SRV - Initiate coverage with BUY

We initiate coverage of SRV with a BUY rating and target price of EUR 3.2. We expect profitability to see recovery during H2/18 with the completion of the REDI project. We expect sales growth of 14.5 % in 2019E, driven by an increase in developer contracting housing unit completions, and an EBIT margin of 3.7 %, supported by improved business construction profitability and a smaller foreign exchange rate impact.

Profitability expected to see recovery in H2/18

SRV’s sales have declined during H1/18 following fewer completed developer contracting units along with a lowered construction activity in international operations. EBIT was negative at EUR -14.3m due to a negative impact of EUR 20.3m from exceeding costs in the REDI project along with exchange rate impacts. Profitability is expected to see recovery during H2/18 with the completion of the REDI project and increased housing completions.

Sales growth and profitability improvement in 2019

We expect sales to see growth in 2019, with our sales growth estimate at 14.5 %. Growth is mainly expected from an increase in developer contracting housing unit completions, supported by a large number of start-ups in 2017. We expect the increased sales, along with the completion of the REDI project in 2018 and reduced exchange rate impact from redenomination of loans to support profitability improvements in 2019 and expect an EBIT of EUR 41.1m, at an EBIT-margin of 3.7 %.

BUY with a target price of EUR 3.2

We initiate coverage of SRV with a BUY-rating and a target price of EUR 3.2. Our sum-of-the-parts and DCF values are at EUR 3.8 per share. On peer 2019E EV/EBIT SRV trades at a slight premium but taking into consideration an estimate range for the earnings impact of a potential Pearl Plaza exit valuation looks more attractive.

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