SRV’s half-year report January–June 2020: SRV’s recovery programme successfully completed

SRV GROUP PLC HALF-YEAR REPORT 21 JULY 2020 8:30 EET

SRV’s half-year report January–June 2020: SRV’s recovery programme successfully completed – balance sheet position and liquidity strengthened substantially

January-June 2020 in brief:

The coronavirus pandemic slightly weakened revenue and earnings for January-June. The slowdown in housing sales and the restrictions imposed by the Russian authorities on shopping centre operations are particularly evident in the result for the review period.
Revenue grew by 10 per cent to EUR 473.1 million (430.0 1–6/2019). Revenue increased in both housing and business construction. Revenue growth in both housing and business construction was driven by an increase in contracting volume. Fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 153 (203). Growth in business construction revenue mainly stemmed from increased volume in alliance contracts.
Operative operating profit amounted to EUR 5.5 (-2.6) million. The main factors that boosted operative operating profit were construction sites’ favourable earnings trends and EUR 2.1 million from the recognition of construction profit margin eliminations arising from the sales of holdings in REDI and Tampere Deck and Arena. Fewer apartments were completed and recognised as income than in the comparison period, which had a negative impact on operative operating profit. Another factor that weakened operative operating profit was that a Russian court of first instance ruled that SRV’s local subsidiary must pay EUR 3.1 million in compensation to a counterparty due to a contractual dispute. This sum has been recognised in full as a provision for expenses. The subsidiary has appealed the ruling. In addition, operative operating profit was weakened by over one million euros in non-recurring expenses from the recovery programme, additional expenses caused by the coronavirus pandemic, the slowdown in housing sales and the decline in rental income from shopping centres.
Operating profit was EUR 7.8 (0.1) million. Operating profit was influenced by the change in the exchange rate of the rouble, which had a net impact of EUR 2.3 (2.8) million. The exchange rate impact, which largely had no effect on cash flow, was caused by the valuation of the euro-denominated loans of associated companies in roubles, hedging expenses and changes in the market value of hedges.
The result before taxes was EUR -6.4 (-11.2) million. This included EUR -1.1 (-3.5) million in changes in the fair value of interest rate swap derivatives and EUR -4.2 (3.3) million in exchange rate differences arising from the conversion of subsidiary and associated company loans, which did not have an impact on cash flow.
Cash flow from business and investment activities totalled EUR 49.2 (-55.8) million. Cash flow was improved mainly by the realisation of holdings in both REDI and the Tampere Deck and Arena, the release of capital due to the sale of contract sites to investors, and the completion of two developer contracting projects.
Earnings per share were EUR -0.09 (-0.16). The comparison figure has been adjusted for share issues.
At period-end, the order backlog stood at EUR 1,332.4 (1,667.2) million. New agreements valued at EUR 411.9 (221.4) million were signed in January–June, a year-on-year increase of 86 per cent. The sold share of the order backlog was 85.7 (84.1) per cent.
On 7 February 2020, SRV divested its holding in REDI and parts of its holdings in the Tampere Deck and Arena project to its co-investors.
In February, as part of its recovery programme, the company agreed on the replacement of its EUR 100 million revolving credit facility with the banks that had granted it. The facility was replaced with two separate revolving credit facilities, one of EUR 60 million and one of EUR 40 million. The EUR 40 million revolving credit facility is used only to finance construction projects.
The Annual General Meeting held on 26 March 2020 authorised the Board of Directors to decide on both a directed share issue for hybrid holders and a rights issue. In May, the company organised a EUR 75 million directed share issue. In June, the company organised a EUR 50 million rights issue.
At the end of May, SRV extended with written procedures of repayment of its two senior unsecured callable fixed-rate notes and certain terms and conditions of these notes. At the end of June, the company terminated the undrawn portion, amounting to EUR 9 million, of its EUR 60 million credit facility. The remaining credit facility will be repaid in the amount of EUR 11 million in December 2021 and EUR 40 million in January 2022.
Thanks to the improved results and cash flow as well as measures taken in the recovery programme, the equity ratio was 25.3 (28.5) per cent and gearing was 148.5 (178.9) per cent. Excluding the impact of IFRS 16, equity ratio was 30.6 (35.1) per cent and gearing was 83.5 (114.0).

April-June 2020 in brief:

Revenue in April-June amounted to EUR 265.0 (207.4) million. Revenue increased due to the growth in revenue from both business and housing construction.

