0.17).
- At period-end, the order backlog stood at EUR 1,734.6 (1,594.6) million. In January-June, the order backlog strengthened by 12.1 per cent, with the recognition of new orders to the value of EUR 567 (296) million.
- Equity ratio was 29.7 (33.5) per cent and gearing was 140.8 (114.4) per cent. In addition to the loss-making result, an increase in net debt due to seasonal growth in invested capital and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.
- Due to the increase in gearing caused by the REDI project, SRV has agreed on the temporary raising of the gearing covenant of the EUR 100 million credit facility with the bank syndicate.
April-June 2018 in brief:
- Revenue declined to EUR 235.7 (283.9 4−6/2017) million. The primary reason behind the lower revenue was the decrease in revenue from housing construction in Finland.
- Operative operating profit declined to EUR -3.4 (1.8) million. Operating profit was weakened by a rise in costs due to the market situation, longer delivery periods and particularly the higher-than-expected costs of the REDI shopping centre. Excluding the EUR 13.6 million negative profit impact of REDI, SRV’s operative operating profit for April-June would have been EUR 10.2 million.
- Operating profit was EUR -5.4 (-10.3) million. The operating loss was reduced by the contraction in the operating loss of international operations, while the exchange rate impact of the rouble was clearly smaller than in the comparison period, EUR -2.1 (-12.1) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses.
- The result before taxes was EUR -9.8 (-15.3) million.
- Earnings per share were EUR -0.15 (-0.26).
Measures to improve financial performance
- SRV has continued to take steps to improve its profitability towards its strategic earnings level. The company has boosted operational efficiency, for example, by selecting its future projects even more prudently with regard to profitability and capital commitment. The company has also focused on higher efficiency in construction planning and savings in procurement.
- SRV has released liquidity of more than EUR 35 million in capital tied up in its balance sheet during the past 18 months. Efforts to improve the balance sheet structure and liquidity are ongoing. The company seeks to release a further EUR 50 million in capital tied up in the balance sheet by the end of 2018. This will be achieved by reducing working capital, selling plots that have been included in the balance sheet for a long time, and accelerating sales of existing smaller-scale investments and unsold residential housing units. The company also seeks to manage the capital tied up in the balance sheet by acquiring new plots for plot funds. In addition, SRV is currently assessing opportunities to sell the Pearl Plaza shopping centre in St Petersburg, Russia.
Outlook for 2018 intact
- Fewer developer-contracted housing units will be completed in 2018 than in the comparison period. It is estimated that a total of 526 housing units will be completed in 2018 (782 in 2017). Although housing will be completed on a steadier schedule in 2018 than in the previous year, a significant part of operating profit will still be made in the second half of the year. In addition, earnings in 2018 will be impacted by the lower-than-expected margins of certain ongoing projects and particularly by the higher-than-expected costs of the REDI shopping centre.
- Full-year consolidated revenue for 2018 is expected to decline compared with 2017 (revenue EUR 1,114.4 million). Operative operating profit is expected to be lower than in 2017 (operative operating profit EUR 27.0 million).
This interim report has been prepared in accordance with IAS 34, and the disclosed information is unaudited.
CEO’s review
Creating something new requires boldness and investments. SRV has always been a pioneer in urban construction in Finland. As we speak, we are involved in numerous projects that develop the living environments of every city dweller. We do not just construct buildings: we create functional living environments built around a good location, easy access to services and diverse traffic connections.
Our order backlog strengthened by more than 12 per cent exceeding EUR 1.7 billion in the first half of the year, as we received new orders amounting close to EUR 570 million. We have selected our new projects more carefully and applied stricter criteria for both profit margins and capital commitment. The sold share of our order backlog rose to 86 per cent, which indicates that the market situation remains strong.
