SRV’s interim report January - March 2019:...

SRV GROUP PLC     INTERIM REPORT     26 APRIL 2019     12.00 EET

SRV’s interim report January - March 2019: Operative operating profit positive, new organisation and segment structure introduced

January–March 2019 in brief:

• Revenue rose 3.2 per cent to EUR 222.6 million (215.7 1–3/2018). Revenue rose in the housing construction, and income was recognised from more developer-contracted housing units than in the comparison period, that is, a total of 156 (70) units. Revenue from business construction contracted, largely due to the completion of REDI shopping centre’s construction.
• Operative operating profit totalled EUR 0.5 (-5.1) million. The operative operating profit was favourably impacted by revenue growth in Construction and the recognition of more than twice as many developer-contracted housing units than in the comparison period. The result includes expense entry of about EUR 3 million for REDI Majakka’s water damage and the dissolution of the VTBC fund. The result for the comparison period was impacted by the result of the REDI shopping centre contract.
• Operating profit rose to EUR 3.3 (-8.8) million. The change in the rouble exchange rate had the biggest impact on the operating profit of the Investments segment, which totalled EUR 0.1 (-5.6) million. The net effect of the change was EUR 2.8 (-3.7) million. The exchange rate impact, which had no effect on cash flow, was caused by the conversion of euro-denominated loans to roubles and hedging expenses.
• The result before taxes was EUR -0.3 (-12.2) million.
• Earnings per share were EUR -0.02 (-0.19).
• At period-end, the order backlog stood at EUR 1,782.5 (1,634.0) million. The order backlog grew by 9.1 per cent on the comparison period. The sold share of the order backlog was 84.0 (84.7) per cent. New agreements valued at EUR 150 (284) million were signed in January–March.
• IFRS 16 weakened the equity ratio to 24.4 (32.5) per cent and gearing to 205.8 (134.3) per cent. The capitalisation of lease agreements in the balance sheet added calculatively EUR 173.0 million to inventories and tangible assets and EUR 173.6 million to interest-bearing liabilities as a consequence of adopting IFRS 16. The comparable figures (without the impact of IFRS 16) were 29.7 (32.5) per cent for the equity ratio and 132.7 (134.3) for gearing.

*The company publishes alternative key figures, that is, IFRS 16 key figures that have been adjusted to exclude the impact of the IFRS 16 Leases standard 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.

SRV plans to strengthen its balance sheet with new financing arrangements

In connection with the publication of its interim report, SRV announced that it is exploring the possibility to issue a new hybrid bond with an estimated size of EUR 45-60 million and to prematurely repay outstanding debt. The proceeds of the new hybrid bond would be used to partially and prematurely purchase notes of the EUR 45 million hybrid bond issued in March 2016 and the EUR 100 million unsecured bond due March in 2021 through a voluntary tender offer. The final amount to be purchased and its allocation between the existing hybrid bond and the notes would be decided after the end of the tender offer period and the completion of the issuance of the planned new hybrid bond. The company estimates that the planned financing arrangements, if completed, would significantly improve key figures of its balance sheet.

Outlook (specified)

SRV specifies its guidance for 2019 in terms of operative operating profit: Full-year consolidated revenue for 2019 is expected to grow compared with 2018 (revenue in 2018: EUR 959.7 million). Operative operating profit is expected to improve on 2018 and to be positive (operative operating profit EUR -10.0 million), but lower than operative operating profit in 2017 (operative operating profit in 2017: EUR 27 million).

The earlier guidance was: Full-year consolidated revenue for 2019 is expected to grow compared with 2018 (revenue in 2018: EUR 959.7 million). Operative operating profit is expected to improve on 2018 and to be positive (operative operating profit EUR -10.0 million).

CEO's review

2019 got off to a good start in housing construction and particularly with regard to the number of housing units recognised as income. We managed to get our revenue back on the growth track, and our operating profit in the black. Our order backlog is also strong, with EUR 150 million in new orders signed. We have major hospital projects in Helsinki, Tampere and Jyväskylä, Tampere Deck and arena project and expansion of Helsinki Airport and renovation of Terminal 2.

Our new segments can be seen for the first time in this interim report. We report on two business areas: Construction and Investments. In Construction, we’ll be focusing on efficient project management and implementation, as well as high-quality construction and an excellent customer experience. We have gathered all of our property investment expertise together under Investments. Quarterly comparison figures for our new segment structure are available for 2018. The comparison figures for this interim report have been adjusted to reflect our new organisational structure.