Operative operating profit amounted to EUR 0.5 (-3.1) million. The positive earnings trend at construction sites and the year-on-year increase in the number of housing units completed and recognised as income contributed to the growth of operative operating profit. However, it was weakened by a EUR 3.1 million provision for expenses that was recognised due to a ruling by a Russian court. In addition, operative operating profit was weakened by over one million euros in non-recurring expenses from the recovery programme, additional expenses caused by the coronavirus pandemic, the slowdown in housing sales and the decline in rental income from shopping centres.

Operating profit was EUR 3.3 (-3.2) million.

The year-on-year growth in new contracts recognised in the order backlog was 198 per cent, amounting to EUR 213.7 (71.7) million.

Events after the period

On 1 July 2020, SRV announced that it will start the basic renovation of operating theatres at HUS Jorvi Hospital. The project management contract was signed in March, at which time a three-month development phase was started. Following the decision to start implementation, SRV recognised the basic renovation project of Jorvi operating theatres in its order backlog in June at a target budget of about EUR 39 million.

On 6 July 2020, SRV announced that it had assigned a total of 67,950 treasury shares to the members of the company’s share-based incentive plan. The earnings period for the scheme was the calendar years 2017-2019. After the assignment, SRV Group Plc owns 850,649 of its own shares.

CEO's review

During the second quarter, we successfully completed our recovery programme. We carried out all the measures we promised within the planned timeframe. Both of the share issues included in our recovery programme were organised with good results in the second quarter. In the directed issue for hybrid holders, about EUR 75 million of the EUR 92 million principal of the hybrid bonds, including interest, was converted into shares. The rights issue in June generated EUR 50 million in new capital. I am very pleased with the trust shown in us and the disciplined implementation of our recovery programme.

Between the share issues, we also completed written procedures whereby we amended the payment schedules and certain terms of our bonds. These measures lengthen the repayment profile of our loan structure.

During the review period, the earnings trend in construction remained good, and our ongoing projects proceeded in line with plans. However, our operative operating profit is burdened by an approximately EUR 3 million provision for damages recognised by our Russian subsidiary, more than EUR 1 million in non-recurring expenses from the recovery programme, expenses related to preventing Covid-19, and particularly the sales losses caused by the slowdown in housing sales in April and the decline in visitor numbers at shopping centres.

As planned, we have quickly turned our project portfolio to include lower-risk and less equity-intensive projects. In January-June, we recognised over EUR 400 million in new projects in our order backlog – the most significant of these are the basic renovation of operating theatres at HUS Jorvi Hospital, the Siuntio education and wellness campus, and the Jousenkaari school. We continue to pursue projects with solid customers that pay for construction work in accordance with its progress, and therefore do not tie up any of SRV’s capital. In addition, supported by our stronger financial situation and the recovery of housing sales, we will seek to start up selected developer-contracted housing projects during the rest of the year.

The exceptional arrangements implemented to prepare for Covid-19 during the spring ushered in some additional costs, but we have avoided the most serious consequences and all our sites have remained in operation in spite of the unusual circumstances. The coronavirus pandemic slowed down housing sales in the period from late March to early May in particular, which had an impact on the pace of sales. To date, the overall impacts of the coronavirus pandemic have been moderate, but its effects on the construction market and the potential continuation or re-escalation of the pandemic blur the outlook for the future.

In Russia, the coronavirus pandemic led to the closure of majority of shops in our shopping centres in late March. A large share of the stores at our shopping centres in St Petersburg remain closed. The opening of shopping centres and consumer confidence in the safety of shopping and the development of their own finances have a major bearing on the operational earnings trends of the shopping centres and may also be reflected in the timing of future sales of properties.

Thanks to the successful implementation of the recovery programme, our balance sheet and financial position have strengthened, and our order backlog has remained strong while becoming less risky. These together with our customers’ trust create a solid foundation for developing SRV further. I thank our personnel for their strong commitment and excellent efforts on our turnaround.

We will continue to focus on our operative earnings performance and the development of our business operations – due to our stronger financial position, we are well poised to do so.

