Project management contractor and real estate developer
SRV’s Q3 was rather uneventful and construction profitability remained at reasonable levels. Near-term upside remains limited in the challenging market, and we lower our TP to EUR 4.3 (5.0), HOLD-rating intact.
Reasonable profitability given market conditions
SRV’s Q3 results were largely rather uneventful. Revenue in Q3 was EUR 186.8m (EUR 176.7m/194.0m Evli/Cons.), near previous year levels. The operating profit amounted to EUR 5.5m (EUR 3.1m/2.7m Evli/cons.). The difference was due to capital gains from the sale of a commercial centre and the operating profit margin in construction was slightly below our expectations (2.6%/2.9% act./Evli). Profitability was supported by improved controllability of projects, successful inflation control and ensuring the availability of materials. The order backlog at the end of the review period stood at EUR 717.1m, down some 30% y/y. SRV announced the initiation of change negotiations to meet the current market demand situation.
Heading into challenging market conditions
SRV is heading into a quite tough market, with construction material costs and inflation continuing to cause some hassle along with expectations of a decline in new building construction volumes. The pipeline for business construction appears to be somewhat fruitful but we see little support for the generally more profitable housing construction volumes. The visibility into 2023 is weak and currently we expect a sales decline of some 6%. There is still some potential for margin improvement potential, although we see the current headwinds limiting that in the short-term, and the completed financing arrangements will support bottom-line figures.
HOLD with a TP of EUR 4.3 (5.0)
Although valuation looks cheap, with the market challenges we see little potential for materialization of valuation upside compared with peers in the near-term. In the mid-term, improved margins and initiation of dividend payments could act as a catalyst, again however limited by current uncertainties. We retain our HOLD-rating with a TP of EUR 4.3 (5.0).
SRV's net sales in Q3 amounted to EUR 186.8m, above our estimates and below consensus (EUR 176.7m/194.0m Evli/cons.). EBIT of EUR 5.5m was a positive, beating expectations (EUR 3.1m/2.7m Evli/cons.).
SRV reported surprisingly good Q2 profitability, but headwinds still remain. With the recently completed transactions the company is now financially in good shape.
Q2 profitability exceptionally good
SRV reported good Q2 results in term of P&L figures. Revenue was on par with comparison period figures at EUR 211.4m (EUR 191.7m/219.0m Evli/cons.), while profitability was above expectations, with an operating profit of EUR 10.1m (EUR 4.1m/5.5m Evli/cons.). The relative profitability was exceptionally good and not expected to be as high during H2. The order backlog development remained unfavourable, at EUR 745.9m at the end of Q2. H1 contained new agreements of EUR 202.4m. SRV specified its guidance, now expecting revenue of EUR 800-860m (prev. 800-950m) and an operative operating profit of EUR 15-25m (prev, >5.3m), which compared with our pre-Q2 estimates is slightly on the weaker side but understandable given the current market situation.
Current uncertainty threatening growth outlook
We have lowered our 2022 revenue estimate by 5% while our operative operating profit estimate is essentially intact nearer the upper end of the new guidance. We have lowered our estimates somewhat for 2023. Although SRV currently has EUR 1.3bn in won projects that are not yet entered into the order backlog, with the current uncertainty, order backlog development and lack of developer contracting housing unit start-ups we currently see limited signs of growth. Cost pressure is also still clearly present, but at least in some areas peak increases appear to be behind and the sector in general appears to have coped quite well with the pressure so far. With the completed financing arrangements SRV is now virtually net debt-free (excl. IFRS 16), thus clearly improving the risk profile.
HOLD with a TP of EUR 5.0 (prev. 0.18 pre-reverse split)
Following revisions to our estimates and with the reverse split completed in July we adjust our target price to EUR 5.0 (prev. 0.18) and retain our HOLD-rating. Our target price values SRV at around 6x EV/EBIT.
SRV's net sales in Q2 amounted to EUR 211.4m, above our estimates and in line with consensus (EUR 191.7m/219.0m Evli/cons.). EBIT amounted to EUR 10.1m, above our estimates and above consensus estimates (EUR 4.1m/5.5m Evli/cons.). SRV now expects a revenue of EUR 800-860m (800-950m) and an operative operating profit of EUR 15-25m (>5.3m) in 2022.
SRV embarked on the last phases of its balance sheet strengthening program. Following balance sheet estimate revisions and released subscription rights we adjust our TP to EUR 0.18 (0.35), HOLD-rating intact.
Last steps of balance sheet strengthening program
SRV initiated a program to strengthen its balance sheet in conjunction with the Q1 results, seeking to increase equity by around EUR 100m and reduce IB net-debt by the same amount, due to the impact of the EUR 141.2m Q1 write-downs on its holdings in Russia and in Fennovoima on SRV’s equity and gearing. SRV is now approaching the final stages of the program to reorganize and strengthen its balance sheet. SRV resolved on a rights issue of up to approximately EUR 34.8m to existing shareholders on May 31st, with the subscription period running from 7.6.-21.6.2022 at a subscription price of EUR 0.10 per share offered.
