SRV - Turning the ship in stormy waters

Name: Evli
Price range: $

SRV’s road has been bumpy in the past two years and measures are being taken to turn the tide. The slowing down of the Finnish construction market has created prerequisites for improved profitability by alleviating some supply chain pressure. The unfortunate Coronavirus outbreak casts a shadow over the planned turnaround and the uncertainty is reflected in valuation multiples. We adjust our target price to EUR 1.00 (1.30) and retain our HOLD-rating.

Seeking turnaround from recent weak profitability years
SRV’s profitability has been in the red the past two years and the company is under new management seeking to turn the tide. Measures are being taken to enhance operational profitability and improve the financial situation. Market development has shown beneficial signs, as a slowing down of new construction volumes should ease supply chain pricing pressure. The Coronavirus outbreak, however, creates significant near-term uncertainty and any possible impact is yet hard to quantify.

Volumes expected to decline, profitability improve
We expect sales to settle at a level of around 10% below the solid 2019 levels (EUR 1,060.9m) following an expected overall decline in construction volumes. 2020 remains supported by the lengthy order backlog while the completion of fewer developer-contracted housing units will lower sales. We expect profitability to improve in 2020 from the recent weak comparison years due to a diminishing burden of non-recurring items but margins to still remain relatively low. We estimate a 2020 operative operating profit margin of 1.1%.

HOLD with a target price of EUR 1.00 (1.30)
Our DCF and SOTP implied equity fair values are EUR 1.10 and 0.64 respectively. We derive a target price or EUR 1.00 (1.30) per share, assigning more weight to our DCF fair value due to an unjust near-term weight on profitability of our SOTP-model and retain our HOLD-rating.

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