Risks and risk management
It is crucial for Peab’s profitability to have well developed routines for identifying and managing risks. This also creates possibilities to take advantage of business opportunities that arise. Changes in, for example, external circumstances, the economy, customers’ preferences and investment needs require constant vigilance and adaptability.
Risks and uncertainty factors
Peab’s business is exposed both to operational and financial risks. How much risks affect Peab’s profits and position depends on how well the company handles daily operations. 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.
In 2019 the signs of a slowdown in the economy emerged and housing prices are expected to continue to fall, even if there are significant differences in demand depending on location and product. Peab’s broad range of operations has meant that downturns in some product areas have been countered by upturns in others. In the beginning of 2020 the coronavirus spread to a large part of the world. At the time of writing this, countries are putting different measures into effect on short notice to limit the spread of the infection, for example entry and quarantine regulations. Stock markets all over the world have plunged during March. Governments and central banks are introducing different forms of crisis packages to mitigate the economic effects. This will affect the global economy but how profound and how lasting the effects will be is difficult to say. Peab is a major employer with many employees and many people at our workplaces. Our first and foremost mission is to keep our business running but we are monitoring developments and follow recommendations by the authorities in respective countries concerning the spread of the coronavirus and we adapt accordingly. The short-term effects of the coronavirus on Peab’s business are limited but how we will be affected in the long run as well as the economic consequences of the coronavirus pandemic cannot be foreseen at the time of publishing this year’s Annual Report.
On December 13, 2019 Peab’s supplier Nynas AB applied for a company reorganization and on March 12, 2020 Nynas AB applied for a further extension of three months which was granted. Nynas AB is an essential supplier of bitumen which is used as a binder in the manufacture of asphalt. If Nynas AB cannot fulfill its obligations it will cause considerable disturbances in the Nordic paving market and affect all the companies involved in asphalt paving, including Peab which is a major actor. Peab has chosen to complement with other suppliers to ensure deliveries of bitumen. Production is limited during the winter period which is why disturbances have not yet been noted.
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.
Peab’s business is largely project-related. There are a number of different contract forms where risk levels vary depending on the type of contract. However, with any type of contract ambiguities can arise concerning the terms, which can lead to delimitation issues that create a dispute with the customer. Regarding the dispute related to the construction contract of Mall of Scandinavia see note 3.
Risk management
Managing operative risks is a continuous process considering the large number of projects the Group is always starting up, carrying out and completing. Operative risks are managed in the line organization in the business areas through established procedures, processes and control systems. Financial risks are primarily associated with the company’s need for capital, tied up capital and access to financing.
| Operative risks | Description | Action |
| Contract risks | Peab’s business is largely project related and each project is unique in its configuration and other circumstances. Erroneous calculations can lead to incorrect tenders, which can then lead to losses in projects regardless of how well they have been carried out. There are a number of contract types and the risk level varies accordingly. Regardless of the type of contract, grey areas in the terms can lead to disputes with customers about where responsibility lies. Disputes make 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 employee salaries. The risks vary depending on the type of contract. | Structured risk assessment is crucial to ensure that risks are identified and priced in bids that are tendered and the underlying calculations. The right resources in projects ensure that they will be carried out according to stipulated procedures, and with the right products and methods. Peab established a Procurement Council, which is a decision-making authority that contributes to thoroughly processed calculations and tenders for projects over a certain size, a few years ago. The purpose is to reach greater opportunities and reduce risk-taking for Peab. The Council can also be consulted for smaller projects that are so complex this help is needed. Price risks are managed through efficient purchasing processes with the right suppliers, largely procured through central contracts. |