Planned actions seen to increase equity ratio above 35%
Based on the company’s rights issue presentation, held on June 8th, we have adjusted our estimates assuming that shares are subscribed for up to maximum amount offered in both the rights issue and directed issue to hybrid note holders. At completion, this would increase the number of shares from approx. 263m to 670m. We have further adjusted our balance sheet estimates for the outcome of the tender offer and conversion regarding its senior unsecured notes. We have adjusted our operative estimates for the change in financial expenses, which according to SRV are expected to decrease by EUR 6m annually. After the transactions SRV’s equity ratio should rise to over 35% and the company should be close to being net-debt free (excluding the impact of IFRS 16).
HOLD-rating with a target price of EUR 0.18 (0.35)
On our revised estimates and the release of subscription rights we lower our TP to EUR 0.18 (0.35) and retain our HOLD-rating. Valuation is currently quite in line with peers, with 2022e EV/EBITDA, assuming full subscription, at 7.3x vs 7.6x for peers.
Main points in SRV’s Q1 report related to the write-downs of holdings relating to Russia and Fennovoima and the program to strengthen the financial position. Operationally, SRV fared rather decently. We lower our TP to EUR 0.35 (0.54) and retain our HOLD-rating.
Write-downs on essentially all holdings related to Russia
SRV reported its Q1 results, with the main topic clearly being the write-downs to its operations in Russia and the announced program to strengthen the balance sheet. Operationally, Q1 was slightly better than expected. Construction revenue amounted to EUR 175.2m (Evli 186.7m) and operative operating profit 6.3m (Evli EUR 5.2m). The Group operating profit was clearly negative, at EUR -85.7m, as SRV wrote-down essentially all of its holdings in Russia and the Fennovoima project. The order backlog was at EUR 858m in Q1, down 19% y/y. SRV however says that it has 1.4bn worth of won contracts not yet in the order backlog.
Initiated program to strengthen balance sheet
SRV initiated a program to strengthen its balance sheet (illustrated in Figure 1 of this report), seeking to increase equity by around EUR 100m and reduce IB net-debt by the same amount, due to the impact of the write-downs on SRV’s equity and gearing. Operationally, we have made no significant changes to our estimates, expecting revenue of EUR 877.8m and operative operating profit of EUR 22.9m. The uncertainty relating to material prices and availability has increased due to the war in Ukraine, with some more bulk type construction material such as steel used in reinforcing concrete in particular being affected. So far, the impact does not appear to have limited SRV’s abilities to run current operations.
HOLD with a target price of EUR 0.35 (0.54)
Although SRV’s Russian assets still hold some value, due to the current uncertainty valuation relies primarily on construction operations. On 2022e EV/EBIT (using operative operating profit), SRV trades at 14.6x. We lower our TP to EUR 0.35 (0.54) and retain our hold rating. We will account for the impact of the financing program once details are finalized.
SRV's net sales in Q1 amounted to EUR 190.7m, quite in line with our consensus estimates (EUR 186.7m/179.0m Evli/cons.). Operative operating profit amounted to EUR 4.9m, above our estimates (EUR 3.2m Evli). EBIT was significantly burdened by write-downs relating to SRV’s holdings in Russia and amounted to EUR -85.7m.
SRV’s Q4 results were on the weaker side but operatively slightly above our estimates. With the current uncertainties we struggle to see realization of valuation upside and downgrade to HOLD (BUY) with a TP of EUR 0.54 (0.60).
Operatively slightly better than expected
SRV reported Q4 results, which operatively in fact slightly beat our estimates. Revenue amounted to EUR 336.3m (EUR 316.0m/316.0m Evli/Cons.) while the operative operating profit amounted to EUR -4.6m (Evli EUR -5.5m). The operating profit however fell below expectations to EUR -11.5m (EUR -5.5m/-0.8m Evli/cons.). SRV also wrote down the entire value of its holdings and receivables relating to the shopping centre 4Daily, due to weak occupancy rates and profitability, which had an EUR 6.1m negative impact on financial expenses. The company estimates revenue in 2022 to amount to EUR 800-950m and operative operating profit to improve on 2021. The profitability guidance could have signalled more strength but reflects the current market uncertainties.
Profitability potential but also uncertainties
We now expect revenue of EUR 863.8m (prev. EUR 938.5m) and operative operating profit of EUR 21.0m (prev. 29.1m). We expect revenue to decline within housing construction given the still low number of developer contracted housing unit start-ups. Uncertainty relating to profitability development is quite high. Development could be substantial y/y, as the implied underlying profitability excl. the Tampere Areena project in 2021 would have been fair. The situation with construction material pricing and availability however still poses a risk. Lower volumes and fewer expected potentially higher margin developer contracted housing unit completions are also to be taken into consideration.
HOLD (BUY) with a target price of EUR 0.54 (0.60)
On our lowered estimates and the prevailing geopolitical uncertainties and additional shopping centre woes we see that the potential realization of valuation upside from exits and profitability improvement is currently beyond grasp. We lower our target price to EUR 0.54 (0.6) and rating to HOLD (BUY).
