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.

Skanska gets a highway contract in Tampa, signs 600 million syndicate loan

Skanska’ss joint ventures keep netting large deals from the United States. This time it and Ajax Paving Industries could rejoice a 215 million USD (nearly 1.5 billion SEK) contract to reconstruct I-275 (SR 93) between SR-60 (Memorial Highway) and the Hillsborough River in Tampa, Florida. The contract was awarded by the Florida Department of Transportation and Skanska’s share of it is about 150 million or 1 billion SEK.

The improvements at the Interstate 275 include replacing the existing highway with four northbound through lanes from Westshore Boulevard to Himes Avenue. Additionally work will be done on four southbound through lanes from Florida State Road 60 (Memorial Highway) to the Hillsborough River. The construction begins next month and is scheduled to complete 4 years from now. Skanska has also signed on a syndicated (involving 12 banks) revolving credit facility of 600 million Euros with a five year tenor to refinance the existing 750 million multicurrency credit facility from 2007.

Skanska to build explosives handling wharf in Silverdale

Skanska (OMX: SKA B) has through its joint venture with American Bridge Company and Nova Group Inc scored 331 million USD or 2.2 billion SEK contract, out of which Skanska’s share is approximately 1 billion SEK or 149 million USD contract for an explosives handling quay aka a structure for ships to dock and unload explosive cargo from United States Navy in Silverdale, Washington, USA.

The order will go into Skanska USA Civil received orders for Q2 2012. The facility will be situated on the east coastline of Hood Canal. An estimated 100 construction-related jobs will be created, with the work starting right away and the estimated completion taking place in January 2016. The contract scope includes wharf, cover and approach trestle as well as other support facilities and utilities.

Skanska’s profit plummets

Swedish construction company Skanska (OMX: SKA B) is falling heavily in Stockholm stock exchange after releasing its Q1 2012 interim report early this morning. While revenues climbed 6.5% to 26.35 billion and bested consensus estimates according to Affärsvärlden, operating income plunged two thirds to 148 million when the market was expecting a slight increase. The main reason for this was weak performance in Residential Development business area, which sells homes to consumers in Nordic Countries, the Czech Republic and Slovakia with Poland and the UK started recently. The decline was primarily due to slowdown in Sweden.

Orders received were somewhat lower than revenue at 25.1 billion, but higher than last year and higher than average quarterly revenue in Q2.2011-Q1.2012 period. Total order backlog of 152.9 billion is 10% higher than a year ago. It corresponds to around 16 months of construction. Reported earnings per share were 0.27 SEK and IFRS earnings 0.64 SEK. Operating cash flow was sharply negative as tends to be the case during this quarter at -2.3 billion.

Construction business division, which generates majority of revenues (in this quarter it actually nearly matched reported group-wide revenue, which was affected negatively by 1.8 billion from central and eliminations) saw a operating margin decline from 1.4% to 1.2%. Construction includes residential and non-residential building construction in Nordic Countries, Central Europe, UK, US and Latin America. There were large local differences if performance. An observed uptick was seen in the United States where the group is active in non-residential and civil construction and in Latin American civil construction. The rest of Europe was again the greatest laggard.

Commercial Property Development business area performance is heating up. It now has 33 ongoing projects with investments nearly 10 billion SEK. Tenants are investing in modern, energy efficient solutions and vacancy rates in the U.S., Nordic and Central European cities are stable. The business area returns are still minute, but the company could boast with its first project sale in Washington D.C. Infrastructure Development business area also made a first, it reached financial close of Midtown Tunnel project in Virginia, which is its first public-private partnership (PPP) project in the U.S. Skanska has been trying to become a player in the segment for quite some time. Thus far these two business areas generate only about a percent of revenues.

Skanska expects large civil construction projects market to slow in Sweden. In the United States large and complex civil construction projects markets is developing well and building construction, healthcare and information technology industry facilities are also being asked for. Geographic divergence in residential construction trends is expected to persist, for example the company foresees very good development in Norway and very weak one in Finland.

Kidnapped Skanska workers reportedly still held in Peru

Suspected Shining Path guerrillas are reportedly still holding 28 local Skanska (OMX: SKA B) employees hostage as a part of a group of 36 captured. The human resource manager Skanska Peru told AFP that earlier reports of a police raid that freed the majority of the abductees were false. Reportedly the insurgents released a couple of female workers earlier.

The terrorists are reportedly demanding millions of dollars as ransom. The Swedish construction company started operating in Peru from a base in Talara some 15 years ago, It has served oil & gas, energy and mining markets in various projects.

