SRV GROUP PLC INTERIM REPORT 31 OCTOBER 2019 8.30 EET
SRV’s interim report January-September 2019: Revenue unchanged, weaker margins push the result into the red
January–September 2019 in brief:
The company publishes alternative key figures that have been adjusted to exclude the impact of IFRS 16 Leases on the balance sheet and result. SRV is applying a simplified approach to adopting this standard, which is why the figures for the comparison period have not been adjusted to comply with the standard.
July–September 2019 in brief:
Events after the period
In connection with the publication of its interim report, SRV announced that it launches a recovery programme with the short-term goal of ensuring its operative operating profit and cash flow for 2020 are positive and returning its operative operating profit for 2021 to the level of 2017. The recovery programme focuses on organisation and organisational culture reformation, lightening its balance sheet, strengthening cash flow, and cost savings. As part of the programme, the company will start co-operation negotiations concerning personnel in Finland. The estimated need for personnel reductions is 90 person-years.
On 10 October 2019, SRV revised its outlook for 2019. The company estimates that its full-year operative operating profit for 2019 will be in the red. The outlook was revised to account for impairments of investments in Russia and weaker margins in certain projects, such as due to the higher-than-anticipated additional costs caused by delays in the completion of the REDI Majakka residential tower.
On 2 October 2019, SRV and real estate investment company Antilooppi signed a development-phase agreement on the basic renovation and modernisation of historical properties in Hakaniemi, Helsinki: Siltasaarenkatu 6 and 8–10 as well as Paasivuorenkatu 4. The Siltasaari 10 project will combine three properties with a total of 36,075 gross m2 into a unique complex to serve urban residents and employees. The parties aim to sign the project management contract in late 2019, at which time the project will be included in SRV’s order backlog.
In terms of earnings, the January-September period was disappointing due to impairments of our investments in Russia and weaker margins of two projects being completed this year. On the other hand, slightly more residential units were completed and recognised as income than in the comparison period. Due to these reasons, we expect that operative operating profit for 2019 will be in the red. We recognised EUR 123 million in new projects in order backlog during the third quarter.
We strengthened our financial position in the spring and early summer. This has facilitated the development of our operations, earnings performance and other financing. However, it goes without saying that these steps alone will not be enough to put the company on a profitable track.
As previously expected, housing start-ups will decline both this year and the next. Demand for housing is waning outside the Greater Helsinki Area compared to previous years. Apartments in good locations – particularly small units – are selling well and investor demand remains strong. At the end of August, we signed a cooperation agreement valued at EUR 120 million with Kojamo. The agreement is for six housing sites built as development projects with a total of 527 rental housing units in the Greater Helsinki Area. The first of these housing projects was completed and recognised as income during the review period.
Occupancy rates, visitor numbers and sales at the Russian shopping centres grew. We are working to improve the attractiveness of the shopping centres and to find the best tenant mix. We are satisfied with the development of all our shopping centres, although the positive development needs to be speeded up.
I believe that SRV has been successful in urban development. We are heading in the right direction: urbanisation will continue. Kalasatama will play a stronger role in the Helsinki city centre this autumn when residents will be able to move into Majakka. Construction of the second residential tower, Loisto, utilises tower construction knowledge and is proceeding according to the plan.
Our challenges are clearly limited to certain parts of our activities, but the depth of the challenges has a wide impact on the entire company. However, with determined measures, the company’s trend can be reversed. We will therefore immediately begin a recovery programme aiming at strengthening financial position and performance and improving profitability.