SRV's net sales in Q4 amounted to EUR 336.3m, above our estimates and above consensus estimates (EUR 316.0m/316.0m Evli/cons.). EBIT amounted to EUR -11.5m, below our and consensus estimates (EUR -5.5m/-0.8m Evli/cons.). Group revenue in 2022 is expected to be EUR 800-950m and the operative operating profit is expected to improve on 2021.
SRV issued a profit warning due to the materialization of cost risks in the Tampere Arena project and postponement of the expected Pearl Plaza divestment, creating a dent in the improved progress so far during 2021.
Profitability guidance lowered
SRV issued a profit warning on Monday, December 13th. The company now expects its operative operating profit to be positive (prev. EUR 16-21m). The revenue guidance of EUR 900-1,000 remains unchanged. The guidance revision is mainly due to cost risk materialization in the Tampere Arena project. The impact on 2021 figures has been approx. EUR -20m, of which EUR -13m was already included in Q3/2021 figures. Further affecting the guidance revision is the postponement of the sale of the Pearl Plaza shopping centre, which was earlier expected to be finalized during 2021.
Project risks continue to materialize
SRV has previously had challenges in managing certain projects of significant size, with these risks unfortunately materializing again. The project has been completed and further risks should be limited to certain final cost calculations. The P&L impact is unfortunate but shouldn’t cause financial risks, especially with the completion of the Loisto tower project and subsequent cash flows during Q4. The significant negative impact of the Tampere Arena project does continue to highlight that the underlying construction profitability is actually at rather good levels, but this is unfortunately of little consolation when risks in single major projects continue to materialize. We have lowered our 2021 operative operating profit estimate to EUR 4.4m (prev. EUR 17.2m) but apart from that our estimates remain largely unchanged.
BUY with a target price of EUR 0.6 (0.7)
With the risks to the company’s turnaround at elevated levels we lower our target price to EUR 0.6 (0.7). Upside potential is in our view still clearly in place but appears more remote with the postponement of expected Pearl Plaza divestment. Our rating remains BUY.
SRV reported weaker than estimated Q3 results, as project margin woes pushed EBIT into the red. Progress is however being made and Q4 completions and potential Pearl Plaza divestment should further strengthen the balance sheet. We adjust our TP to EUR 0.7 (0.8), BUY-rating intact.
Q3 results well below our estimates
SRV reported Q3 results below our estimates. Revenue amounted to EUR 191.1m (EUR 261.1m/235m Evli/cons.), falling below our estimates due to the timing of recognization of income of the Loisto-project but also due to the lower activity in business construction showing more clearly. The operating profit fell to EUR -1.6m (EUR 5.3m/4.6m Evli/cons.), as the weak financial development of the Tampere Areena project and construction material costs and availability impacted on profitability. Actions to strengthen the balance sheet saw the IB net-debt decrease further by almost EUR 53m. In light of the weak Q3 SRV revised its guidance, expecting 2021 revenue of EUR 900-1,000m (prev. 900-1,050) and operative operating profit of EUR 16-21m (prev. 16-26m).
Further strengthening of balance sheet seen
Our revenue estimates for 2021 remain rather unchanged, now at EUR 912.2m, as we were already near the lower end of the guidance range. Q4 will see a clear increase in housing construction revenue with the completion of Loisto. Our revised estimates put 2021 operative operating profit at EUR 17.2m (prev. 21.1m) with the weaker profitability in Q3. SRV targets to close a deal in regards to the divestment of Pearl Plaza during 2021, which together with housing completions in Q4, namely Loisto, would free up a considerable amount of capital and further strengthen the balance sheet.
BUY with a target price of EUR 0.7 (0.8)
With the setback in margins in Q3 and uncertainty from construction material availability and prices we lower our target price to EUR 0.7 (0.8) but retain our BUY-rating.
SRV's net sales in Q3 amounted to EUR 191.1m, below our estimates and below consensus (EUR 261.1m/235m Evli/cons.). EBIT amounted to EUR -1.6m, below our estimates and below consensus (EUR 5.3m/4.6m Evli/cons.).
SRV’s Q2 results were fairly in line with expectations and held little new information. Progress is being made slowly but steadily and the company is quite well on track to regain decent profitability levels. We retain our BUY-rating and target price of EUR 0.8.
No surprises in Q2
SRV reported Q2 results that were fairly well in line with expectations. Revenue declined some 18% y/y to EUR 218.0m (EUR 232.1m/243.0m Evli/cons.) mainly due to lower business construction revenue. The operating profit was fairly good, at EUR 6.3m (EUR 5.8m/5.0m Evli/cons.), and the operative operating profit stood at EUR 5.7m (Evli 5.8m). The order backlog was down 21% y/y at EUR 1,048m. The guidance for 2021 of EUR 900-1,050m in revenue and operative operating profit of EUR 16-26m remains intact. The second quarter was rather limited in new information content, one highlight being the completed financing arrangements that clearly improved the maturity structure.
