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.