Saku Sipola, President & CEO
|Group key figures
(IFRS, EUR million)
|1−9/ 2019||1−9/ 2018||change||change, %||7−9/ 2019||7−9/ 2018||1−12/ 2018||previous 12 months|
|Operative operating profit1)||-9.6||-11.6||1.9||-7.0||-3.1||-10.0||-8.1|
|Operative operating profit, %||-1.5||-1.8||-3.1||-1.5||-1.0||-0.8|
|Operating profit, %||-0.9||-3.0||-2.8||-2.7||-2.1||-0.6|
|Operating profit, excl. IFRS 162) *)||-9.7||-19.9||10.2||-7.6||-5.7||-19.8||-0.1|
|Operating profit, %, excl. IFRS 162)||-1.5||-3.0||-3.3||-2.7||-2.1||0.0|
|Financial income and expenses, total**)||-18.9||-11.2||-7.8||-7.6||-3.5||-17.5||-25.2|
|Profit before taxes||-25.1||-31.1||5.9||-14.0||-9.1||-37.3||-31.4|
|Net profit for the period||-20.2||-27.3||7.0||-11.6||-8.1||-31.2||-24.2|
|Net profit for the period, %||-3.1||-4.1||-5.1||-3.9||-3.3||-2.5|
|Order backlog (unrecognised)3)||1,592.6||1,661.5||-69.0||-4.1||1,816.0|
|*) net effect of currency exchange fluctuations||3.4||-8.3||11.7||0.6||-2.6||-9.8||1.9|
| **) derivatives
included in financial income and expenses
|Group key figures
(IFRS, EUR million)
|1−9/ 2019||1−9/ 2018||change||change, %||1−12/ 2018|
|Equity ratio, %1)||27.2||28.0||28.5|
|Equity ratio, %, excl. IFRS 16 2)||33.3||28.0||28.5|
|Net interest-bearing debt1)||513.2||346.5||166.7||48.1||282.8|
|Net interest-bearing debt, excl. IFRS 162)||339.7||346.5||-6.7||-1.9||282.8|
|Net gearing ratio, %1)||199.1||144.2||121.1|
|Net gearing ratio, %, excl. IFRS 162)||131.4||144.2||121.1|
|Return on investment, %||-0.2||-3.7||-2.9|
|Return on investment, %, excl. IFRS 162)||-1.0||-3.7||-2.9|
|Capital employed, excl. IFRS 162)||622.5||664.0||-41.5||-6.2||611.0|
|Return on equity, %||-11.0||-13.9||-12.1|
|Earnings per share, EUR||-0.42||-0.48||0.07||-13.5||-0.56|
|Equity per share (without hybrid bond), EUR||2.97||3.32||-0.35||-10.5||3.21|
|Share price at end of period, EUR||1.44||2.50||-1.06||-42.4||1.70|
|Weighted average number of shares outstanding, millions||59.6||59.6||59.6|
Earnings trends for the segments
Construction January–September 2019
Revenue from Construction declined to EUR 654.6 million (656.9 1–9/2018) in the January–September period. Revenue was down in business construction and increased in housing construction. Revenue from housing construction was up 0.4 per cent because more housing units were recognised as income than in the comparison period. Revenue from business construction was down 0.7 per cent.
Construction’s operating profit rose to EUR 3.5 (-5.8) million. Operating profit was positively impacted by the completion of the REDI shopping centre contract, but was reduced by the lower margin forecasts of two projects in particular, EUR 9.8 million. The result includes EUR 4.5 million in expense entries due to water damage at REDI Majakka and EUR 0.8 million in write-down of inventories, to a total of around EUR 5.3 million.
Construction’s order backlog stood at EUR 1,592.6 (1,661.5) million. Although the order backlog has declined slightly, it remains at a good level, and 82 per cent of the order backlog has been sold. New agreements valued at EUR 344.7 (695.0) million were recognised in January–September. The most significant agreements were REDI Loisto in the first quarter, the Finnish-Russian School in the second quarter, and Tampereen Wallesmanni, Tampereen Opaali and the Raisio production facility in the third quarter.
Construction’s capital employed totalled EUR 472.0 (286.0) million. IFRS 16 had an accounting effect of EUR 161 million on this growth in capital employed.
Revenue from Construction totalled EUR 226.0 million (207.6 7-9/2018) in the July–September period. Operating profit totalled EUR -3.4 (-1.6) million. New agreements entered into the order backlog in July-September amounted to EUR 123.3 (128.3) million.