Estimates largely intact, potential minor headwind in H2
We have made some smaller adjustments to our 2021 estimates, now expecting revenue of EUR 907.2m (prev. 904.3m) and operating profit of EUR 22.1m (23.9m). Revenue in H2 is expected to improve clearly on H1 with for instance the completion of the second Kalasatama tower, Loisto, but relative profitability is expected to be weaker due to lower margins in key projects. Elevated building material costs and availability could cause some headwind in the latter half of 2021 but so far, the impact does not appear to be material. Start-ups of developer-contracted housing units continued on a slight positive trend, with the financing arrangements opening up potential for accelerated pace given sufficient demand.
BUY with a target price of EUR 0.8
Q2 was quite neutral and did not affect our view of SRV as an investment and SRV’s potential is being unlocked, although slowly. We retain our target price of EUR 0.8 and BUY-rating.
SRV's net sales in Q2 amounted to EUR 218.0m, below our and consensus estimates (EUR 232.1m/241.0m Evli/cons.). EBIT amounted to EUR 6.3m, above our and consensus estimates (EUR 5.8m/5.0m Evli/cons.).
SRV’s Q1 revenue was slightly below expectations but profitability beat our estimates. The continued positive margin development is essential while we remain rather dubious about construction volumes during 2021. We raise our target price to EUR 0.80 (0.64), BUY-rating intact.
Revenue slightly below estimates but good profitability
SRV’s Q1 results were somewhat in line with expectations, as although revenue came in a bit short at EUR 187.1m (EUR 205.7m/196.0m Evli/Cons.), EBIT amounted to a rather solid EUR 5.2m (EUR 4.4m/3.2m Evli/cons.). The order backlog stood at EUR 1,061m (Q1/20: EUR 1,362m). Order intake was quite weak at EUR 85.4m but on a positive note these included new developer contracted housing units, with start-ups picking up again after the break during Q1-Q3/2020. The most positive news in our view was the continued improvement in the Construction segments EBIT-margins (Q1/21: 3.7%, Q1/20: 3.0%) and the already earlier announced approx. EUR 730m Laakso Joint Hospital alliance project, to which SRV was chosen to develop and build (not yet final).
Favourable margin development, volumes a slight concern
With the lower than expected revenue and rather meager order development we have lowered our 2021 sales estimates near the lower bound of the EUR 900-1,050m sales guidance. Although SRV anticipates improved order intake in Q2 along with the increase in completion of developer contracted housing units later on in 2021 a more conservative approach still appears warranted. On the current profitability track and even if revenue were to decline clearly the upper bound of the profitability guidance is well within reach assuming no major surprises in the Investments-segment.
BUY with a target price of EUR 0.80 (0.64)
Although construction volumes are a slight concern going forward, the main thing for SRV is that margins have continued to develop positively and even better than we had expected. We raise our target price to EUR 0.80 (0.64), BUY-rating intact.
SRV's net sales in Q1 amounted to EUR 187.1m, below our estimates and slightly below consensus (EUR 205.7m/196.0m Evli/cons.). EBIT amounted to EUR 5.2m, above our and consensus estimates (EUR 4.4m/3.2m Evli/cons.).
SRV’s Q4 results were quite in line with our expectations. 2021 guidance is slightly softer than anticipated but the wide range leaves room for solid figures in 2021. We have made minor downwards revisions to our estimates but good order intake during H1/2021 could swing our expectations more towards the upper half of the guidance range.
Results quite in line with expectations
SRV’s Q4 results were rather well in line with our estimates. Net sales in Q4 amounted to EUR 292.5m, quite in line with our and consensus estimates (EUR 294.1m/299.6m Evli/cons.). EBIT amounted to EUR -8.0m, slightly below our and consensus estimates (EUR -6.6m/-6.9m Evli/cons.). Although full-year EBIT was quite weak due to the booked negative changes in the value of investments in Q4, 2020 operating cash flow was at a commendable EUR 46.3m. SRV as expected proposed that no dividend be distributed for 2020.
Guidance slightly soft but room for solid figures in 2021
In SRV’s outlook for 2021 revenue is expected to amount to EUR 900-1,050m and operative operating profit to EUR 16-26m. Our earlier estimates (EUR 999m and EUR 23.8m) were slightly above the mid-point of the guidance range. The guidance is somewhat soft, but the upper points of the range still leaves room for a solid 2021. We have made minor downward revisions to our estimates, as we are not fully convinced on sales development given the order backlog and order intake. Solid order intake during H1/21 could still swing expectations more strongly towards the upper half of the guidance range. We now expect revenue of EUR 962.1m and operative operating profit of EUR 22.0m.
BUY-rating with a target price of EUR 0.64
SRV’s Q4 results and the outlook for 2021 all in all were quite as expected and although earnings remained quite weak more importantly cash flows were at good levels. We reiterate our target price of EUR 0.64 and BUY-rating.
SRV's net sales in Q4 amounted to EUR 292.5m, quite in line with our and consensus estimates (EUR 294.1m/299.6m Evli/cons.). EBIT amounted to EUR -8.0m, slightly below our and consensus estimates (EUR -6.6m/-6.9m Evli/cons.).
Given the previously specified outlook the Q4 profitability is largely known, with the Investments segment overshadowing good construction progress. The Q4 report should bring a lot to the table, especially in regards of previous communication of restoring profitability back to 2017 levels, clearly above the 2020 guidance.
