SRV´s interim report January-September 2018: The REDI shopping centre opened in September, pushed earnings into the red. Order backlog EUR 1.7 billion

SRV GROUP PLC                        INTERIM REPORT                        25 OCTOBER 2018                      08:30 AM

SRV´s interim report January-September 2018: The REDI shopping centre opened in September, pushed earnings into the red. Order backlog EUR 1.7 billion

January–September 2018 in brief:

  • Revenue declined by 14.9 per cent to EUR 659.9 (775.4 1−9/2017) million. Revenue was down in all operations, particularly in the housing business. 
  • Operative operating profit amounted to EUR -11.6 (13.0) million. Operative operating profit was significantly weakened by rise in labour and material costs due to the market situation, longer delivery periods and particularly the higher-than-expected costs of the REDI shopping centre, which was implemented as a fixed-price construction contract and opened in September. Excluding the negative impact of REDI on earnings, EUR 29.7 million, SRV’s operative operating profit for January-September would have been EUR 18.1 million.
  • Operating profit decreased to EUR -19.9 (4.2) million, impacted by the loss-making result of operations in Finland due to the higher-than-expected costs of the REDI shopping centre. The operating profit of International Operations, EUR -11.8 million, was impacted above all by the change in the rouble exchange rate, which had a net effect of EUR -8.3 (-8.9) 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 -31.1 (-4.7) million.
  • Earnings per share were EUR -0.48 (-0.13).
  • At period-end, the order backlog stood at EUR 1,678.5 (1,535.7) million. In January-September, the order backlog strengthened by 8.4 per cent, with the recognition of new orders to the value of EUR 695 (459) million. 85 per cent of the order backlog has been sold.  
  • Equity ratio was 28.0 (34.0) per cent and gearing was 144.2 (123.4) per cent. In addition to the loss-making result, an increase in net debt due to seasonal growth in capital employed and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.
  • Due to the rise 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.

July–September 2018 in brief:

  • Revenue declined to EUR 208.4 (267.8 7-9/2017) million. The primary reasons behind the lower revenue were the decrease in revenue from housing construction in Finland as well as the completion of the REDI shopping centre contract.
  • Operative operating profit declined to EUR -3.1 (8.4) 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 negative impact of REDI on earnings, EUR 9.4 million, SRV’s operative operating profit for July-September would have been EUR 6.3 million.
  • Operating profit was EUR -5.7 (7.2) million. Operating profit declined due to the greater impact of the rouble exchange rate on International Operations than in the comparison period, EUR -2.6        (-1.3) 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 -9.1 (3.3) million.
  • Earnings per share were EUR -0.14 (0.04).
  • On 14 September 2018, SRV specified its outlook for 2018. The company stated that its full-year operative operating profit is expected to be in the red mainly due to the increased costs of the REDI shopping centre.

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

 

Events after the period

On 4 October 2018, SRV announced that it will implement a logistics centre extension project for SOK, Finland’s largest daily consumer goods store. Construction work on the extension of the property, located in Sipoo’s Bastukärr business park, will be launched immediately and the project will be completed in June 2020. SRV will implement the project as a project management contract. The final contract price will not be disclosed.

Measures taken to improve financial performance

SRV has continued to take steps to improve its profitability towards its strategic earnings level. The company has boosted its operational efficiency, such as by selecting its future projects even more prudently with regard to profitability and capital commitment. SRV has also focused on higher efficiency in design and savings in procurements.

Efforts to improve the balance sheet structure and liquidity are ongoing. After July, the company has released or has agreed to release about EUR 50 million in capital tied up in the balance sheet. An additional goal for the rest of the year is to release EUR 20-30 million. 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 units. SRV also seeks to manage the capital tied up in the balance sheet by acquiring new plots for plot funds. In addition, the company is continuing the process to sell the Pearl Plaza shopping centre in St Petersburg, Russia. 

Outlook for 2018

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 from these units 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 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 in the red (operative operating profit EUR 27.0 million.)

