SRV - Growth rests on non-residential volumes
SRV publishes its Q1/24 figures on Thursday 25th of April. We expect growth driven by non-residential construction while higher margin residential volumes remain low.
Residential construction outlook remains bleak for 2024
According to the Confederation of Finnish Construction Industries RT, the Finnish residential construction volumes will continue declining in 2024 by 22%. The continued decline is backed by residential building permit and start data by Statistics Finland which have both continued in freefall during 2023. Driven by the current market environment, SRV has no developer contracted projects under construction and only a relatively small number of contracted units and units sold to investors under construction. On the positive side, SRV had less than a hundred units of completed and unsold developer contracted units at the end of 2023. During Q1, SRV agreed to two new sizeable residential projects which will be implemented as competitive and negotiated contracts. While positive for residential volumes, contracts have lower project margin potential and on the other hand, lower risks when compared to own developer contracted projects and projects sold to investors.
Non-residential construction sustains volumes
While residential construction will not support the company’s volumes in 2024, we estimate SRV’s strong non-residential backlog to support group wide revenue growth for the FY. Whilst we estimate revenue growth, the relatively lower margin non-residential construction will keep the profitability modest. For Q1/24, we now estimate revenue of EUR 152m (prev. EUR 159m, Q1/23 EUR 138.3m) with operative EBIT of EUR 1.5m (prev. EUR 2.6m, Q1/23 EUR -2.0m). Despite the lower margin sales mix, we expect increased volumes, profitability improvement initiatives and lower material costs to improve operative EBIT y/y.
HOLD with a TP of EUR 4.1
After slight adjustments to our estimates, valuation remains elevated on our 2024E estimates. Following the recent share price surge, we consider the largest mid-term potential diminished especially given the low visibility into 2025E and beyond.
According to the Confederation of Finnish Construction Industries RT, the Finnish residential construction volumes will continue declining in 2024 by 22%. The continued decline is backed by residential building permit and start data by Statistics Finland which have both continued in freefall during 2023. Driven by the current market environment, SRV has no developer contracted projects under construction and only a relatively small number of contracted units and units sold to investors under construction. On the positive side, SRV had less than a hundred units of completed and unsold developer contracted units at the end of 2023. During Q1, SRV agreed to two new sizeable residential projects which will be implemented as competitive and negotiated contracts. While positive for residential volumes, contracts have lower project margin potential and on the other hand, lower risks when compared to own developer contracted projects and projects sold to investors.
Non-residential construction sustains volumes
While residential construction will not support the company’s volumes in 2024, we estimate SRV’s strong non-residential backlog to support group wide revenue growth for the FY. Whilst we estimate revenue growth, the relatively lower margin non-residential construction will keep the profitability modest. For Q1/24, we now estimate revenue of EUR 152m (prev. EUR 159m, Q1/23 EUR 138.3m) with operative EBIT of EUR 1.5m (prev. EUR 2.6m, Q1/23 EUR -2.0m). Despite the lower margin sales mix, we expect increased volumes, profitability improvement initiatives and lower material costs to improve operative EBIT y/y.
HOLD with a TP of EUR 4.1
After slight adjustments to our estimates, valuation remains elevated on our 2024E estimates. Following the recent share price surge, we consider the largest mid-term potential diminished especially given the low visibility into 2025E and beyond.