Good construction development burdened by investments
SRV will report Q4 results on February 4th. SRV specified its guidance earlier on, expecting the operative operating profit for 2020 to be in the range of EUR 3-6m. The Q4 results will be affected by changes in the value of the Investment segment’s balance sheet items for a total negative impact of EUR 12m. Although the negative impact casts a shadow on the good operative operating profit development during earlier quarters these items should to our understanding be non-cash, and the guidance still implies continued healthy construction margin development. Our estimate for the Construction segment’s operative operating profit margin in 2020 is at 2.9% (2019: 0.7%) and Group operative operating profit estimate at EUR 6.0m.
Expectations of a better year in 2021
We do not expect a dividend distribution for FY2020. Although the company’s cash flows have improved clearly through divestments and financial measures taken, the company still has a rather strained balance sheet given current operating cash flows. The guidance for 2021 will be of key interest, as SRV has previously communicated intentions to restore the operative operating profit in 2021 to levels seen in 2017 (EUR 27.0m). SRV will also release its updated strategy and financial targets in conjunction with the Q4 results.
BUY with a target price of EUR 0.64
Apart from the changes to the Investments segment’s balance sheet item changes, our estimates remain intact. We retain our BUY-rating and target price of EUR 0.64.
SRV’s Q3 results were fairly neutral and most importantly construction profitability was rather good. Supported by construction cost declines, the target of improving the 2021 operative operating profit to 2017 levels appears feasible. We retain our BUY-rating, TP EUR 0.64 (0.66).
Decent results, construction margins held up
SRV reported somewhat two-fold Q3 results. Revenue was below our expectations (EUR 223.6m/234.0m Evli/cons.) despite more developer-contracted housing units being recognized as income than we had expected. Operating profit was below expectations at EUR 1.7m (EUR 2.9m/3.0m Evli/cons.) while the operative operating profit amounted to EUR 7.1m (Evli EUR 2.9m), with the cancellation of a EUR 3.1m provision for expenses that were recognized due to a ruling by a Russian court impacting positively. Relative profitability in the Construction segment held up well and corresponded to our expectations.
Margin improvement supported by cost decline
Visibility is somewhat weakened going into 2021. The housing prices recovered well from the dip in H1/20 and activity has been at healthy levels. The order backlog has been relatively stable in the past four quarters and with the current project portfolio we see potential for minor growth in 2021, expecting a slight sales decline in business construction and growth in housing construction. The sales development is currently however clearly of secondary importance as improvement in profitability to offset the interest expense burden is essential. We expect margins to improve in 2021, as margins in 2020 have been pressed by high construction costs and the situation should ease going forward.
BUY with a target price of EUR 0.64 (0.66)
The uncertainty has particularly affected the shopping centres in Russia and exits continue to appear more distant. The construction outlook remains relatively decent, although demand within certain business construction areas is being affected by the pandemic. We adjust our target price to EUR 0.64 (0.66) with our BUY-rating intact.
SRV's net sales in Q3 amounted to EUR 209.9m, below our and consensus estimates (EUR 223.6m/234.0m Evli/cons.). EBIT amounted to EUR 1.7m, below our and consensus estimates (EUR 2.9m/3.0m Evli/cons.).
SRV’s Q2 profitability fell short of our estimates due to one-offs, with revenue and construction profitability slightly better than expected. We have raised our 20-22E EBIT estimates by some 5-10% on a fairly good H1 order intake and higher construction margin expectations. We upgrade our rating to BUY (HOLD) with a target price of EUR 0.66 (0.64).
One-offs affected profitability, good construction margins
SRV’s revenue in Q2 grew 28% y/y to EUR 265.0m for a slight expectations beat (EUR 243.4m/243.0m Evli/cons.). The operative operating profit was at EUR 0.5m (Evli 3.8m), affected by an EUR 3.1m provision for expenses recognized due to a ruling by a Russian court as well as recovery programme costs and costs stemming from impacts of the coronavirus. Construction profitability was good and slightly better than expected, with an operative operating profit margin of 2.8% (Evli 2.6%). The effects of the coronavirus were limited, although some additional costs were incurred, and housing sales were slower during April-May. Shopping centres were also affected and in Russia a large share of stores were and remain closed due to restrictions.
20-22E EBIT estimates raised by some 5-10%
We have post-Q2 raised our 20-22E EBIT estimates by some 5-10%, prompted by a fairly good H1/20 order intake and slightly raised construction margin expectations. The coronavirus pandemic continues to pose a risk, but current recovery prospects in Finland and a higher share of housing units sold to investors in the construction portfolio remain supportive factors.
BUY (HOLD) with a target price of EUR 0.66 (0.64)
Uncertainty of shopping centre exits has increased due to the pandemic and will most likely be delayed, with Pearl Plaza discussions already having been in late stages. On our 21-22E estimates and peer multiples, current valuation levels in our view essentially appear to only assign a value to SRV’s construction operations. We upgrade our rating to BUY (HOLD) with a target price of EUR 0.66 (0.64).