| Risks relating to suppliers and subcontractors (SC) | Suppliers/SCs who do not conform to existing laws, conventions and Peab’s contracts and regulations can lead to infringements regarding the environment, ethics, human rights and the work environment. Choosing the wrong supplier/SC can lead to quality defects, delivery delays or no delivery at all in the case of bankruptcy. Purchases outside of Peab’s framework contracts can entail considerable risk. Infractions, defects and delays caused by suppliers/SCs can have a negative effect on Peab’s profitability and brand. Failure to ensure that information about Peab’s regulations is received by every individual on a Peab worksite can also entail a risk. Flaws in the supplier chain or management of SCs is one of Peab’s greatest sustainability risks, which our customers have also noted. Insufficient control of suppliers or shortcomings in reviews and analysis before a contract is signed are both risk factors. | All the contracts Peab signs with suppliers/SC stipulate the rules and regulations for the specific project and for doing business with Peab. The Code of Conduct and the ethics clause for suppliers are attached to all contracts. These clarify, among other things, what is expected of suppliers and consequences in cases of non-compliance with the Code of Conduct, working conditions and human rights requirements and workplace safety regulations. During the year Peab further developed procedures and methods in a number of sustainability areas with particular focus on the work environment, working conditions, reliable supplier chains and the environment. These include using a blocking system that makes it possible to stop rogue suppliers and SCs and through the system Peab Ease all the actors in a project can be checked. Peab’s methodology for supplier reviews was implemented during the year. |
| Skills recruitment risks | Peab is dependent on attracting and keeping competent employees in order to fulfill customers’ expectations. Competition for the skills Peab needs is intense, which makes the recruitment process a high priority. There is a considerable risk that Peab will not have qualified personnel in sufficient numbers; partly because the labor market is small and competition is high, partly because so few youths are interested in the industry and it lacks diversity. | Peab works strategically with short and long term skills recruitment as well as practical measures like establishing new supply channels in cooperation with the education system, active integration work, extensive internal training and running our own high school, the Peab School. The company has launched a career map aimed at clarifying and enabling paths for development for every employee, regardless of their role or background. Employees, skills development is documented and planned with the aid of a competence platform. Peab’s goal-oriented work with diversity and equal treatment is a part of our effort to handle risks connected to recruiting needed skills, which also contributes to greater diversity. It is also an important attraction quality. |
| 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 zoning for the exploitation land since decisions taken by the authorities can have significant impact on land values and thereby future projects’ profitability. | The sales risk is reduced through set requirements for advance sales before production starts in housing projects. Corresponding risk management for commercial property development is the requirement for a certain level of rented space 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 workplaces can lead to employees or suppliers/SCs getting hurt or, in the worst case, killed. In addition to injuries to individuals, this can lead to fines, legal sanctions and brand damage. A crucial risk area is the organizational and social work environment, which includes risks concerning stress and victimization. Taking care of underage youths at workplaces is another risk area. | To prevent incidents and accidents at workplaces Peab develops quality-ensured work methods and continuously trains personnel. Focus is on planning and risk assessment early on, and learning from reported risk observations, incidents and accidents. Efforts to increase the number of risk observations have been very effective and observations have redoubled. This generates important organizational learning about where, when and why risks occur. Peab teaches employees about equal treatment to prevent discrimination and abuse and to promote equality. Instructors that guide trainees and underage youths in production receive special education approved by the National Agency for Education. |
| Ethical risks | Ethical risks can entail Peab employees not following our Code of Conduct and involving themselves in irregularities, bribes or corruption. Ethical risks can also be connected to transgressions of human rights by in our own company or at suppliers (see above also). This can lead to fines, legal sanctions and brand damage and Peab’s exclusion from public procurements. There are even ethical aspects of failings concerning discrimination and victimization. | Peab conducts systematic ethic work focused on preventive education, a well-defined Code of Conduct and strict consequences for transgressions. Supplier checks and reviews prevent ethical risks in the supplier chain and a whistleblower system ensures the right to anonymously point out ethical risks, internally and externally. Peab’s Ethical Council ensures that infractions of the Code of Conduct and laws, as well as matters concerning discrimination and victimization are investigated and dealt with consistently and impartially. |
| Environmental risks | Peab is exposed to a large number of environmentally related risks, which can damage the environment and individual as well as profitability and brand. A lack of external monitoring and competence in combination with adjusting too slowly can lead to the products and services Peab offers not meeting the demands and expectations of customers, which can be a considerable risk. If Peab should be found guilty of an environmental crime, by not running operations that follow valid legal demands and permits according to the Environmental Code, the company runs the risk, for example, of not being able to participate in public procurements. A lack of risk management in acquisitions can lead to Peab purchasing substantial environmental debt in the form of polluted land/water or operations that cannot deliver as promised. Based on known climate scenarios global warming will likely create