Urban construction is by no means the easiest kind of construction and it requires expertise. In terms of earnings, we cannot be satisfied with the first half of the year. The costs of the REDI shopping centre, completed in September and implemented under a fixed-price construction contract, have been higher than expected and this has burdened SRV’s consolidated result. Excluding the impact of REDI, SRV’s operative operating profit for January-June would have been EUR 11.8 million positive. Even when facing all these challenges, we have not compromised on quality: REDI will be a fine complex that the builders, customers, tenants and local residents can be proud of, right down to every detail.
The construction of REDI has also put a significant strain on our balance sheet. We are working to manage our balance sheet structure, for example by using working capital more efficiently and selling plots. Next year, our gearing will naturally start to decline due to the handover of Majakka, the first REDI residential tower, and the refinancing of project loans for the REDI and Okhta Mall shopping centres.
We expect SRV profitability to improve and return to its normal levels in 2019. Our more positive earnings estimate is based on three key factors: first of all, the result for 2018 is burdened by the REDI shopping centre and parking facility, which will be completed in September of this year; secondly, it is expected that a greater number of developer-contracted housing units will be completed in 2019, about 800; and thirdly, rental income from shopping centres is anticipated to improve in both Russia and Finland.
Our mission is to create entirely new kind of urban environments. We are looking decades ahead. We believe the future is bright as we have a long-term commitment on developing cities and urban environments.
Juha Pekka Ojala, President and CEO
Overall review
| Group key figures (IFRS, EUR million) |
1−6/ 2018 | 1−6/ 2017 | change | change, % | 4−6/ 2018 | 4-6/ 2017 |
1−12/ 2017 | previous 12 mo. |
| Revenue | 451.5 | 507.5 | -56.1 | -11.0 | 235.7 | 283.9 | 1,114.4 | 1,080.7 |
| Operative operating profit1) | -8.5 | 4.6 | -13.0 | -285.5 | -3.4 | 1.8 | 27.0 | 14.0 |
| Operative operating profit, % | -1.9 | 0.9 | -1.4 | 0.6 | 2.4 | 1.3 | ||
| Operating profit* | -14.2 | -3.0 | -11.2 | -5.4 | -10.3 | 15.3 | 4.1 | |
| Operating profit, % | -3.1 | -0.6 | -2.3 | -3.6 | 1.4 | 0.4 | ||
| Financial income and expenses, total**) | -7.7 | -5.0 | -2.7 | -4.3 | -5.0 | -10.7 | -13.4 | |
| Profit before taxes | -21.9 | -8.0 | -13.9 | -9.8 | -15.3 | 4.6 | -9.3 | |
| Net profit for the period | -19.2 | -8.9 | -8.4 | -15.5 | 5.8 | -4.5 | ||
| Net profit for the period, % | -4.2 | -1.8 | -3.6 | -5.4 | 0.5 | -0.4 | ||
| Order backlog | 1,734.6 | 1,594.6 | 140.0 | 8.8 | 1,547.9 | |||
| New agreements | 566.7 | 295.9 | 270.8 | 91.5 | 282.3 | 140.5 | 771.4 | 1,042.2 |
| *) net effect of currency exchange fluctuations | -5.7 | -7.6 | 1.9 | -24.4 | -2.1 | -12.1 | -11.7 | -9.8 |
| **) of which accounted for by derivatives |
-1.1 | 1.0 | -2.1 | -205.5 | -1.2 | 0.6 | 0.3 | -1.8 |
1) Operative operating profit is determined by deducting the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts from operating profit. Exchange rate differences during the review period amounted to EUR -5.4 (-6.9) million, with hedging expenses of EUR -0.3 (-0.7) million.
January-June 2018
The Group’s revenue declined by 11.0 per cent to EUR 451.5 (507.5 1-6/2017) million. Revenue from housing construction and International Operations declined, while revenue from business construction remained steady.
The Group’s operative operating profit amounted to EUR -8.5 (4.6) million. Operative operating profit was weakened by longer delivery periods and a rise in material and labour costs due to the market situation. Operative operating profit was also impacted by the higher-than-expected costs of the REDI shopping centre, which is being implemented as a fixed-price construction contract and will be completed in September. Excluding the EUR 20.3 million negative profit impact of REDI, SRV’s operative operating profit for January-June would have been EUR 11.8 million. Fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 202 (250).
