SRV - Biggest troubles now behind

SRV’s operative operating profit remained barely positive, at EUR 0.5m, despite notable FX impact and one-off items burden. SRV specified its guidance for the operative operating profit, implying a range of EUR 0-27m. Our revised estimate for 2019 stands at EUR 21.1m (prev. 32.7m), attributable to a re-evaluation of the impact of on-going lower margin projects. We retain our HOLD-rating with a target price of EUR 1.9 (2.0)

Earnings impacted by approx. EUR 3m one-offs

SRV’s Q1 revenue amounted to EUR 222.6m, supported by increased housing unit completions. The operative operating profit fell below expectations, at EUR 0.5m, primarily due to approx. EUR 3m expense entries for REDI Majakka’s water damage and the dissolution of the VTBC fund. The operating profit was aided by a stronger ruble and amounted to EUR 3.3m. SRV further specified its operative operating profit guidance for 2019, expecting it to be positive but below the EUR 27m operative operating profit in 2017.

Downwards revisions on our estimates

We have lowered our 2019 revenue estimates by approx. 5% to EUR 1,029m, mainly through lowered business construction estimates. We have also lowered our operative operating profit estimates to EUR 21.1m (prev. 32.7m) in accordance with the specified guidance. We note that in our pre-Q1 estimates we underestimated the impact of on-going lower margin projects, which are expected to continue to have an effect during 2019. With the delay of REDI Majakka we expect a bulk of housing units to be completed in late-2019 and such our estimates, especially for earnings, are heavily skewed towards Q4/19.

HOLD with a target price of EUR 1.9 (2.0)

The introduction of IFRS 16 and the treatment of plot leases, causes severe comparability uncertainty for peer multiples, as for SRV the change increased net interest-bearing debt by more than 50%, and for now we refrain from relying on per multiples. With the downward revisions of our estimates we lower our target price to EUR 1.9 (2.0) and retain our HOLD-rating.

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