physical risks such as extreme weather, floods and a material and energy shortages, which can affect ongoing projects and our own property and facilities. Climate change also leads to conversion risks and opportunities, such as changes in demand, higher raw material prices and new laws, which can affect business conditions. SCs/suppliers that do not hold a sufficiently high environmental standard can lead to environmental damages and compensation demands as well as hurt Peab’s brand. The use of forbidden or unsuitable material, products or substances as well as the improper use of material can cause serious damage to human health and the environment as well as lead to compensation demands and hurt Peab’s brand. | Peab has extensive external monitoring that includes an active and broad stakeholder dialogue. Internal risk prevention takes place within the Group’s three prioritized environmental areas, which are also covered by our environmental goals: climate impact, resource efficiency and phasing out environmentally and health hazardous substances. Our environmental work starts locally and operations work systematically with environmental issues based on overriding and operative procedures in a business management system that is for the most part environmentally certified. These procedures comprise, for example, how monitoring laws and that they are followed is conducted but also enable practical support of environmental steering in a project and regulate environmental delegation in order to ensure that responsibility is clear. Due Diligence is performed on acquisitions and includes environmental matters. In addition, Peab has environmental damage insurance. To ensure that all employees have the right environmental competence for their jobs education and training is ongoing as part of Peab’s risk management. Preventively, operation specific in-depth analyses are performed within the framework of Peab’s established, systematic risk management. Peab has already begun to take practical measures to suit operations to predicted climate changes. An example of this is the work being done to produce methods for climate calculations in construction projects. Another is that Peab has invested in a factory for alternative binder in concrete which can reduce the use of climate-impacting cement. Peab offers ECO-Concrete® and ECO-Asphalt® with a lower carbon footprint than conventional products and participates in developmental projects aimed at suiting construction technology solutions to more extreme weather. |
| IT risks | Peab is raising the level of digitalization in our business, which in turn requires greater access to our IT system. A growing identifiable risk area is IT attacks that can lead to shutdowns in operations. Because of our dependence on IT systems these shutdowns can be extensive and have a major effect on our business for a long time. This can have far-reaching consequences on both our financial results and brand. | Together with external experts Peab’s IT function works systematically with IT security to map out IT risks based on accumulated information, routine follow-ups according to a review plan and continuity planning. Focus is on preventative actions to ensure access to information and IT tools from internal and external sources. External monitoring is continually analyzed and prioritized in order to meet new threats and requirements. |
| 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. Contract construction 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 set frameworks. Investments in Peab follow a set investment procedure 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, raw material risks, currency risks and credit risks. | For further information on financial risks, see note 35. |
| Risks connected to financial reporting | Since Peab applies recognition over time as a project is completed for most of our ongoing projects, erroneous project forecasts means that recognition and monitoring can be misleading. A number of balance items, including project and development property, are valued based on estimations and assessments. This value can be affected by, for example, the current market, interest rates and customers’ preferences, which can lead to impairment. | A prerequisite for correct recognition over time is reliable forecasting of the outcome. Well-developed procedures and system support for the monitoring and forecasting of each project is crucial to limiting risks of erroneous revenue recognition. The recognized value for project and development property has been calculated as the lowest of the purchase price and the net sales price based on current price levels in the respective locations. Peab is continously testing the values of project and development property by using an internal model. As a complement to this valuation external market values are annually reviewed for some of the properties. |
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.
Sensitivity analysis
| MSEK | Calculation basis | Change | Pre-tax profit effect | ||
| Mkr | Beräkningsbas | Förändring | Resultateffekt (före skatt) | ||
| Operative | Operativt | ||||
| Volume (operating margin constant) | Volym (rörelsemarginal konstant) | 54,008 | +/- 10% | +/- 10% | +/- 259 |
| Operating margin (volume constant) | Rörelsemarginal (volym konstant) | 4.8% | +/- 1 percentage | +/- 1 procentenhet | +/- 540 |
| Production costs | Produktionskostnader | 37,798 | +/- 1% | +/- 1% | +/- 378 |
| Financial | Finansiellt | ||||
| Net debt excluding additional IFRS 16 (interest rate constant) | Nettoskuld exklusive tillkommande IFRS 16 (räntan konstant) | 6,743 | +/- 10% | +/- 10% | +/- 10 |
| Average effective interest rate 1) (net debt constant) | Genomsnittlig effektivränta 1)(nettoskuld konstant) | 1.5% | +/- 1 percentage | +/- 1 procentenhet | +/- 70 |