Risks and risk management
The ability to systematically identify, analyze and manage risks is crucial for Peab’s business to be sustainable long-term and good risk management can also provide opportunities for value creation.
Risk and risk management is an important part of Peab’s governance. Peab’s presence in four Nordic countries, operations in four business areas and customers in the private and public sectors provide the foundation for spreading risks well.
Risks and uncertainty factors
Peab’s business is exposed both to operative and financial risks as well as compliance risks and external and market risks. How much risks affect Peab’s profit and position depends on how well the company handles daily operations. These four risk categories can also have a direct impact on confidence in Peab and our brand and thereby our ability to run our business.
External and market risks are events that are out of Peab’s control but which affect the business environment. These are, for example, developments in the economy, customer behavior, climate impact and political decisions. Peab can, on the other hand, affect and manage operative risks. These are matters such as project steering, talent management and product and method choices. Compliance risks concern following laws and regulations such as complying with policies and ethical principles. Financial risks are primarily associated with interest and credit risks and the company’s need for capital, tied up capital and access to financing.
In the beginning of 2020 the coronavirus spread out over the world and the pandemic has raged ever since, although a stage was reached in the beginning of 2022 where countries and companies more or less opened up. During the pandemic governments and central banks introduced different forms of crisis packages to reduce its financial effects. The effects of the corona pandemic on Peab’s operations have been limited but we closely follow developments to continually assess any further possible effects.
An uncertainty that can still upset the market is access to cement. In 2021 the Supreme Land and Environment Court dismissed Cementa’s application for a renewed permit to continue to quarry limestone in Slite on Gotland. The government granted Cementa a time-limited license until December 31, 2022 but this has been appealed to the Supreme Administrative Court and the issue of a long-term solution remains unresolved. A substantial shortage of cement would impact the entire construction and civil engineering market in Sweden. As a significant actor Peab would therefore also be affected by the situation. Peab has already begun working with our own alternative binder and certain degree of cement importation to handle the risk of lower or no cement deliveries.
In 2021 material and energy prices rose dramatically and thereby inflation as well. So far Peab has handled the rise in prices in our operations well and therefore the financial consequences have been limited. We continually work to streamline production all the while expecting a gradual increase in construction costs if the trend in material and energy prices does not turn.
The recent dramatic developments in Ukraine have a key impact on the world around us. In addition to the tragedy for the people the war touches, the situation risks hampering macroeconomic growth in the world. In Sweden this can affect the construction industry through greater uncertainty and cautiousness concerning investments, continued high material and energy prices and material shortages and delivery problems. We follow developments carefully to continually assess any effects on Peab.
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 risks concerning the Mall of Scandinavia contract, see note 2.
The parent company is indirectly affected by the risks described in the section below.
Risk management
Managing the identified risks is an ongoing process. Many of the risks are managed in our line organization and its various projects in each business area as well as in Group functions. Risk management is based on established procedures, processes and steering systems such as Peab Spirit and the company’s core values. In daily operations our strategic targets and prioritized activities are also important for risk management.
Peab conducts an annual Group review of the risks in every section of our business – in both the business areas and the supporting functions – to determine the relevance and probability of each identified risk. The work is led by a team from Group functions and the result is processed by executive management and the Board. Work on risks and risk management is an integrated part of the business areas’ business planning process.
| Operative risks | Description | Action |
| Information security | Peab’s digitalization raises demands for access to information. Dependence on IT systems increases vulnerability to cyberattacks and shutdowns that can be extensive and have considerable financial consequences. Information can also be manipulated, erased or end up in the wrong hands. | Together with external experts in IT security Peab’s IT function works systematically to map out IT risks based on accumulated information and routine follow-ups according to an audit plan and continuity planning. Focus is on preventative actions to ensure access to information and IT tools from internal and external sources. Peab follows explicit procedures concerning IT and digitalization as well as works to increase awareness and knowledge in our employees regarding information security risks.
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| Contract work risks | Peab’s business is largely project related. Erroneous calculations can lead to incorrect tenders and losses in projects. There are a number of contract types and the risk level varies accordingly. Grey areas in the terms can lead to disputes with customers about where responsibility lies and thereby make it hard to assess the result of projects. Price risks can be unforeseen cost increases for materials or subcontractors. Other risks can be linked to technical solutions, method choices and amount calculations. | Structured risk analysis is crucial to ensure that risks are identified and correctly priced in bids in the underlying calculations. The right resources in projects ensure that they will be carried out according to contract terms and established processes and procedures. Several years ago Peab established a Procurement Council in order to produce thoroughly processed calculations and tenders for projects over a certain size. The Council can also be consulted for smaller projects where needed. Price risks are handled through purchasing processes with the right suppliers which are mostly procured via central purchasing contracts.