SRV's net sales in Q2 amounted to EUR 265.0m, above our and consensus estimates (EUR 243.4m/243.0m Evli/cons.). EBIT amounted to EUR 3.3m, below our estimates and above consensus estimates (EUR 3.8m/2.4m Evli/cons.).
SRV is approaching the final leg of its recovery programme and initiated a rights issue, seeking to raise EUR 50m gross proceeds. The good progress so far remains somewhat overshadowed by the development of the Russian economy. We adjust our TP to EUR 0.64 (1.10), HOLD-rating intact.
Seeking to raise EUR 50m gross proceeds
SRV initiated a rights issue with the aim of raising gross proceeds of EUR 50m and resolved upon offering up to ~131m new shares, corresponding to 49.8% of all shares if fully completed, with existing shareholders receiving one subscription right for each owned share and the subscription price for new shares set at EUR 0.38. The share issue proceeds are primarily intended for strengthening of the company’s balance sheet. SRV also completed a directed share issue in May, resulting in gross proceeds of approx. EUR 75m but no cash proceeds, as outstanding hybrid bonds were converted into equity. The company expects that the issues along with measures taken as part of the company’s recovery programme will improve the company’s equity ratio excl. lease liabilities from 26.4% (31.12.2019) to 30-33% by the end of Q2.
Profitability improving, financial expenses hamper earnings
We assume full completion of the rights issue in our estimates given the EUR 40m commitments made and the discount of the subscription price. Apart from adjustments due to the expected expenses related to the share issues our estimates remain intact. We expect the operative operating profit to improve to EUR 15.3m following improved construction profitability, while expecting net earnings to remain negative due to the high financial expenses.
HOLD with a target price of EUR 0.64 (1.10)
Our SOTP implies an equity value of EUR 0.69 per share while peer multiples remain challenging. The ruble has seen recovery from its Q1 dip but together with the state of the Russian economy pose a risk to easing balance sheet strains through exits. We adjust our target price to EUR 0.64 (1.10) with our HOLD-rating intact.
SRV’s Q1 results were better than expected, most importantly profitability improved to healthy levels (EBIT Act./Evli EUR 4.5m/-5.1m), and order intake is showing positive development. Steps to improve the financial position continue to be of focus, COVID-induced uncertainty poses a threat to shopping centre exit plans. We retain our HOLD rating with a TP of EUR 1.1 (1.0).
Back to healthier profitability in Q1
SRV’s Q1 results were better than expected. Revenue amounted to EUR 208.1m (EUR 187.0m/198.0m Evli/cons.) and EBIT to EUR 4.5m (EUR -5.1m/-0.4m Evli/cons.). Compared to our estimates, profitability was higher mainly due to a misjudgment of FX hedging and the higher revenue. Q1 included EUR 2.1m profit margin eliminations from the sale of holdings in REDI and Tampere Deck and Arena. Overall, Q1 profitability was in our view a clear but still early positive sign of a turnaround. New orders have developed positively so far during 2020, with EUR 198m new orders in Q1.
2020 EBIT estimate raised to 14.8m (4.3m)
Apart from adjustments based on Q1 figures, our 2020 estimates are largely intact. SRV’s estimate for developer-contracted housing unit completions in 2020 was revised to 520 (586), but we had for housing construction already as a precaution to possible near-term housing market uncertainty due to the coronavirus pandemic assumed a clearly lower number of units recognized as income compared to completion guidance. Our revised 2020E estimates for revenue and EBIT are EUR 957.2m (prev. 956.2m) and EUR 14.8m (prev. EUR 4.3m).
HOLD with a target price of EUR 1.1 (1.0)
Following estimates revisions, we adjust our target price to EUR 1.1 (1.0) and retain our HOLD-rating. Q1 showed good progress on the profitability front, next steps will be the measures to improve the financial position. Received commitments support the upcoming rights issues, shopping centre exits will likely see delays due to the COVID-induced uncertainty.
SRV's net sales in Q1 amounted to EUR 208.1m, above our and consensus estimates (EUR 187.0m/198.0m Evli/cons.). EBIT amounted to EUR 4.5m, above our and consensus estimates (EUR -5.1m/-0.4m Evli/cons.). SRV estimates that 520 developer-contracted housing units will be completed in 2020 (previously 586).
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.
SRV’s Q4 results were on paper rather catastrophic due to significant impairment charges relating mainly to the REDI shopping centre, with the Q4 operative operating profit at EUR -87.2m (Evli EUR 2.3m). SRV announced a series of measures to strengthen its financial position, that on a short-term perspective appear unfavourable, but will benefit SRV in the coming years. We retain our HOLD-rating with a target price of EUR 1.30.
Earnings clearly in the red due to impairment charges
SRV’s Q4 revenue amounted to EUR 403.8m (Evli 370.2m) and operative operating profit to EUR -87.2m (Evli 2.3m). Q4 included impairment charges of EUR 92.9m, relating mainly to the REDI shopping centre, as SRV has agreed to divest its ownership. Although the Q4 results on paper were rather catastrophic, construction margins (excluding one-off charges) were in fact clearly better than we had expected, supported at least partly by the higher than expected revenue.
