Skanska’s Q2 report judged harshly

Sweden’s largest construction company Skanska (OMX: SKA B) saw its returns stall during the second quarter. Quarterly group revenues reached 34.2 billion SEK and operating profit was about 1.3 billion. Reported profit of 894 million translates into earnings per share of 2.17. Order backlog continued to grow quickly. Analysts were expecting much higher profit numbers and this resulted in pressure on the stock on the reporting date (Thursday) and subsequently on target price cuts on Friday. Cash flow was negative. Now whether the cuts based on this report are justified is another matter: negative cash flow and lately ever increasing order book means that more projects are in their early stages, meaning lower reported margins at this point are also somewhat expected.

Operating margin in Construction fell markedly vs. 2011 across the entire group but Sweden’s 36% drop in operating income despite 3% revenue growth stands out. While Norway and Finland returned to show a miniscule profit, Latin American segment fell to minus in spite of a large increase in activity since there was a 180 million project write-down. USA Building and USA Civil, which are important segments, weren't able to maintain margins although higher volumes compensated on the bottom line. In aggregate out of almost 31 billion in segment revenue, a mere 1 billion operating income was generated. Some of this is explained by the project mix and the group also said tendering costs have increased.

Residential Development revenue grew quarter on quarter and sequentially to 2.35 billion operating income would have stayed rather level if not for one-off items of 380 million that led to a minus 288 million result. Commercial Property Development revenue and profit was up strongly based on sale and gain from property divestments. In Infrastructure Development, there wasn’t a whole lot to report. President and CEO Johan Karlström believes the group is at a good positive to show future profits based on healthy activity across all the segments.