SRV - Persisting challenges

SRV’s Q3 results were below our expectations, as while revenue beat our estimates slightly (Act./Evli 227.1m/222.1m), EBIT was below our estimates at EUR -6.3m (Evli -2.5m). Profitability was impacted by impairments relating to investments in Russia and weaker margins in the Construction segment, driven by two larger projects. SRV announced the initiation of a recovery programme, with the short-term goal of ensuring positive cash flow and operating profit in 2020.

Results below expectations

SRV’s Q3 results were weaker than expected. Revenue was slightly above our estimates, at EUR 227.1m (Evli EUR 222.1m), while EBIT was below our estimates at EUR -6.3m (Evli -2.5m). EBIT was weaker partly due to impairments relating to investments in Russia, which we had forecast to Q4/19, but the weaker margins also hit EBIT of the Construction segment harder than we had estimated and was EUR -3.4m (Evli -0.5m). Positive operational news in the quarter were quite frankly limited, but the announced recovery programme and comments from recently joined CEO Saku Sipola point towards stronger determination in improving cash flows and the balance sheet.

Initiated a recovery programme

SRV announced the launch of a recovery programme, with the short-term goal of ensuring its operative operating profit and cash flow for 2020 are positive and returning its operative operating profit for 2021 to the level of 2017 (EUR 27.1m). We interpret the information given as a continued subpar performance in 2020 and take a more conservative stance on earnings improvement, lowering our 2020 EBIT estimate to EUR 12.6m (prev. EUR 28.2m). The slowing down of the construction sector and the more non-recurring nature of a larger part of the problems in 2019 in our view, however, still continue to speak for clear profitability improvements.

HOLD with a target price of EUR 1.30

Following revisions to our estimates we lower our target price to EUR 1.3 (1.4), retaining our HOLD-rating.

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