SRV’s interim report January–March 2020: SRV’s recovery programme progresses

SRV GROUP PLC INTERIM REPORT 29 APRIL 2020 8:30 EET

SRV’s interim report January–March 2020: SRV’s recovery programme progresses – a clear earnings turnaround and strong order intake

January–March 2020 in brief:

The coronavirus pandemic did not substantially affect SRV’s revenue and result for January–March. The implications of a more protracted situation will be described later.
Revenue declined by 6.5 per cent to EUR 208.1 million (222.6 1−3/2019). Revenue increased in business construction but decreased in housing construction. Revenue from housing construction declined, as fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 25 (161). Growth in business construction revenue mainly stemmed from increased volume in alliance contracts.
Operative operating profit amounted to EUR 5.0 (0.5) 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. Far fewer apartments were completed and recognised as income than in the comparison period, which had a negative impact on operative operating profit.
Operating profit was EUR 4.5 (3.3) million. Operating profit was influenced by the change in the exchange rate of the rouble, which had a net impact of EUR -0.4 (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 -6.6 (-0.3) million. This included EUR -0.8 (-2.0) million in changes in the fair value of derivatives and paid interest and EUR -6.5 (2.9) 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 19.6 (-29.9) million. This improvement in cash flow was largely due to the realisation of SRV’s holdings in REDI and Tampere Deck and Arena.
Earnings per share were EUR -0.13 (-0.02).
At period-end, the order backlog stood at EUR 1,361.5 (1,782.5) million. The order backlog experienced a year-on-year decline of 23.6 per cent in January-March. The sold share of the order backlog stood at 84.7 (84.0) per cent. New agreements valued at EUR 198 (150) million were signed in January–March.
The equity ratio was 20.4 (24.4) per cent and gearing was 260.2 (205.8) per cent. Excluding the impact of IFRS 16, equity ratio was 25.8 (29.7) per cent and gearing was 160.2 (132.7). The equity ratio calculated as per the bond covenants was 29.2 per cent, as the covenant calculation took into account the recognition of income from developer-contracted projects on the basis of percentage of completion, and also handled the EUR 9 million capital loan as shareholders’ equity. Covenants other than bond covenants will only be tested at the end of the second quarter.
On 7 February 2020, SRV divested its holding in the REDI project to its co-investors as part of its recovery programme. The company also sold parts of its holdings in 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.
At the end of March, the company raised a EUR 9 million capital loan to repay some of the EUR 60 million revolving credit facility. [in more detail in the Financing and financial position chapter]

The company publishes alternative key figures that have been adjusted to remove the impact of IFRS 16 Leases on the balance sheet and result. The company also discloses its operative operating profit, which is determined by deducting the calculated rouble exchange differences included in financial items and their potential hedging impacts from operating profit.

Events after the period

On 27 April 2020, SRV announced discussions with the holders of its EUR 100 million (of which EUR 62,1 million is outstanding) senior unsecured callable fixed rate notes due 23 March 2021 and its EUR 75 million senior unsecured callable fixed rate notes due 27 March 2022 regarding potential amendments to the terms and conditions of the Senior Notes.

On 21 April 2020, SRV and Kojamo signed a contract for Kompassi in Helsinki Kalasatama. Construction of the third residential tower begins immediately.

Outlook for 2020 (specified)

SRV specifies its guidance for 2020 in terms of the amount of completed developer contracted housing units: 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).

The earlier guidance was: 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 586 developer-contracted housing units will be completed in 2020 (808 in 2019).

CEO's review

SRV’s positive turnaround was realised in early 2020 in all aspects of our recovery programme: we announced an extensive financing solution to improve our balance sheet structure, improved our operative earnings performance, while our ongoing projects progressed as planned, and received plenty of new orders. Although the coronavirus pandemic did not have a significant impact on revenue or earnings during the review period, it increases uncertainty in business operations.