Preliminary estimate of development during the remainder of 2018 and in 2019

SRV expects that the operative operating profit and cash flow will be positive in the last quarter, as many developer-contracted housing projects will be completed. In addition, the company estimates that 2019 will be a better year in terms of earnings, and that the operating result and cash flow will be positive. There are three key factors behind the more positive estimate: first of all, the result for 2018 is burdened by the REDI shopping centre and parking facility, which were completed in September of this year; secondly, about 800 developer-contracted housing units will be completed and a greater number of housing units built as development projects will be recognised as income than in 2018; and thirdly, rental income from shopping centres is anticipated to improve in both Russia and Finland.

SRV expects that the company’s gearing will decline in 2019 thanks to the handover of Majakka, the first REDI residential tower, and the refinancing of project loans for the REDI and Okhta Mall shopping centres. SRV intends to implement the refinancing with higher debt levels. The company will also continue to take steps to reduce the amount of capital tied up to its balance sheet.

SRV will revise its outlook for 2019 when the annual financial statements are published in February.

 

CEO’s review

As a pioneer in urban construction, SRV creates new kinds of functional living environments that are built around good location, easy access to services and diverse traffic connections.

Although creating something new requires boldness and investments, our loss-making result for January-September and our high gearing mean that it is time for us to have a look in the mirror. The costs of the REDI shopping centre got out of hand during the long construction phase and were higher than expected, depressing the full-year operating result for 2018 into the red and putting our balance sheet under heavy pressure. Despite of the cost increases, we have not compromised on construction quality.

We believe that the toughest phase is now behind us, as the REDI shopping centre and parking facility were completed as planned at the end of September. The grand opering of the REDI shopping center was on 20 September and during September alone, we had 350,000 visitors. For us, it’s a matter of honour to ensure that REDI is an excellent place to live, with no compromises on quality.

In addition to taking measures to improve our profitability, we are continuing our efforts to lighten our balance sheet. After July, we have released a total of about EUR 50 million in capital from our balance sheet, mainly by making more efficient use of working capital and selling plots. Of course, there is still much to be done, and our objective is to release a further EUR 20-30 million in liquidity from the balance sheet during the remainder of the year. The process of selling the Pearl Plaza shopping centre in Russia is also progressing.

At the end of September, our order backlog amounted to EUR 1.7 billion, 9 per cent stronger than a year earlier. 85 per cent of the order backlog has been sold. Together with the projects that are under negotiation, this provides us with a good outlook and workload for the months ahead. There are some indications in the market that the surge in construction is levelling off. We are in a strong position to seize new projects when the availability of subcontracted resources improves and the worst price pressures on material and subcontracting costs ease up.

We expect that SRV’s operative result and cash flow will rise into the black in the last quarter of the year, when we will complete many developer-contracted housing projects. Our preliminary outlook for the next year is also positive.

Juha Pekka Ojala, President and CEO

 

Overall review

Group key figures
(IFRS, EUR million)
1−9/ 2018 1−9/ 2017 change change,
%
7−9/ 2018 7−9/ 2017 1−12/ 2017 previous 12 mo.
Revenue 659.9 775.4 -115.5 -14.9 208.4 267.8 1,114.4 998.9
Operative operating profit1) -11.6 13.0 -24.6   -3.1 8.4 27.0 2.4
Operative operating profit, % -1.8 1.7     -1.5 3.2 2.4 0.2
Operating profit* -19.9 4.2 -24.0   -5.7 7.2 15.3 -8.7
Operating profit, % -3.0 0.5     -2.7 2.7 1.4 -0.9
Financial income and expenses, total**) -11.2 -8.9 -2.3   -3.5 -3.8 -10.7 -13.0
Profit before taxes -31.1 -4.7 -26.4   -9.1 3.3 4.6 -21.7
Net profit for the period -27.3 -5.6     -8.1 3.3 5.8 -15.9
Net profit for the period, % -4.1 -0.7     -3.9 1.2 0.5 -1.6
Order backlog 1,678.5 1,535.7 142.8 9.3     1,547.9  
New agreements 695.0 458.5 236.6 51.6 128.3 162.6 771.4 1,008.0
                 
*) net effect of currency exchange fluctuations -8.3 -8.9 0.5   -2.6 -1.3 -11.7 -11.1
**) of which accounted for
by derivatives
-0.6 0.6 -1.2   0.5 -0.4 0.3 -0.8

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 -8.3 (-8.9) million, with hedging expenses of EUR -0.3 (-0.4) million.