Taking measures to improve financial situation
SRV announced a series of measures to strengthen its financial position, of which the in our view in the near-term most important include the divestment of the ownership in the REDI shopping centre and a larger part of the Tampere Deck and Arena project, which should have a near-term positive cash flow impact of some EUR 45m. The measures do not appear favourable in the short-term but are in our view a positive sign as SRV is under CEO Saku Sipola clearly looking to create a more sustainable financial situation and improve operational performance.
HOLD with a target price of EUR 1.3
Our SOTP values SRV at EUR 1.9 per share. The valuation is still highly dependent on improvement in the construction business profitability, which we have yet to see significant proof of. The financial situation is still somewhat challenging even with the measures announced and as such the investment risks remain elevated. We retain our HOLD-rating and target price of EUR 1.3
SRV's net sales in Q4 amounted to EUR 403.8m, above our estimates and above consensus estimates (EUR 370.2m/381.0m Evli/cons.). EBIT amounted to EUR -86.8m, below our and consensus estimates (EUR 2.3m/0.2m Evli/cons.). Q4 was affected by significant amortization charges relating mainly to the REDI shopping centre.
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.
SRV's net sales in Q3 amounted to EUR 227.1m, in slightly above our and consensus estimates (EUR 222.1m/222.0m Evli/cons.). EBIT amounted to EUR -6.3m, below our and consensus estimates (EUR -2.5m/-2.9m Evli/cons.). SRV announced the initiation of a recovery programme.
SRV issued a profit warning on October 10th, estimating that its operative operating profit will be at a loss due to impairments relating to its investments in Russia and decreasing margins in certain projects. We had expected profitability to improve towards the end of 2019 with the completion of a significant number of developer-contracting housing units and the new guidance puts the operative operating profit well below our estimates (Evli EUR 14.7m).
2019 operative operating profit to be negative
SRV downgraded its operative operating guidance for 2019, estimating that its operative operating profit will be at a loss due to impairments relating to its investments in Russia and decreasing margins in certain projects. Previous guidance put the operative operating profit between EUR 0-27m. SRV’s estimate for completed developer-contracting housing units in 2019 remains unchanged, at 809 units. We had estimated a 2019 operative operating profit of EUR 14.7m, based on the expected large number of completions in Q4/2019.
We expect a 2019 EUR -6.3m operative operating profit
Based on the limited information given we have adjusted our H2/19 operative operating profit estimate for the Construction segment by EUR -11m to account for the weaker margins and costs related to the delay of REDI Majakka. We have further included a EUR -10m impairment charge to Q4/19 relating to the Russian investments, which on a speculative note may relate to the on-going Pearl Plaza negotiations. Our revised operative operating profit for 2019 is at EUR -6.3m. We do not expect a dividend in 2019/2020, with our other estimates unchanged until further clarity from the Q3 results on October 31st.
HOLD with a target price of EUR 1.40 (1.80)
Following the vague guidance revision, uncertainty regarding our end of year estimates is significant, but 2019 will nonetheless be another weak year. We adjust our target price to EUR 1.40 (1.80) following the estimates revisions and retain our HOLD-rating.
SRV’s profitability in Q2 was clearly weaker than we had expected following margin reductions in certain construction projects. We adjust our 2019E operative operating profit estimate downward to EUR 14.7m (prev. 21.1m). We retain our HOLD rating with a TP of EUR 1.8 (1.9)
Weaker margin projects pushed profits back in to the red
SRV’s Q2 earnings were weak, with the operative operating profit at EUR -3.1m compared to our estimate of EUR 2.9m. Q2 saw the completion of a low number of developer-contracted housing units and as such a y/y revenue decline to EUR 207.4m, in line with our estimate of EUR 209.8m, which had an impact on profitability. Earnings were further affected by construction margin reductions in three projects, expected to be completed by the end of this year, totaling EUR 6.8m, along with other minor non-recurring items.
2019 earnings to be dictated by Q4 housing completions
Our estimates remain intact apart from minor H2/19 adjustments and a revision for 2019 profitability due to the weaker than expected Q2. For 2019E we estimate revenue of EUR 1,026m (prev. 1,029m) and an operative operating profit of EUR 14.7m (prev. 21.1m). Earnings in 2019 are heavily skewed towards Q4 due to developer-contracting housing unit completion timing, with REDI Majakka accounting for some half of the expected completions. We continue to expect a divestment of Pearl Plaza in 2019, although not included in our earnings estimates as the possible transaction would according to SRV have no significant impact on group profits.
HOLD with a target price of EUR 1.80 (1.90)
Valuation based on peer multiples appears more than challenging, in particular on EV metrics due to the high leverage, while our SOTP offers some leeway due to the shopping centres not reflected through earnings comparison. Caution due to weak near-term earnings visibility following a sequence of negative surprises is also warranted and we retain our HOLD rating, adjusting our TP to 1.80 (1.90) following our estimates revision.
SRV’s Q2 earnings overall were weaker than expected. Revenue was in line with our expectations (Act./Evli EUR 207.4m/209.8m) as Q2 saw the completion of fewer developer-contracted housing units. The operative operating profitability was negative at EUR -3.1m (Evli 2.9m) and clearly weaker than expected, seemingly mainly due to an underestimation of the impact of weaker margin projects.