Saku Sipola, President & CEO

Overall review

Group key figures(IFRS, EUR million)	1−6/ 2020	1−6/ 2019	change	change, %	4-6/2020	4-6/2019	1−12/ 2019	previous 12 months
Revenue	473.1	430.0	43.1	10.0	265.0	207.4	1,060.9	1,104.1
Operative operating profit¹⁾	5.5	-2.6	8.1		0.5	-3.1	-96.8	-88.7
Operative operating profit, %	1.2	-0.6			0.2	-1.5	-9.1	-8.0
Operating profit^*)	7.8	0.1	7.7		3.3	-3.2	-93.0	-85.4
Operating profit, %	1.6	0.0			1.2	-1.5	-8.8	-7.7
Operating profit, excl. IFRS 16^{2) *)}	5.8	-2.1	8.0		2.3	-4.3	-94.3	-86.4
Operating profit, %, excl. IFRS 16²⁾	1.2	-0.5			0.9	-2.1	-8.9	-7.6
Financial income and expenses, total^**)	-14.2	-11.3	-2.9		-3.1	-7.7	-29.3	-32.2
Profit before taxes	-6.4	-11.2	4.8		0.2	-10.8	-122.4	-117.5
Net profit for the period	-7.6	-8.6	1.0		-0.1	-9.0	-103.6	-102.6
Net profit for the period, %	-1.6	-2.0			0.0	-4.3	-9.8	-9.3
Order backlog (unrecognised)³⁾	1,332.4	1,667.2	-334.7	-20.1			1,344.2
New agreements	411.9	221.4	190.5	86.0	213.7	71.7	487.6	678.1

^*) net effect of currency exchange fluctuations	2.3	2.8	-0.5		2.7	0.0	3.8	3.3
**) derivatives included in financial income and expenses	-1.5	-3.9	2.4		-0.7	-1.9	-3.7	-1.3

1) Operative operating profit 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 2.3 (2.8) million, of which the effect of currency hedging was EUR 5.9 (-2.8) 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.

Group key figures(IFRS, EUR million)	1−6/ 2020	1−6/ 2019	change	change, %	1−12/ 2019
Equity ratio, %	25.3	28.5			21.2
Equity ratio, %, excl. IFRS 16 ¹⁾	30.6	35.1			26.4
Net interest-bearing debt	307.4	480.2	-172.8	-36.0	422.0
Net interest-bearing debt, excl. IFRS 16¹⁾	177.0	306.6	-129.5	-42.3	271.9
Net gearing ratio, %	148.5	178.9			240.3
Net gearing ratio, %, excl. IFRS 16¹⁾	83.5	114.0			151.2
Return on investment, %	1.9	1.6			-15.2
Return on investment, %, excl. IFRS 16¹⁾	1.6	1.1			-17.5
Capital employed	612.6	773.8	-161.3	-20.8	625.3
Capital employed, excl. IFRS 16¹⁾	487.1	600.9	-113.7	-18.9	479.4
Return on equity, %	-8.0	-6.9			-50.6
Earnings per share, EUR ²⁾	-0.09	-0.16	0.07	-42.8	-1.52
Equity per share (without hybrid bond), EUR ²⁾	0.75	2.60	-1.85	-71.2	1.31
Share price at end of period, EUR ³⁾	0.48	1.62	-1.14	-70.4	1.36
Weighted average number of shares outstanding, millions²⁾	84,7	72.1			72.1

1) The figure has been adjusted to remove the impacts of IFRS 16.
2) The comparison figures have been adjusted to reflect share issues.
3) The comparison figures have not been adjusted to reflect share issues.

Earnings trends for the segments

Construction January-June 2020

Revenue from Construction grew to EUR 469.0 million (428.6 1–6/2019) in the January–June period. Revenue was up in both business construction and housing construction. Revenue from housing construction was up 10.0 per cent. Revenue grew even though fewer housing units were completed and recognised as income than in the comparison period. Revenue from business construction was up 9.2 per cent. Growth in business construction revenue mainly stemmed from increased volume in alliance contracts.

Construction’s operating profit rose to EUR 13.5 (6.8) million. This improvement in operating profit was mainly due to construction sites’ favourable earnings trends, particularly in business construction. On the other hand, far 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 weakened by the lower margins of three projects and an expense entry totalling EUR 6.8 million for REDI Majakka’s water damage.

Construction’s order backlog stood at EUR 1,332.4 (1,667.2) million. Several of the new projects entered into the order backlog during the first half of the year 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 85.7 (84.1) per cent of the order backlog has been sold. New agreements valued at EUR 411.9 (221.4) million were signed in January–June. The most significant projects entered into the order backlog 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 Kompassi and Piispanristi for Kojamo. Major projects recognised in the first quarter included the basic renovation contract for the Finnish National Theatre and the construction of 256 housing units for Kojamo. A complaint has been lodged in the administrative court concerning the deviation decision on the National Theatre basic renovation project. The client is investigating the progress of the project.

Construction’s capital employed totalled EUR 391.1 (448.1) million.