We have also adopted IFRS 16 in our segment reporting. Our development project construction usually focuses on leased plots. The adoption of IFRS 16 increases the accounting value of our balance sheet assets by EUR 173.0 million and our financial liabilities by EUR 173.6 million. Plot lease agreements have the most significant impact.

The long-term rise in costs in the construction sector finally ended during the first quarter of this year. Capacity was freed up in the concrete element industry in particular, and international subcontractors’ increased activity in the market was reflected both in tender prices and as tougher competition. We are also expecting this to lower production costs this year.

REDI Majakka suffered water damage in February, and this will unfortunately cause some delays. We now expect that residents will be able to start moving into their structurally safe and healthy homes in October. The sale of apartments in the second residential tower, Loisto, began in February and construction is already underway in Kalasatama.

Favourable developments are reflected in our strong order backlog and the rise in our EPSI Rating, based on an independent study of the construction industry. According to this rating, our customers are extremely satisfied with the quality of our new building and other construction. As the highest climber in the sector, we attained an exceptionally high level. Our NPS (which measures customer satisfaction) is also rising, and sales of new apartments have remained good.

Juha Pekka Ojala, President & CEO

Overall review

Group key figures (IFRS, EUR million)	1-3/ 2019	1-3/ 2018	change	change, %	1-12/ 2018	previous 12 months
Revenue	222.6	215.7	6.9	3.2	959.7	966.5
Operative operating profit1)	0.5	-5.1	5.6		-10.0	-4.4
Operative operating profit, %	0.2	-2.4			-1.0	-0.5
Operating profit*)	3.3	-8.8	12.1		-19.8	-7.7
Operating profit, %	1.5	-4.1			-2.1	-0.8
Operating profit excl. IFRS 162)*)	2.2	-8.8	10.9		-19.8	-0.1
Operating profit, % excl. IFRS 162)	1.0	-4.1			-2.1
Financial income and expenses, total**)	-3.6	-3.4	-0.2		-17.5	-17.7
Profit before taxes	-0.3	-12.2	11.8		-37.3	-25.4
Net profit for the period	0.4	-10.7	11.1		-31.2	-20.1
Net profit for the period, %	0.2	-5.0			-3.3	-2.1
Order backlog (unrecognised)3)	1,782.5	1,634.0	148.5	9.1	1,816.0
New agreements	149.7	284.4	-134.7	-47.4	1,133.0	998.3
*) net effect of currency exchange fluctuations	2.8	-3.7	6.5		-9.8
**) derivatives included in financial income and expenses	-2.0	0.1	-2.1		-2.2

1. Operative operating profit is determined by deducting the calculated rouble currency exchange differences included in financial items and their potential hedging impacts from operating profit. Exchange rate differences during the review period amounted to EUR 2.8 (-3.7) million, of which EUR -1.9 (-0.5) million was accounted for by hedging.
2. Restated IFRS 16 effects for the year 2019. As a result of the adjustment, the figure is comparable with the figures for 2018.
3. The amount of the order backlog, which is entirely stated to the Construction segment, is also presented as adjusted comparative information.

Group key figures (IFRS, EUR million)	1-3/ 2019	1-3/ 2018	change	change, %	1-12/ 2018
Equity ratio, %1)	24.4	32.5			28.5
Equity ratio, % excl. IFRS 162)	29.7	32.5			28.5
Net interest-bearing debt1)	490.8	355.4	135.4	38.1	282.8
Net interest-bearing debt excl. IFRS 162)	317.3	355.4	-38.2	-10.7	282.8
Net gearing ratio, %	205.8	134.3			121.1
Net gearing ratio, % excl. IFRS 162)	132.7	134.3			121.1
Return on investment, %	4.1	-5.2			-2.9
Return on investment, % excl. IFRS 161)	4.0	-5.2			-2.9
Capital employed	791.9	650.0	141.9	21.8	611.0
Capital employed excl. IFRS 16 2)	618.9	650.0	-31.1	-4.8	611.0
Return on equity, %	0.6	-15.7			-12.1
Earnings per share, EUR	-0.02	-0.19	0.17	-89.9	-0.56
Equity per share (excluding hybrid bond), EUR	3.28	3.72	-0.44	-11.8	3.21
Share price at end of period, EUR	1.70	2.90	-1.20	-41.4	1.70
Weighted average number of shares outstanding, millions	59.6	59.6			59.6

1. The 2019 figures are not comparable with the 2018 figures.
2. Restated IFRS 16 effects for the year 2019. As a result of the adjustment, the figure is comparable with the figures for 2018.