 

January–September 2018

The Group’s revenue declined by 14.9 per cent to EUR 659.9 (775.4 1-9/2017) million. Revenue contracted in all business areas, particularly in the housing business. 

The Group’s operative operating profit amounted to EUR -11.6 (13.0) million. Operative operating profit was weakened by longer delivery periods and a rise in material and labour costs due to the market situation. The main reason, pushing earnings in to the red the higher-than-expected costs of the REDI shopping centre, which was implemented as a fixed-price construction contract and completed in September. Excluding the negative impact of REDI on earnings, EUR 29.7 million, SRV’s operative operating profit for January-September would have been EUR 18.1 million. Fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 247 (463).

The Group’s operating profit declined to EUR -19.9 (4.2) million due to the loss-making result of operations in Finland and the higher-than-expected costs of the REDI shopping centre. The operating profit of International Operations, EUR -11.8 million, was impacted above all by the change in the rouble exchange rate, which had a net effect of EUR -8.3 (-8.9) 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 1,678.5 (1,535.7) million. The order backlog has grown by 9.3 per cent year-on-year and by 8.4 per cent compared with the end of 2017 (EUR 1,547.9 million). The sold share of the order backlog was 85 per cent (81).

New agreements valued at EUR 695 (459) million were signed in January-September, of which the most significant were the Siltasairaala Hospital in Helsinki, the Jokirinne Learning Centre in Kirkkonummi and the Hämeenlinna Women’s Prison. 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 modernisation of its Terminal 2.

The Group’s profit before taxes totalled EUR -31.1 (-4.7) million.

The Group’s earnings per share were EUR -0.48 (-0.13).

The Group’s equity ratio stood at 28.0 (34.0) per cent and gearing at 144.2 (123.4) per cent. In addition to the loss-making result, an increase in net debt due to seasonal growth in capital employed and the weaker exchange rate of the rouble contributed to the change in the equity ratio and gearing.

 

Group key figures
(IFRS, EUR million)
1−9/
2018
1−9/
2017
change change, % 1−12/
2017
Equity ratio, % 28.0 34.0     35.5
Net interest-bearing debt 346.5 338.7 7.8 2.3 297.6
Gearing ratio, % 144.2 123.4     105.0
Return on investment, % -3.7 1.4     3.1
Return on investment, construction, % -0.6 3.4     7.4
Return on investment, property development, % -4.6 -5.0     -4.8
Capital employed 664.0 634.9 29.1 4.6 604.5
Capital employed, construction 336.6 303.4 33.2 11.0 276.6
Capital employed, property development 327.8 331.4 -3.6 -1.1 327.9
Return on equity, % -13.9 -2.6     2.0
Earnings per share, EUR -0.48 -0.13 -0.35 273.9 0.05
Equity per share, EUR 3.32 3.88 -0.56 -14.4 4.03
Share price at end of period, EUR 2.50 4.41 -1.91 -43.3 3.60
Weighted average number of shares outstanding, millions 59.6 59.5     59.5

 

Espoo, 24 October 2018

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.

 

Interim results briefing

A conference for analysts, fund managers, investors and representatives of the media will be held on 25 October 2018 at 12.30 EET at the Living Lab, address Kaasutehtaankatu 1, 00540 Helsinki. The event will be held in Finnish.
A live webcast of the conference will begin at 12.30 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:
Juha Pekka Ojala, President and CEO, +358 (0)40 733 4173, jp.ojala@srv.fi
Ilkka Pitkänen, CFO, +358 (0)40 667 0906, ilkka.pitkanen@srv.fi
Johanna Henttonen, (acting) Senior Vice President, Communications, +358 (0)40 530 0778, ext-johanna.henttonen@srv.fi

www.srv.fi

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