April-June 2020

Revenue from Construction in April-June amounted to EUR 264.1 million (206.7 1-6/2019). Operating profit totalled EUR 7.4 (2.0) million. New agreements entered into the order backlog in April-June amounted to EUR 213.7 (71.7) million.

Investments January-June 2020

Investments’ revenue totalled EUR 2.8 million in the January–June period (2.8 1–6/2019). 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 -5.4 (-4.7) million. Operative operating profit was weakened by the ruling of a Russian court of first instance concerning SRV’s local subsidiary. The company will have to pay compensation of EUR 3.1 million to a counterparty. The sum has been recognised in full as a provision for expenses. The subsidiary has appealed against the decision to the court of second instance. The complaint is concerning an electricity connection, which was never implemented. The company 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 result for 2019 included a loss corresponding to SRV’s combined holdings in the associated companies that own the REDI shopping centre and parking facility. SRV divested its holding during the review period and this result will no longer be consolidated with SRV’s result. SRV’s result contains a share of the result of the associated company that owns the Okhta Mall, including not only the shopping centre’s operating margin, but also depreciation, financial expenses and taxes. On 31 December 2019, the Pearl Plaza shopping centre was designated as an asset held for sale, and the proportion of the result equivalent to SRV’s holding will therefore no longer be consolidated with SRV’s result.

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, which temporarily weakens the operational capabilities of shopping centres and reduces their rental income. The decline in rental income has short-term impacts on the liquidity and loan management capabilities of shopping centres. SRV has engaged actively in negotiations with banks and co-investors in the shopping centres to secure financing for the sites.

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. At present it is not yet known when and how extensively the restrictions in St Petersburg will be lifted. In Moscow, shopping centres closed their doors about one week earlier than in St Petersburg, and the operations of tenants have now returned closer to normal as restrictions have been gradually lifted. However, restrictions still apply to the operations of restaurants, for example, in the Moscow area.

Investments’ operating profit was EUR -3.1 (-1.9) million. The net effect of currency exchange fluctuations was EUR 2.3 (2.8) 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 193.5 million (245.7 12/2019). The divestment of SRV’s holding in REDI and the reduction of its holding in the Tampere Deck and Arena decreased the amount of capital employed. In addition, investments were repaid to the owners of the Pearl Plaza project, which reduced the capital invested in the project by EUR 7.0 million. The weakening of the rouble exchange rate also affected capital employed. The exchange rate impact entered through the income statement was EUR -1.9 million, and the total impact of translation differences on capital employed was EUR -9.4 million. Total capital employed decreased by about EUR 52.2 million.

The return on investment was -5.5 (2.0) 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. For instance, the rental income of Pearl Plaza in St Petersburg, which was opened in 2013, is now stable. 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 is expected to have a temporary negative impact 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.

April-June 2020

Investments’ revenue totalled EUR 1.2 million in the April–June period (1.5 4–6/2019). Revenue was generated by shopping centre management. Operative operating profit amounted to EUR -4.4 (-1.9) million.

Outlook for 2020

During 2020, 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 continuously recognised as income 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.

The largest ongoing projects are Tampere Deck and Arena, the extension of Helsinki Airport, and several hospital projects.

The company's main focus in 2020 will be on major business premises contracts, hospital projects, and housing development projects for investors. Fewer developer-contracted housing units will be completed in 2020 than in the comparison period. It is estimated that a total of 520 developer-contracted housing units will be completed in 2020 (808 in 2019).
Measures to boost operational efficiency and achieve savings in procurement are expected to improve the company’s earnings performance. The recovery programme measures that were carried out in late 2019 are also expected to improve the company’s cost structure.
Full-year consolidated revenue for 2020 is expected to fall in comparison with 2019 (revenue in 2019: EUR 1,060.9 million). Operative operating profit is expected to improve on 2019 and to be positive (operative operating profit EUR -96.8 million).

Espoo, 21 July 2020

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.

Briefing, audiocast and presentation materials

A briefing for analysts, fund managers, investors and media representatives will be held on 21 July 2020, starting at 12.00 EET as an audiocast and conference call. The audiocast 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, saku.sipola@srv.fi
Ilkka Pitkänen, CFO, tel. +358 (0)40 667 0906, ilkka.pitkanen@srv.fi
Maija Karhusaari, SVP, Communications and Marketing, tel. +358 (0)45 218 3772, maija.karhusaari@srv.fi

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SRV in brief

SRV is 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 growth centres in Finland and Russia. Our revenue in 2019 was EUR 1,061 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

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2020 HALF YEAR REPORT SRV EN