Comments from the CEO

Group development

Group net sales contracted by six percent during the first nine months of the year and amounted to SEK 43,182 million (46,087). Operating profit amounted to SEK 1,720 million (1,888) and the operating margin was 4,0 percent (4,1). Excluding the effect of Mall of Scandinavia (MoS) the operating profit amounted to SEK 1,320 million and the operating margin was 3,1 percent. The lower demand for new production of housing in all the countries Peab operates in primarily affected business areas Project Development and Construction. Civil Engineering, Paving and public construction in Construction have developed well but not enough to fully compensate the effect of the severely diminished housing construction market. This affects both our ability to generate profits and our indebtedness and we are continually adapting to the market situation.

Business area development

Net sales in business area Construction remained unchanged but increased in Civil Engineering by one percent during the first nine months. The operating margin in Construction excl. MoS was 1.9 percent (2.2) and 3.0 percent (3.0) in Civil Engineering. Business area Construction is in the process of adjusting to the lower demand in housing developments. In total, the operating margin for the construction contract businesses amounted to 2.3 percent (2.5).

Net sales in business area Industry contracted by six percent during the first nine months. The operating margin was 3.3 percent (2.9). The improved operating margin is mainly due to better earnings in Paving. Operations in Industry have continued to handle the high energy and fuel prices through prices to customers as well as adapting and streamlining operations.

In business area Project Development net sales contracted by 36 percent as a result of the low level of activity on the housing market throughout the entire Nordic region. Few sold homes and very few production-starts of our own housing developments contributed to the continued decline of operating profit in Housing Development, which had an operating margin of 5.8 percent (10.5). No major transactions occurred in Property Development during the period.

The total number of our own housing development start-​​ups was 648 (2,022) during the period January to September, of which 121 (1,680) were tenant-​owner apartments/condominiums and 527 (342) were homes in rental apartment projects on our own balance sheet. The number of sold homes was 604 (1,502), of which 341 (1,502) were tenant-​​owner apartments/condominiums and 263 (–) were homes in rental apartment projects. The portion of sold tenant-​owner apartments/condominiums in ongoing production amounted to 67 percent (72) as of September 30, 2023.

Order situation

The level of orders received contracted during January to September to SEK 34.6 billion (42.8). The decrease is mainly due to the weak demand for housing projects, which affects business areas Project Development and Construction. We have also been more selective about the tenders submitted by Paving in Norway. There has been a good level of orders received from the public sector in the period. Order backlog yet to be produced at the end of the period was SEK 41.7 billion (48.8).

Arbitration decision in Peab’s favor

A decision in the case between Peab and Unibail Rodamco Westfield regarding the contract for Mall of Scandinavia in Solna was handed down in Peab’s favor on June 30, 2023. Since then Unibail Rodamco Westfield has petitioned the Swedish Court of Appeal to set aside the judgment in its entirety in a so-called protest action and the judgement was suspended. This means the judgement is not enforceable until further notice, deferring the time of payment. Peab’s assessment of the previously communicated estimated effects on profit has not changed and we cannot see any ground whatsoever for a protest action.

Target outcome

We are reporting the outcome for three of our nine external targets this quarter: serious accidents, operating margin and net debt/equity ratio. The number of serious accidents, calculated on rolling 12 months, amounted to 40 (48 per September 30, 2022) of which 26 referred to our own employees and 14 referred to subcontractors.

Our focus on these issues continues to generate positive results and the trend is headed in the right direction. Our preventive work concerning the work environment and measures to prevent accidents from reoccurring as well as continuous information are key to reducing the number of workplace accidents.

Our financial targets are based over time and in a normal business cycle. One of them is to have an operating margin that surpasses six percent. Operating margin calculated on rolling 12 months at the end of the third quarter was 3.6 percent. The operating margin is clearly affected by the deteriorated situation on the housing market. Our second financial target, the net debt/equity ratio, was 0.7 at the end of the third quarter, which is inside the target interval 0.3-0.7. Net debt has increased due to more tied up capital, mostly in business areas Project Development and Industry.

Market and prospects for the future

According to external analysists market prospects for the Nordic region in housing are trending downward in 2023 while developments in other building construction and civil engineering are expected to be considerably positive. Above all they foresee a stronger demand for public building construction, civil engineering and investments connected to green transition. Regarding housing, hardly any new projects are starting up on the market. Higher interest rates and high inflation make it harder to make calculations come out ahead. The lower investment level is expected to continue in 2024 in the Nordic markets.

Considering that there is still an underlying need for housing in the Nordic region, the drastic reduction in housing construction is not a good development. It is vital to find a solution to the long-term management of supplying housing, particularly in Sweden. As far as Peab is concerned, we have a well-dimensioned development rights portfolio in attractive locations and in anticipation of market recovery we are further developing and preparing projects for the future.

While waiting for the housing market and other private construction to scale up again we continue to adapt our business through intense focus on costs and caution regarding investments.

Our broad offer to the market with widely diverse operations is a source of strength for us. Our four collaborating business areas, extensive Nordic local presence and our skilled employees make Peab less vulnerable in the current market situation. In the long run the conditions for growth in the segments and markets where we are active are good.

 

Jesper Göransson
President and CEO