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| Suppliers and subcontractors (SC) | Flaws or vulnerabilities in the supply chain or how the SCs are handled are one of Peab’s greatest risks and can affect our profitability and brand. Choosing the wrong supplier/SC can lead to quality defects, delivery delays or no deliveries at all. Suppliers/SCs who do not conform to existing laws, conventions and Peab’s contracts and regulations can have a negative effect on the environment, human rights, equal opportunity and the work environment. There are also risks connected to dependence on one or a few suppliers. Failure to ensure that information about Peab’s regulations is received by every individual at a Peab workplace can also entail a risk. Insufficient monitoring of suppliers and SCs or shortcomings in audits and analyses before a contract is signed are other risk factors. | Peab’s Code of Conduct and the ethics clause for suppliers are attached to all contracts Peab signs with suppliers/SCs. Peab has developed procedures in the work environment, work conditions, reliable supplier chains and the environment. These include using a blocking system that makes it possible to stop rogue suppliers and SCs in Sweden, Norway and Finland. In Sweden Peab has initiated third party checks of workplaces. Peab also works with audits of certain suppliers. Peab signs framework contracts to minimize risks in projects, particularly quality deficiencies and delivery delays. To further reduce vulnerability Peab works with strategic supply plans and to broaden our base for the number of supplier and alternative materials. |
| Talent management and skills development | Peab is dependent on attracting and keeping competent employees in order to fulfill customers’ expectations. There is a risk that Peab will not have qualified personnel in sufficient numbers due to strong competition or because so few youths are interested in the industry or because the industry will fail in increasing equal opportunity and diversity. There is also a risk that employees do not possess the right competence to deliver on customers’ demands. | Peab works strategically with short and long term talent management and our attraction as an employer through 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. We believe being a social actor and displaying our important role as a community builder is crucial to attracting the right skills. Peab’s goal-oriented work with diversity and equal opportunity is also important and we have set targets for equal opportunity recruitment to make sure we always work on this. We have a recruitment system and career map aimed at clarifying development paths for our employees. Employees’ skills development is planned and documented with the aid of a competence platform. |
| Work environment | Work related accidents at Peab’s workplaces can lead to employees or suppliers/SCs being injured or, in the worst case, killed. In addition to injuries to individuals, this can lead to fines, legal sanctions and damage confidence in the company. Another risk area is the organizational and social work environment, which includes risks concerning stress and victimization. | Focus is on planning and risk analysis observations early on as well as monitoring 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 organizational learning about where, when and why risks occur. Peab also teaches employees about equal treatment to prevent discrimination and victimization and to promote equal opportunity. |
| External and market risks | Description | Action |
| Macro factors | Peab’s profitability is affected by circumstantial factors such as the general economy and interest rates, unemployment and demographic developments that can influence customers’ willingness to buy, the demand and other market conditions. | Peab’s broad geographic presence and our mix of operations and products dampens the effect of declining economies and markets. This was evident in the acquisition we made in 2020 in paving and mineral aggregates that contributes to spreading risks on both counts. In general, we work continually to augment flexibility in our overhead to better handle external and market risks. In business area Project Development, for example, we reduce sales risks through set requirements for advance sales before production starts in housing projects. The corresponding risk management for commercial property developments is a required level of rented space before production starts.
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| Market | Customer behavior and demands can change creating the risk of Peab not being able to follow these changes. Peab can also risk investing in the wrong markets, market segments or not being able to handle the competition. | Peab’s broad geographic presence and our mix of operations and products dampens the effect of declining economies and markets. Peab also continues to develop our dialogue with customers, we work with so-called market navigators that map ongoing projects in sub-markets.