Earnings trends for the segments

Construction January–March 2019

Revenue from Construction rose to EUR 221.9 million (214.8 1–3/2018) in the January–March period. The 29.8 per cent increase in revenue from housing construction had the biggest impact on overall revenue growth. Revenue from business construction fell by -6.8 per cent due to the completion of the REDI and Karuselli shopping centres.

Construction’s operating profit rose to EUR 4.8 (-3.2) million. The operating profit was favourably impacted by revenue growth in Construction and the recognition of more than twice as many developer-contracted housing units than in the comparison period. The result includes expense entry of about EUR 2.5 million for REDI Majakka’s water damage. Wintery weather also affected profitability, especially in January. The result for the comparison period was impacted by the result of the REDI shopping centre contract.

Construction’s order backlog stood at EUR 1,782.5 (1,634.0) million. The order backlog remains at a good level, and 84 per cent of the order backlog has been sold. New agreements worth EUR 150 (284) million were signed in January–March, the most notable of which was REDI Loisto.

Construction’s invested capital totalled EUR 393.3 (316.7) million. IFRS 16 had an accounting effect of EUR 161 million on this growth in invested capital.

Investments January–March 2019

Investments’ revenue totalled EUR 1.3 million in the January–March period (1.2 1–3/2018). It mainly consists of revenue from shopping centre management. In accordance with SRV’s operating model, revenue from associated companies’ projects and joint ventures are reported under the Construction segment. Tampere Deck and Arena and arena is an example of such projects.

The operative operating profit totalled EUR -2.7 (-1.9) million. The occupancy rates and rental income of the shopping centres owned by associated companies improved, but earnings were burdened by the fact that the management and financing expenses of recently opened shopping centres were higher than income. The result included expense entry of EUR 0.6 million 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 0.1 (-5.6) million. Operating profit was increased by the rouble’s strengthening exchange rate. The net effect of currency exchange fluctuations was EUR 2.8 (-3.7) million, which arose from converting euro-denominated loans 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.

Invested capital totalled EUR 352.4 (327.9) million. Invested capital was increased by investments in REDI and the Tampere Deck and Arena project, as well as the strengthening of the rouble exchange rate. The majority of SRV’s invested capital consists of investments in associated companies.

The return on investment was 4.5 (-6.4) per cent. When calculating the return on investment, the income from interest on loans granted to associated companies is 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.

Outlook for 2019

In addition to general economic trends, SRV’s revenue and result in 2019 will be affected by several factors, such as: the trend in the exchange rate of the rouble; the recognition as income upon delivery of SRV’s own projects; the part of the order backlog that is continuously recognised as income consisting mainly of low-margin contracting; trends in the order backlog’s profit margins; the sales volume of developer-contracted housing and the completion schedules of the properties; and the launch of new contracts and own-development projects. The largest projects are Tampere Deck, the extension of Helsinki Airport and ongoing hospital projects.

• More developer-contracted housing units will be completed in 2019 than in the comparison period. It is estimated that a total of 809 developer-contracted housing units will be completed in 2019 (526 in 2018).
• SRV makes long-term procurement agreements, due to which the expected reduction in construction costs will not have a significant effect on the company’s earnings performance in 2019. The trend in rental income from shopping centres is positive, but slower than anticipated.

SRV specifies its guidance for 2019 in terms of operative operating profit:

• Full-year consolidated revenue for 2019 is expected to grow compared with 2018 (revenue in 2018: EUR 959.7 million). Operative operating profit is expected to improve on 2018 and to be positive (operative operating profit EUR -10.0 million), but lower than operative operating profit in 2017 (operative operating profit in 2017: EUR 27 million).

The earlier guidance was:

• Full-year consolidated revenue for 2019 is expected to grow compared with 2018 (revenue in 2018: EUR 959.7 million). Operative operating profit is expected to improve on 2018 and to be positive (operative operating profit EUR -10.0 million).

Espoo, 26 April 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 26 April 2019, starting at 1 pm in the Living Lab (address Kaasutehtaankatu1, 00540 Helsinki).

A webcast of the briefing will begin at 1 pm on 26 April 2019. A livestream will be broadcast at www.srv.fi/sijoittajat.  The recording will be available on the website immediately after the presentation. The materials will also be made available on the website.

For further information, please contact:

Juha Pekka Ojala, CEO, tel. [phone], [e-mail]
Ilkka Pitkänen, CFO, tel. [phone], [e-mail]
Maija Karhusaari, SVP, Communications and Marketing, tel. [phone], [e-mail]  

www.srv.fi

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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

Attachment

• SRV_Q1_2019_Interim Report_EN