Investments January–September 2019
Investments’ revenue totalled EUR 4.2 million in the January–September period (3.6 1–9/2018). It mainly consists of revenue from shopping centre management. The startup of shopping centre management at REDI increased revenue. In accordance with SRV’s operating model, revenue from associated companies’ projects and joint ventures is reported under the Construction segment; one example is the Tampere Central Deck and arena project.
The operative operating profit totalled EUR -8.4 (-3.8) million. The occupancy rates and rental income of the shopping centres owned by associated companies improved, but earnings were burdened both by the fact that the management and financing expenses of recently opened shopping centres were higher than income and by the EUR 2.3 million impairment losses on the Etmia office property. The result includes an expense entry of EUR 0.6 million in the first quarter for the dissolution of the VTBC fund. The shares of associated companies’ results included in SRV’s result include not only the projects’ EBITDA, but also depreciation, financial expenses and taxes.
Investments’ operating profit was EUR -5.0 (-12.1) million. Operating profit was improved by the rouble’s strengthening exchange rate. The net effect of currency exchange fluctuations was EUR 3.4 (-8.3) million, which arose from revaluation of euro-denominated loans of associated companies into roubles. 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 330.7 (331.7) million. Capital employed was increased by additional investments in REDI and the Tampere Deck and arena project, as well as the strengthening of the rouble exchange rate. Capital employed was decreased by the impairment losses on Etmia, the sale of the VTBC fund and the sale of SRV’s shareholder loan receivables for the REDI shopping centre to other investors. Total capital employed decreased by about EUR 1.0 million. The majority of SRV’s capital employed consists of investments in associated companies.
The return on investment was -0.3 (–4.7) 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 four 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. For instance, the rental income of Pearl Plaza in St Petersburg, which was opened in 2013, is now stable.
Investments’ revenue totalled EUR 1.4 million in the July–September period (1.2 7–9/2018). Revenue was generated by shopping centre management. Operative operating profit amounted to EUR -3.7 (-1.1) million.
Changes in the Corporate Executive Team
On 25 June 2019, SRV Group Plc’s Board of Directors appointed Saku Sipola, M.Sc. (Tech), 50 years old, as President and CEO of SRV Group Plc. He started in his position on 1 September 2019. Sipola joined SRV from SATO Corporation, where he worked as the President and CEO in 2015-2019.
Outlook for 2019
The company estimates that its full-year operative operating profit for 2019 will be in the red. The outlook was revised to account for impairments of investments in Russia and weaker margins in certain projects, such as due to the higher-than-anticipated additional costs caused by delays in the completion of the REDI Majakka residential tower.
Espoo, 31 October 2019
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.
Briefing, webcast and presentation materials
A briefing for analysts, fund managers, investors and media representatives will be held on 31 October 2019, starting at 12 noon in the Living Lab (address Kaasutehtaankatu1, 00540 Helsinki). A webcast of the briefing can be followed live at www.srv.fi/en/investors. The recording will be available on the website after the presentation. The materials will also be made available on the website.
For further information, please contact:
Saku Sipola, President & CEO, tel. +358 (0)40 551 5953, firstname.lastname@example.org
Ilkka Pitkänen, CFO, tel. +358 (0)40 667 0906, email@example.com
Maija Karhusaari, SVP, Communications and Marketing, tel. +358 (0)45 218 3772, firstname.lastname@example.org
SRV in brief
SRV is a bold developer and innovator in the construction industry. We want to offer the best customer experience as a constructor of urban city centres, while also being the most attractive employer in the industry. Our genuine cooperation and enthusiasm for our work comes across in every encounter. Sustainability is reflected in all our activities.
Established in 1987, we are a publicly listed company since 2007 in Helsinki Nasdaq stock exchange that operates in selected growth centres in Finland and Russia. Our revenue in 2018 was EUR 960 million. Over 1,000 people work for us and we employ a network of almost 4,000 subcontractors in our projects.
SRV – Building for life