SRV - Weathering the storm

We see SRV as well positioned to weather the storm driven by the company’s healthy, low-risk project backlog and low amount of unsold completed units in its balance sheet. Despite the long-term potential driven by the projected turnaround, we continue to see the short-term potential for the stock limited. We retain our HOLD-rating and adjust our target price to EUR 4.4 (4.1).

Leading project management contractor in Finland

SRV is a leading Finnish project management contractor and one of the largest house builders in the Helsinki Metropolitan Area. SRV business model is largely based on the company’s own project management model, the SRV approach. The SRV approach relies heavily on the company’s subcontractor network, financing and other partners. In 2022, SRV was the 5th largest construction company in Finland measured by revenue.

 

Weak market hampers turnaround

Due to the prevailing high inflation and interest rate environment, the construction volumes are expected to decrease in 2023, primarily driven by a decline in residential construction. SRV’s construction margins have slowly improved during the last two years yet we expect profitability to stay at low levels during 2023 driven by low residential volumes. Despite lower volumes in the higher margin potential residential development projects, we see that the company is able to weather the current storm well as majority of its backlog consists of lower risk non-residential contracting projects. In addition, SRV has low amount of unsold developer contracted units in its balance sheet.

 

HOLD with a target price of EUR 4.4 (4.1)

On our estimates, the near-term valuation upside remains limited. SRV trades at a premium to its Nordic construction peer companies based on our 2023E multiples, yet, when looking at 2024E P/E and EV/EBIT multiples, the valuation appears neutral. The current valuation is significantly below the 2025E peer group multiples and the value derived from our discounted cash flow valuation, yet we see it currently justified because of the company’s track record during the last years and the low visibility for the projected turnaround in profitability.

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