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.
SRV’s Q1 results were in general quite in line with our and consensus estimates. The operating profit was EUR 3.3m (EUR 3.8m/2.8m Evli/cons.) and operative operating profit EUR 0.5m (Evli 4.8m). Revenue was EUR 222.6m (EUR 224.7m/232.7m Evli/cons.). SRV specified its guidance, adding that the operative operating profit is expected to be lower than in 2017 (EUR 27m).
SRV’s Q4 profitability was below our expectations mainly due to additional REDI shopping centre costs. We continue to expect significant profitability improvement in 2019 but have lowered our estimates due to expected slower shopping centre development in Russia and continued higher construction costs during 2019. We retain our HOLD-rating with a TP of EUR 2.0 (2.4).
Weak profitability in Q4
SRV’s Q4 earnings fell below our estimates, with operating profit at EUR 0.1m (Evli EUR 7.8m). The operating profit was affected by EUR 11.1m additional costs from the REDI shopping centre along with an EUR 4m impairment charge in International Operations but aided by the EUR 14m capital gain of the sale of SRV Kalusto. The operational profitability in Operations in Finland, adjusted for the REDI impact, remained rather weak despite the high revenue and many completed developer-contracting housing units, affected by weaker margins in certain projects.
2019 profitability estimates lowered
SRV expects revenue to grow in 2019 compared to 2018 and the operative operating profit to improve compared to 2018 and be positive. The profitability in 2019 is expected to be affected by higher construction costs due to long-term procurement agreements. We have lowered our 2019E operative operating profit estimate to EUR 32.7m (EUR 40.2m) due to both expected lower profitability in International Operations from slower shopping centre development in Russia and Operations in Finland due to the expected higher construction costs.
HOLD with a target price of EUR 2.0 (2.4)
On our revised estimates valuation looks challenging based on peer multiples, with SRV trading at a larger premium to peers, but is still supported by our SOTP. The balance sheet remains excessive, although some EUR 90m in capital employed was released during the year and with the uncertainty regarding shopping centre divestments we retain our HOLD rating with a TP of EUR 2.0 (2.4).
SRV’s Q4 profitability fell below our expectations, with the operating profit at EUR 0.1m (Evli EUR 7.8m). Revenue was EUR 299.8m (Evli 299.6m). Profitability was burdened by additional costs from the REDI shopping centre and impairment charges in International Operations. SRV expects revenue to grow in 2019 compared to 2018 (EUR 959.7m) and the operative operating profit to improve compared to 2018 (EUR -10.0m) and be positive.
SRV’s Q3 results were slightly better than we expected. Revenue fell slightly short of our estimates due to lower revenue in business construction. Profitability was better than expected, mainly due to a smaller impact of the REDI project than we had anticipated. Further cost exceeding in the project is still possible but unlikely and with the project having been completed the potential additional costs should be significantly smaller. We retain our HOLD rating with a target price of EUR 2.4 (2.7).
Q3 slightly better than anticipated
SRV’s Q3 revenue came in at EUR 208.4m (Evli 216.8m), while the operative operating profit amounted to EUR -3.1m (Evli EUR -6.9m). The revenue was mainly in line with expectations but fell short of our estimates in business construction in Finland. The profitability beat was mainly due to the negative impact of the REDI project being smaller than we had anticipated. SRV’s order backlog remained solid at EUR 1,678.5m, up 9.3 % y/y. SRV made agreements for releasing capital tied on the balance sheet for approx. EUR 50m, of which around EUR 20m will materialize in Q4 along with an additional goal of EUR 20-30m.
Estimates revisions minor
We have made minor changes to our estimates, with our 2018E revenue and operative operating profit figures at EUR 959.3m (prev. 960.5m) and EUR -2.3m (prev. -5.2m). SRV expects revenue in 2018 to decline compared to 2017 (EUR 1,114.4m) and the operative operating profit to be negative. We have also checked down our 2019E sales growth estimates by approx. 2 percentage points, mainly in business construction in Finland.
HOLD with a target price of EUR 2.4 (2.7)
On our estimates SRV trades at EV/EBIT and P/E 2019E of 10.8x and 7.7x respectively. SRV trades at a discount to peer P/E 2019E multiples, which we currently consider reasonable following the profitability issues. We retain our HOLD-rating at a target price of EUR 2.4 (2.7).
SRV’s Q3 results were slightly better than expected. Although revenue fell slightly short of our estimates, EUR 208.4m vs. Evli EUR 216.8m, EBIT came in above our estimates, at EUR -5.7m vs. Evli EUR -8.4m. The earnings impact of REDI was slightly smaller than we had anticipated in Q3. SRV expects a positive operative operating profit and cash flow in Q4/18.
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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Full-year consolidated revenue for 2022 is expected to be EUR 770-820m and the operative operating profit is expected to be EUR 17-23m.
2021-2024 strategic financial objectives: Operative operating profit margin of 6 per cent by the end of the strategy period. Gearing (excl. IFRS 16 impact) target above 40-60 per cent. The longer-term objective is to distribute dividend of 30-50 per cent of the annual result.
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