What do people think about SRV’s performance? Another profit warning and now they’re already making a loss. Apparently, there are more problems with REDI, as they can’t seem to generate a proper profit. During the last interim report, they assured us that there shouldn’t be any more problems with REDI, but it doesn’t really look that way.
If this keeps up, the entire Kalasatama project will ruin SRV’s results for a long time. Apparently, the tower blocks have lower margins than normal production anyway. The whole thing is a bit of a gamble if they are “learning something new” (quote from the interim report briefing) with low-margin projects, and at this scale too.
Besides, SRV has been snagging these big projects, so I wonder how they’ve been priced, since they almost all fell into SRV’s lap
As a small curiosity, it should be mentioned that this is, to my understanding, the first loss-making year in the company’s 30-year history.
REDI has so far been an overall very low-margin project. The project’s problems began over 5 years ago when its start was constantly delayed due to planning complaints. Then, when construction began, it coincided with a heating cycle and sharply rising subcontracting and material prices. The demanding nature of the project has also clearly surprised the company. Combined with a fixed price and a tight schedule, the end result has been financially dreadful to watch. The margins for the first residential tower are also expected to remain weak.
However, REDI should no longer significantly burden profitability or the balance sheet after the current year, as the construction phase for the shopping center ends this year, and from Q4 onwards, the company will start receiving rental income from the shopping center, and it can be refinanced. Ultimately, the profitability of the REDI project will be determined by the price and timing of the shopping center’s eventual sale. However, the sale is likely to take place only years from now.
It is to be hoped that SRV will no longer take on such large-scale projects in the future, but rather focus on the development and construction of less capital-intensive and less risky projects.
We will update our view on SRV next week, so more of our thoughts on the matter will follow then.
What does fixed price mean here? SRV is contracting that for itself, as an investor has not yet been found.
And regarding projects that tie up less capital, those are then contracts that are put out to tender by the client, and it is known that the margins in contracting are worse due to competition than in self-initiated projects.
It seems that SRV has focused on growth in recent years (revenue has doubled from 3-4 years ago), but entirely at the expense of profitability. What’s the point of greedily taking on work that is consistently done with poor margins, and how has SRV planned to maintain its current revenue level while improving profitability?
There are also other owners in Redi. So, a fixed price for Redi was agreed upon with the other shares. Cost overruns will therefore be paid by SRV.
Even smaller projects can be self-developed just as well. It’s mainly about the fact that if there are several smaller projects, the risk is much lower. Margins can be in the same range for smaller projects. SRV also has many large commissioned projects that SRV won in tenders. The margins in those can’t be very good either.
Okay, I didn’t know that. I thought it was entirely on SRV’s balance sheet at the moment.
The point, however, is that there’s no joy in rapid revenue growth when it’s been achieved entirely at the expense of profitability.
Cf. Lehto, which, even with strong growth, has practically managed to maintain its 10% operating profit margin, which is indeed very high for a construction company.
Of course, that hasn’t been the goal. SRV’s project management model becomes expensive in a heated construction market, especially if projects are fixed-price. SRV has to buy almost everything from the market, where demand significantly exceeds supply and prices have risen considerably. Traditional construction companies have their own workers and tools, so they are not burdened by rising prices to the same extent.
This is not true. In almost all even slightly larger construction companies, the subcontracting rate is really high, and hardly anything other than work related to site maintenance/support functions is done with their own employees.
In that sense, the rise in input prices does not hit SRV any more than most other construction companies, but the timing mentioned by Aho, where a fixed-price contract is made during a downturn and the construction itself occurs during an upturn, is the biggest problem in SRV’s case.
Yes, it is true. SRV uses subcontractors more than other construction companies. When I spoke of traditional construction companies, I was referring to the operating model, not specific companies. The fact is, however, that many other construction companies do much more work themselves than SRV. SRV apparently doesn’t have any traditional direct employees on its payroll at all.
That’s just not true. SRV doesn’t have any of its own workers, and other competitors of the same size have very few, and those few don’t really do any actual work phases, but rather fill-in jobs that fall outside of subcontracting. Others buy everything through subcontractors in exactly the same way.
So, for other construction companies, these own workers are just cost items when everything is bought from subcontractors? Think about it again.
YIT has 5500 employees with a turnover of 2 billion, and SRV has 1100 employees with a turnover of 1.1 billion. How can this difference in personnel be explained if not by the different use of subcontractors?
“Helin believes that the curved lines also lead to people spending more time in Redi than in centers with straight corridors.” How many people actually go hang out in shopping mall corridors? Surely what’s decisive is what services are available there and how easily they can be found.
Redi will probably be another disaster for SRV when they can’t find a buyer for the structure
In the Lehto thread, I posted a graph from Statistics Finland (Tilastokeskus) showing the number of old apartment sales in Finland. They have plummeted, which is very negative for SRV as well. Furthermore, Redi’s weakness is very negative for SRV, making it difficult to sell Redi’s towers. On the other hand, SRV is also a direct owner of the Redi shopping center, and in my opinion, after this news, there is pressure in the sum-of-parts valuation regarding the Redi shopping center ownership.
The Kalasatama project has been a terrible flop as a whole. Redi could still become a real disaster if customer numbers don’t pick up there. On the other hand, I don’t really understand what the idea behind Redi was, since they didn’t build proper hypermarkets there. It’s not a transit shopping center like, for example, Kamppi. It’s quite obvious that if people bother to come there, they want to do all their shopping at once. A concept like Redi can work if you can get proper brand and luxury stores there and there are enough people with purchasing power around. In Finland, it’s really difficult to make something like that work.
I suspect that SRV’s management might have been a bit blinded by their plans, and at first, the intention was to build something too luxurious for Finnish conditions. Now, however, due to building regulations, it turned into quite a struggle. And in the end, they are quite ugly compared to the marketing pictures (though almost all of them have the same flaw to some extent). SRV’s management has directly admitted that this tower construction has primarily been about learning new things. They probably just took on too big a learning project right from the start.
SRV also has major projects elsewhere, for example in Tampere (central hospital expansion, Kansi and Areena project, etc.). It seems difficult for SRV’s projects to clearly become profitable operations. Uncle has always watched this from the sidelines.