The coronavirus pandemic has had only minor impacts on progress at our construction sites, but the housing trade has slowed. We are managing this developing situation daily with regard to both health and supply chain functionality, and are actively seeking solutions to any potential disturbances. Ensuring safe and healthy working conditions plays a key role in safeguarding both progress in our work and our personnel’s and partners’ health and safety. It is difficult to predict the longer-term effects of the coronavirus pandemic. The most significant variable is the duration of the pandemic, combined with society’s ability to open up as quickly as possible and in a controlled manner after the crisis.

Many of the actions we have taken in line with the first part of the recovery programme that we announced in October 2019 and the favourable changes in the subcontracting market situation have strengthened the earnings performance of our construction sites, which is evident in the good operative operating result for the first quarter.

I am extremely pleased that the progress of our recovery programme has strengthened our customers’ confidence in us, and that we have agreed on and launched several new construction sites this year. In March, we announced a EUR 197 million contract with Kojamo for the construction of rental housing in Helsinki and Espoo. We entered almost EUR 200 million in new projects into our order backlog, the most significant of which were the renovation of the Finnish National Theatre, commercial premises for the Radiation and Nuclear Safety Authority (STUK), and a logistics centre for Sagax. These agreements are good examples of 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.

Our measures to develop our balance sheet structure as part of the recovery programme are ongoing in many areas. The Annual General Meeting authorised the Board of Directors to decide on two share issues in support of the recovery programme. In a directed share issue, SRV will offer hybrid bondholders the opportunity to convert their hybrids into shares. The directed share issue’s subscription price will be paid by offsetting existing hybrid bonds and their accrued interest. We have received binding advance commitments worth EUR 57 million from hybrid bondholders. In addition, we will implement a maximum EUR 50 million rights issue for all existing and new shareholders. In this issue too, we already have binding advance commitments to subscribe for EUR 40 million worth of new SRV shares. We intend to implement both share issues by the end of the second quarter.

In addition, after the end of the review period, we agreed on changes to the payment schedule of the revolving credit facility agreed in February. We are making headway in the process of proposing changes to the payment schedule and certain terms and conditions to bond holders. These measures are intended to improve the repayment profile of our loan structure.

In spite of the coronavirus, our construction sites have managed to continue operating well thanks to the effective action taken by our personnel and partners. Progress in our recovery programme, a strengthened order backlog, our customers’ confidence and our personnel’s commitment have all given SRV a fresh new start and have created a firm foundation for developing the company. We will be reviewing our strategy and setting financial targets during 2020. We will build homes, schools, hospitals and business premises to meet the current and future needs of Finnish society.

Saku Sipola, President & CEO

Overall review

Group key figures(IFRS, EUR million)	1−3/ 2020	1−3/ 2019	change	change, %	1−12/ 2019	previous 12 months
Revenue	208.1	222.6	-14.5	-6.5	1,060.9	1,046.4
Operative operating profit¹⁾	5.0	0.5	4.5	905.5	-96.8	-92.3
Operative operating profit, %	2.4	0.2			-9.1	-8.8
Operating profit^*)	4.5	3.3	1.2	37.3	-93.0	-91.8
Operating profit, %	2.2	1.5			-8.8	-8.8
Operating profit, excl. IFRS 16^{2) *)}	3.6	2.2	1.4		-94.3	-93.0
Operating profit, %, excl. IFRS 16²⁾	1.7	1.0			-8.9	-8.9
Financial income and expenses, total^**)	-11.1	-3.6	-7.5		-29.3	-36.8
Profit before taxes	-6.6	-0.3	-6.3		-122.4	-128.6
Net profit for the period	-7.6	0.4	-7.9		-103.6	-111.6
Net profit for the period, %	-3.6	0.2			-9.8	-10.7
Order backlog (unrecognised)³⁾	1,361.5	1,782.5	-421.0	-23.6	1,344.2
New agreements	198.2	149.7	48.5	32.4	487.6	536.2

^*) net effect of currency exchange fluctuations	-0.4	2.8	-3.2		3.8	0.5
^**) derivatives included in financial income and expenses	-0.8	-2.0	1.2		-3.7	-2.5

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 -0.4 (2.8) million, of which the effect of currency hedging was EUR 5.8 (-1.9) million.
The figure has been adjusted to remove the impacts of IFRS 16.
The Group’s order backlog consists of the Construction business.