Two large orders received by Skanska joint ventures across Atlantic Ocean

Skanska (OMX: SKA B) noted of two large orders before market open on Tuesday. In total these will add over 2.5 billion SEK into Q1 2012 orders received. The stock was up 1.5% on Tuesday following an afternoon surge.

As a leader of a consortium, Skanska was awarded Engineering, Procurement and Construction contract from Petrobras to increase natural gas treatment & compressing capacity of Cabiúnas Terminal (TECAB) in Rio de Janeiro, Brazil by 25 percent. Skanska’s share in the joint venture with local companies is 33%, so its portion of the total 1.3 billion BRL (currently ~5.2 billion SEK) order is some 450 million BRL (~1.7 BSEK).

The over 5 million cubic metre per day increase demands seven new processing units and interconnections with exiting units. Pre-salt oil and gas fields observed by Petrobras are part of the plan. Work will start immediately with around 3000 people involved at peak construction. Completion is expected in Q4 2014.

Skanska will also build a 2.8 million square foot (260 000 m2) research and development facility in the U.S. in 50/50 joint venture with DPR Construction. The initial contract is valued 256 million USD, making Skanska’s share at 128 million (~860 million SEK). Skanska said it is expecting amendments to the contract for additional phases once prices are agreed upon.

Construction in Finland and Norway lets Skanska down in Q4 2011

Skanska (OMX: SKA B) warned late last week that losses in Finland and in Norway will have 520 million SEK impact on Q4 2011 accounts. Skanska is striving to improve the performance of the two units and a major review is ongoing.

In Skanska Finland write-downs and provisions will set Skanska back by 350 million. The majority of those are related to commercial building projects in Southern Finland and in Estonia. While many large commercial centres are still being planned in Finland, the general view on such projects has turned more negative.

Ongoing restructuring of construction operations in Norway led to write downs and provisions of 170 million SEK. Skanska will report remaining Q4 information on February 8th. The stock has been under some pressure due to this revelation, which was viewed as largely company specific.

Skanska lands a contract for rapid transit line expansion in California

Sweden-based construction company Skanska (OMX: SKA B) has through its subsidiary Skanska USA secured a rapid transit line expansion contract from Santa Clara Valley Transportation Authority for Bay Area Rapid Transit worth 347 million USD (about 2.2 billion SEK) in Northern California, USA as a part of a joint venture with Shimmick Construction and Herzog Contracting Corporation .

The project is to extend the rapid rail transit system to the City of San Jose, California from Warms Springs Station in Fremont and includes stations and crossings. The work will start in February 2012 and the planned completion is in the spring of 2016. Skanska will book the order in Q4 2011 accounts.

Changes involving Nordic firms in STOXX indices

European index specialist STOXX Limited completed an annual review of its Blue-Chip indices. Finnish mobile phone manufacturer Nokia (OMX: NOK1V) will be removed from STOXX Europe 50 Index as it is still down 40% for the year despite a little bit of a rebound in recent days.

There are also some changes in STOXX Nordic 30 Index with Skanska (OMX: SKA B) and Vestas Wind Systems (OMX:VWS) being taken out to be replaced by Swedbank(OMX: SWED A) and Seadrill (OSE:SDRL, NYSE:SDRL). The changes will take effect on September 19th.

Comments about Skanska's Q2 of 2011

Swedish construction firm Skanska (OMX: SKA B) is down marginally after releasing its six-month interim report for 2011. The multinational posted revenue of 53.9 billion Euro, out of which 51.4 billion came from construction. The numbers were down a notch on 2010 but up when taking into account the strengthening Swedish krona.

Operating income includes 4.5 billion krona gain from divestment of the Autopista Central in Chile. Without this item, that the company calls its best investment ever, the group earned 1.6 billion, 1.42 out of which came from construction. Operating margin was down to 2.8 percent. Order intake was down 27% although 14.5 billion SEK booking for Nya Karolinska Solna in the comparison period explains slightly more than half of the decline. The company still has a 15 month order backlog. The company feels that there is a good chance to grow orders in the second half of 2011.

Building Construction market trend is still good in Nordic markets but remains weak in the UK. In the US the picture is more mixed and demand in some segments such as healthcare and data centres is good. There is growing uncertainty in Residential Development market in Sweden but overall the picture is rather similar than in Construction segment. Modern and efficient green properties are in high demand in Commercial Property Development, which also means high margins for these projects. Fiscal tightening is affecting Infrastructure Development projects.