Risks and risk management
It is crucial for Peab’s profitability to have well developed routines for identifying and managing risks. This process also creates possibilities to take advantage of business opportunities that arise. Changes in external circumstances and the economy require constant vigilance and adaptability. The year 2016 brought dramatic changes that can have a significant impact on the financial and political arena on our home market in the Nordic region as well. Developments in the US after the presidential election, Brexit and the upcoming elections in several European countries make for new scenarios.
MATERIAL RISKS AND UNCERTAINTY FACTORS
Peab’s business is exposed both to operational and financial risks. The effects of risks on Peab’s results and position depend on how well daily operations are handled in the company. In addition, as a construction and civil engineering company Peab is vulnerable to external risks such as developments in the economy and changes in circumstances due to amendments in laws and regulations, and other political decisions. See also External circumstances and the market for a description of economic developments on Peab’s markets. The parent company is indirectly affected by the risks described in this section.
RISK MANAGEMENT
The management of operative risks is a continuous process considering the large number of projects the company has in different phases of started up, carried out and completed. Operative risks are managed in the line organization in the business areas through established procedures, processes and control systems. Financial risks are associated with capital tied up in the company and its capital requirements.
SENSITIVITY ANALYSIS
Peab’s operations are sensitive to changes in, among other things, volumes and margins. The sensitivity analysis below describes how pre-tax profit is affected by changes in some of the important Group variables.
| Operative risks | Description | Action |
| Contract risks | Peab’s business is largely project related and each project is unique in terms of design and other prerequisites. Erroneous calculations can lead to incorrect tenders, which can then lead to losses in projects regardless of how well they have been completed in the field. There are a number of contract types and the risk level varies accordingly. Regardless of contract type uncertainties concerning terms might lead to responsibility issues and this can lead to a dispute with the orderer. This makes it hard to assess the result of both ongoing and completed projects. Peab’s operations are subject to market risks in the form of price risks such as unforeseen cost increases for material, subcontractors or the employee salaries. The risks vary depending on the type of contract. | Therefore structured risk assessment is crucial to ensure that risks are identified and priced in the tender and the calculations made. The right resources in projects mean they will be carried out according to stipulated procedures, and with the right products and methods. Price risks are managed through efficient purchasing processes with the right suppliers, purchased trough central contracts. |
| Risks relating to suppliers and subcontractors (SC) | Suppliers/SCs who do not conform with existing laws, conventions and Peab’s contracts and regulations can lead to infringements regarding the environment, ethics and work environment. Choosing the wrong supplier/SC can lead to quality defects, delivery delays or no delivery in the case of bankruptcy. Violations, defects and delays caused by suppliers/SCs can have a negative effect on Peab’s profitability and brand. | All contracts Peab signs with suppliers/SCs include the rules and requirements that govern the particular project as well as all business Peab conducts. The code of conduct is enclosed in all contracts. The contracts have an ethics clause that, among other things, describe the expectations on suppliers and consequences in case of non-compliance with the code of conduct, labor laws and safety regulations on workplaces. In 2016 Peab took concrete initiatives in our work on “Reliable Business”, please read more here. |
| Skills supply risks | Peab is dependent on attracting and keeping competent employees in order to fulfill the customers’ expectations on products and services. The competition is hard for the competence that Peab need and this makes the recruitment process a priority. | Peab works strategically with long-term skills supply and concrete measures like establishing alternative supply channels in cooperation with the education system, active integration work, extensive internal competence development and our own upper secondary school, the Peab School. Peab’s goal-oriented work with equality, diversity and equal treatment is a part of our effort to manage risks connected to skills supply while contributing to increasing diversity in the industry as well. |
| Project development risks | The risks affecting the profitability of Peab’s housing project developments are, in addition to the risks linked to production, circumstantial factors such as the general economy, interest rates, customers’ willingness to buy and other market conditions. Peab’s commercial property development faces similar risks, including the fact that the investor market’s willingness to buy also influences sales conditions. A common factor for development operations is the risk in planning land exploitation since decisions taken by the authorities can have a great impact on land values and thereby on project profitability. | The sales risk is reduced through set requirements for advance sales before production starts in housing projects. The corresponding risk management for commercial property development is the requirement for a certain level of rented apartments before production start. From a risk perspective it is also important to shorten lead times from land acquisition to finished project in view of the risk for changed market prerequisites. |
| Work environment risks | Work related accidents at Peab’s construction sites can lead to employees or subcontractors getting hurt or at worst killed. | To prevent accidents at worksites Peab develops quality-ensured work methods and trains personnel in this area. |
| Ethical risks | Ethical risks can entail Peab employees not following our code of conduct or Peab’s ethical guidelines and becoming involved in irregularities, bribes or corruption. This can lead to fines, legal sanctions and a damaged brand. | Systematic ethic work focused on preventive education and strict consequences for transgressions are the foundation of a strong brand and healthy competition. |
| Environmental risks | Peab is also exposed to environmentally related risks. Serious environmental accidents at Peab’s construction sites can have a considerable effect on the local environment, lead to fines and damage its brand. Extreme weather can cause problems and delays on worksites and in the supply chain. Higher costs for energy and the emission of greenhouse gases can have a negative effect on Peab’s profitability. | Peab works with prevention focused on climate impact, streamlining resource use and phasing out environmentally and health hazardous substances. |
| Financial risks and risk connected to financial reporting | Description | Action |
| Financial risk-taking | Financial risk-taking is connected to the business’ capital and investment needs. The need for capital is different for each of Peab’s four business areas. Contracting operations in Construction and Civil Engineering normally have a positive working capital that contributes to financing the other operations. Industry binds capital in fixed assets with an ongoing need for investments. Project Development binds capital when investing in land and development rights until they are sold. | Peab’s financial goal of an equity/assets ratio of over 25 percent is the means by which the Group governs financial risk-taking. For business areas Industry and Project Development tied-up capital is managed through fixed frameworks. All investments in Peab follow a set investment routine in which an investment group decides on all investments. Tied-up capital in business areas Construction and Civil Engineering is managed through payment balance requirements. |
| Financial risks | The Group is exposed to financial risks, such as interest rate risks, liquidity risks, refinancing risks, exchange risks and credit risks. | For further information on financial risks, see note 35. |
| Risks connected to financial reporting | Since Peab uses the percentage of completion method in most of our ongoing projects erroneous project forecasts mean that reporting and follow-ups will be misleading. A number of balance items are valued based on estimations and assessments and this value can be affected by, for example, the current market and customers’ preferences. | A prerequisite for correct percentage of completion is reliable forecasting. Well-developed procedures and system support for the monitoring and forecasting of each project is crucial to limiting risks of erroneous percentage of completion. |
Sensitivity analysis
| MSEK | Calculation basis | Change | Pre-tax profit effect |
| Operative | |||
| Volume (operating margin constant) | 46,000 | +/- 10% | +/- 207 |
| Operating margin (volume constant) | 4.5% | +/- 1 percentage | +/- 460 |
| Material and subcontractors | 22,000 | +/- 1% | +/- 220 |
| Financial | |||
| Net debt (interest rate constant) | 1,862 | +/- 10% | +/- 5 |
| Average effective int. rate 1) | |||
| (net debt constant) | 2.6% | +/- 1 percentage | +/- 16 |
1) The calculation is based on the assumption that SEK 1,644 million of the total net debt, has a fixed interest period shorter than one year and is thereby affected almost at once by a change in market interest rates.