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| Political factors | Political decisions and currents influence Peab’s business. This is true for politics in the Nordic region as well as international politics. Public investments in community building have direct consequences for Peab’s business. For example, laws and regulations concerning buying homes, like requiring a capital investment from private persons, affect Peab’s project development operations. There are also zoning risks in development operations for exploitation land where decisions by authorities can impact land values and thereby the project’s future profitability. | Peab’s broad geographic presence and our mix of operations and products contributes to dampening political risks as well. Project development’s operations, for example, work to shorten lead times from land acquisition to finished project in view of the risk for changed market prerequisites. |
| Environment and climate | Peab is exposed to environmental and climate related risks, which can lead to injuring people and damaging our business. A lack of competence and adjusting too slowly can lead to Peab’s products and services not meeting the demands and expectations of customers and other stakeholders. Global warming can create physical risks such as extreme weather, floods and material and energy shortages, which can affect ongoing projects and our own property and facilities. Climate change also leads to transition risks such as shifts in demand, higher raw material prices and new laws. Other identified risks are, for example, suppliers/SCs that do not hold a sufficiently high environmental standard, the use of prohibited or unsuitable material and products as well as the improper use of material. This can be hazardous to people’s health and the environment as well as give rise to compensation demands and damage Peab’s brand.
| Risk prevention comes under the Group’s three prioritized environmental aspects which also have set targets; climate neutrality, resource efficiency and phasing out environmentally and health hazardous products. We have also begun climate analyses according to TCFD. For more information see the section Environment. Our environmental and climate work starts locally and is run systematically based on a business management system that is for the most part environmentally certified. These procedures comprise, for example, how monitoring laws and compliance is conducted, enable practical support of environmental steering in a project and regulate environmental delegation in order to ensure responsibility. Employees continuously receive education and training to ensure the right environmental competence. Preventively we perform operation specific in-depth analyses. We have also taken measures to adjust operations to climate changes, for example by developing new products with a lower climate footprint. |
| Compliance risks | Description | Action |
| Ethics | 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 in our own company or the supply chain. This can lead to fines, legal sanctions, brand damage and Peab’s exclusion from public procurements. There are even ethical aspects concerning discrimination and victimization. | Peab conducts systematic ethical work focused on preventive education and strict consequences for transgressions. During the year Peab gathered all issues concerning ethics, regulation compliance and steering in the new Group function corporate governance and regulation compliance. Supplier checks and audits prevent risks in the supply chain. 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. |
| Steering | Steering-related risks refer to both overriding Group governance and project steering. This includes everything from applying internal regulations, defining roles and collaboration to our ability to meet higher customer demands and more formalization. | Peab works to clarify steering through targets. We also have a strategy organization tasked with working for effective governance. In addition, Peab works with skills development, particularly in strategic positions, dialogue with our customers and advising them, where the latter can require a different project organization than previously at Peab. |
| Financial risks | Description | Action |
| Financial risk-taking | Financial risk-taking is connected to the business’ capital and investment needs which are 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 through investments in land and development rights. | Peab’s financial targets are the overriding 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. | Peab’s Finance Policy is adopted by the Peab AB Board and creates a framework for risk mandates and limits within the Peab Group. The Treasury function is centrally organized. For further information on financial risks, see note 35. |
| Financial reporting | Since Peab applies recognition over time as a project is completed for most of our ongoing projects, erroneous project forecasts can entail 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 reliably forecasting the outcome. Well-developed procedures and system support for monitoring and forecasting each project is crucial to limiting the risk of erroneous revenue recognition. The recognized value of 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 continuously testing the values of project and development property through 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 according to segment reporting is affected by changes in some of the important Group variables.
| MSEK | Calculation basis | Change | Pre-tax profit effect | ||
| Mkr | Beräkningsbas | Förändring | Resultateffekt (före skatt) | ||
| Segment reporting | Segmentsredovisning | ||||
| Volume (operating margin constant) | Volym (rörelsemarginal konstant) | 60,026 | +/- 10% | +/- 10% | +/- 312 |
| Operating margin (volume constant) 1) | Rörelsemarginal (volym konstant) 1) | 5.2% | +/- 1 percentage point | +/- 1 procentenhet | +/- 600 |
| Production costs | Produktionskostnader | 43,003 | +/- 1% | +/- 1% | +/- 430 |
| Financial | Finansiellt | ||||
| Average effective interest rate | Genomsnittlig effektivränta | 1.4% | +/- 1% | +/- 1% | +/- 45 |
1) The sensitivity analysis shows the effect of a change in interest on Group pre-tax profit based on an assumption of unchanged net debt. The calculated net debt amount of SEK 4 490 million is based on net debt according to IFRS reduced by liabilities for Swedish tenant-owner associations and additional leases according to IFRS 16. It is further assumed that a change in interest would directly affect the interest Peab pays respectively receives on liabilities and receivables with a floating interest rate. Activating interest is not taken into account in the sensitivity analysis. For more information about net debt, see note 35.