The Group’s operating profit declined to EUR -14.2 (-3.0) million. The operating loss grew due to the loss-making result of operations in Finland. The operating profit of International Operations, EUR -8.1 million, was impacted above all by the change in the rouble exchange rate, which had a net effect of EUR -5.7 (-7.6) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses. 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. As part of the euro-denominated loans were redenominated to roubles in the Russian associated companies in the early part of the year, the original rouble risk has decreased to about a half.
At period-end, the Group’s order backlog stood at EUR 1,734.6 (1,594.6) million. The order backlog is at a good level and it has strengthened by 8.8 per cent year-on-year and by 12.1 per cent compared with the end of 2017 (EUR 1,547.9 million).
New agreements valued at EUR 567 (296) million were signed in January-June, of which the most significant were the HUS Siltasairaala Hospital in Helsinki, Jokirinne Learning Centre and new women’s prison in Hämeenlinna. The most significant project that is expected to be included in the order backlog later in 2018 is the expansion of Helsinki Airport and the renovation of its Terminal 2.
The Group’s profit before taxes was EUR -21.9 (-8.0) million.
The Group’s earnings per share were EUR -0.34 (EUR -0.17).
The Group’s equity ratio stood at 29.7 (33.5) per cent and gearing at 140.8 (114.4) per cent. In addition to the loss-making result, an increase in net debt due to seasonal growth in invested capital and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.
| Group key figures (IFRS, EUR million) |
1−6/2018 | 1−6/2017 | change | change, % |
1−12/2017 |
| Equity ratio, % | 29.7 | 33.5 | 35.5 | ||
| Net interest-bearing debt | 355.7 | 310.3 | 45.4 | 14.6 | 297.6 |
| Gearing ratio, % | 140.8 | 114.4 | 105.0 | ||
| Return on investment, % | -3.8 | -0.8 | 3.1 | ||
| Return on investment, construction, % | -0.9 | -1.5 | 7.4 | ||
| Return on investment, property development, % | -4.6 | -6.1 | -4.8 | ||
| Invested capital | 665.0 | 617.0 | 47.9 | 7.8 | 604.5 |
| Invested capital, construction | 337.2 | 281.0 | 56.1 | 20.0 | 276.6 |
| Invested capital, property development | 327.8 | 336.0 | -8.2 | -2.4 | 327.9 |
| Return on equity, % | -14.3 | -6.3 | 2.0 | ||
| Earnings per share, EUR | -0.34 | -0.17 | -0.17 | 103.5 | 0.05 |
| Equity per share, EUR | 3.52 | 3.84 | -0.32 | -8.3 | 4.03 |
| Share price at end of period, EUR | 2.65 | 4.99 | -2.34 | -46.9 | 3.60 |
| Weighted average number of shares outstanding, millions | 59.6 | 59.5 | 59.5 |
Espoo, 18 July 2018
Board of Directors
All forwarding-looking statements in this report are based on management’s current expectations and beliefs about future events, and actual results may differ significantly from the expectations and beliefs such statements contain.
Invitation to SRV Group Plc’s January-June 2018 result audiocast and conference call
SRV will present the financial result to the media and analysts at a combined audiocast and conference call event on Thursday 19 July at 12.00 noon. The event will be held in Finnish.
Participants are kindly asked to dial in 5-10 minutes ahead the event at +358 9 8171 0495 (Finland). The event can be followed live at https://srv.videosync.fi/2018-07-19-srv-half-year-report
The presentation material will be published both in Finnish and in English at the company’s website.
For further information, please contact:
Juha Pekka Ojala, President and CEO, +358 40 733 4173, jp.ojala@srv.fi
Ilkka Pitkänen, CFO, +358 40 667 0906, ilkka.pitkanen@srv.fi
Johanna Henttonen, interim SVP Communications, Tel. +358 40 530 0778, ext-johanna.henttonen@srv.fi
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