Group key figures(IFRS, EUR million)	1−3/ 2020	1−3/ 2019	change	change, %	1−12/ 2019
Equity ratio, %	20.4	24.4			21.2
Equity ratio, %, excl. IFRS 16¹⁾	25.8	29.7			26.4
Net interest-bearing debt	400.4	490.8	-90.4	-18.4	422.0
Net interest-bearing debt, excl. IFRS 16¹⁾	254.1	317.3	-63.2	-19.9	271.9
Net gearing ratio, %	260.2	205.8			240.3
Net gearing ratio, %, excl. IFRS 16¹⁾	160.2	132.7			151.2
Return on investment, %	-0.4	4.1			-15.2
Return on investment, %, excl. IFRS 16¹⁾	-1.4	4.0			-17.5
Capital employed	593.7	791.9	-198.2	-25.0	625.3
Capital employed, excl. IFRS 16¹⁾	452.0	618.9	-166.9	-27.0	479.4
Return on equity, %	-18.4	0.6			-50.6
Earnings per share, EUR	-0.13	-0.02	-0.11	601.5	-1.85
Equity per share (without hybrid bond), EUR	1.25	3.28	-2.03	-61.9	1.59
Share price at end of period, EUR	0.94	1.70	-0.76	-44.7	1.36
Weighted average number of shares outstanding, millions	59.6	59.6			59.6

The figure has been adjusted to remove the impacts of IFRS 16.

Earnings trends for the segments

Construction January–March 2020

Revenue from Construction declined to EUR 204.9 million (221.9 1–3/2019) in the January–March period. Revenue increased in business construction but decreased in housing construction. Revenue from housing construction was down 34.0 per cent, as fewer housing units were recognised as income than in the comparison period. Revenue from business construction was up 6.3 per cent. Growth in business construction revenue mainly stemmed from increased volume in alliance contracts.

Construction’s operating profit rose to EUR 6.2 (4.8) 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.

Construction’s order backlog stood at EUR 1,361.5 (1,782.5) million. Several of the new projects entered into the order backlog during the first quarter were for clients 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 84.7 (84.0) per cent of the order backlog has been sold. New agreements valued at EUR 198 (150) million were signed in January–March. The most significant were the renovation of the Finnish National Theatre in the first quarter and the construction of 256 housing units for Kojamo.

Construction’s capital employed totalled EUR 403.0 (385.0) million.

Investments January–March 2019

Investments’ revenue totalled EUR 1.6 million in the January–March period (1.3 1–3/2019). 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 -1.0 (-2.7) million. The result for the comparison period included costs related to the dissolution of the VTBC fund. The result for 2019 also 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 mall’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.

Investments’ operating profit was EUR -1.4 (0.1) million. The net effect of currency exchange fluctuations was EUR -0.4 (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 193.1 (245.7 12/2019) million. 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. The owners of the Pearl Plaza project also had their investments returned, which reduced the capital invested in the project to EUR 7.0 million. The weakening of the rouble exchange rate also affected capital employed. The exchange rate impact entered into the cash flow statement was EUR -6.9 million, and the total impact of translation differences on capital employed was EUR -14.2 million. Total capital employed decreased by about EUR 52.6 million.

The return on investment was -13.4 (4.5) 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 situation and economic uncertainty in Russia, it is possible that the sale of Russian shopping centres may be postponed.

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.

SRV specifies its guidance for 2020 in terms of the amount of completed developer-contracted housing units:

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).

The earlier guidance was:

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 586 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, 29 April 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 29 April 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

Liitteet

SRV Q1 2020 Interim report EN