The commentary on the financial results of the Unibep Group for the third quarter of 2023
In the third quarter of 2023, the Unibep Group achieved revenues from its core operations totalling approx. PLN 1.83 million, representing a 14.9% increase compared with the same period last year. The increase in turnover primarily affected the construction segment (over +21%), mainly as a result of increased sales in the Power and Industrial Construction (+234%) and General Contracting (+14%). At the same time, a decrease in revenue was recorded in the Infrastructure (-36%) and Development (-19%) segments.
The operational profit of the Group amounted to PLN (-)1.1 million, decreasing by approx. PLN 68 million compared to the previous year. The decrease in operational profit was, on one hand, the result of a lower profitability of the development segment caused by a changed structure of sales of the delivered apartments, in which a significant part constituted the sales of apartments to institutional clients. Such transactions have lower margins compared to the sale of apartments to individual buyers. Additionally, such a significant decrease in profit was also influenced by the previously announced and partially estimated change in rules (to a more conservative approach) regarding the creation of maintenance provisions, allowances for receivables, provisions for potential liabilities, and changes in rules concerning the recognition of additional revenues. The results includes the increased costs recognised in certain contracts (excluding potential negotiated payments from investors not covered by a signed agreement or annex), the negative impacts on the 2023 results due to changes in construction schedules, and the costs incurred by the downtime resulting from the unused production capacity at the modular house factory. It is worth highlighting that the process of identifying and recording all the above-mentioned aspects of the Group’s operations in the 2023 results will be completed in the Q4 of this year. However, we can already responsibly confirm that the effects of these activities will not have a significant impact on the Group’s cash flows in the future. They will mostly consist of accounting entries related to a more restrictive recognition of revenue and costs policy compared to previous practices.
The gross profit of the Unibep Group was approx. PLN 84 million lower than in the previous year. In addition to the factors mentioned above, the profit was also significantly affected by the results in financial activity (decrease by approximately PLN 16.5 million compared with the first half of the previous year), mainly due to higher interest costs, foreign exchange losses, and the valuation of financial assets.
The significant difference between the net profit and the net profit attributable to the shareholders of the parent company arises from the execution of development contracts in a joint venture (JV), the results of which are partially excluded from the profit attributable to the shareholders of Unibep SA. In the Group’s report for the third quarter of 2023, the results from two such contracts were recognised.
At the end of the third quarter of 2023 the Group's cash balance amounted to PLN 138 million compared to PLN 109 million at the end of the third quarter of 2022. During the first three months of the current year, the Group experienced negative cash flows from operating activities of PLN (-)21.1 million, mainly due to an increase in receivables. Positive cash flows from investing activities amounted to (+)3.8 million PLN as a result of interest received and financial instrument settlements, while positive cash flows from financing activities totalled (+)17.0 million PLN, primarily due to issued bonds and received loans.
The Construction Segment, encompassing residential, office, and commercial construction, the Infrastructure Branch, and Power and Industrial Construction, achieved sales of approx. PLN 1.550 million in Q3 2023, marking a 21% year-on-year increase. The Power and Industry Construction segment exhibited the highest turnover growth rate, reaching 234%. The dynamic growth in this part of our activity is the result of the base effect. This business commenced operations in the first quarter of 2022 and recognised revenue from five contracts by the end of the third quarter of 2022. Currently, close to twenty contracts are being implemented within this area. Within this segment, the decrease in turnover (by 36%) occurred only in the Infrastructure Branch due to the fact that many contracts are being executed under the “design and construct” model, and currently, the design works are underway.
The operational profitability of this segment decreased noticeably from (+)1.6% to (-)0.2%. This was primarily the effect of the changes described at the beginning of the commentary concerning the significantly more conservative principles for recognising revenues and costs. This had the greatest impact on the results of the Power and Industrial Construction segment (a decrease in sales margin from 8.6% to 3.7%) and general contracting (a decrease in sales margin from 3.9% to 0.6%). To a lower degree, this effect concerned the Infrastructure Branch (decrease of sales margin from 3.0% to 2.0%).
The performance of the largest company segments, including residential and commercial construction, as well as power and industrial construction, was shaped by the price stabilisation, although the prices of basic materials and services remained high. It was not always possible to alleviate the increase in these prices with additional payments negotiated with the investors. These negotiations were all the more difficult as they took place during a period of a noticeable slowdown, especially in residential construction. In residential and commercial construction, there continues to be a noticeable decline in the number of tender procedures, leading to intensified competition among general contractors. In the Board’s view, the price competition is expected to intensify further in the coming months, clearly leading to a reduction in margins. On the other hand, the decrease in the number of new tender proceedings is also noticeable among subcontractors as they are more inclined to lower their prices. In the coming months, an important factor shaping the results of both residential and commercial as well as power and industrial segments is the ongoing work on the final settlement of contracts signed before the outbreak of war in Ukraine. Due to the challenging situation in the construction market, we expect that these contracts may result in lower margins than we had anticipated so far.
In the infrastructure sector, the increase in prices of materials and services is being absorbed by the indexation mechanism to a significantly greater extent. However, the Board believes that this mechanism should be increased from 10% to 15% of the contract value, and efforts towards that goal are underway, undertaken jointly with other contractors in this area.
In the first three quarters of 2023, within the construction segment, we secured contracts for implementation with the total value of approx. PLN 1.162 million. As a result, the backlog of orders for implementation in this segment from 4Q 2023 onwards reached approx. PLN 3.3 billion, i.e., which is approx. PLN 85 million higher than in the corresponding period of 2022.
In the near future, the activity of this segment will be focused on acquiring and initiating new contracts, based on updated implementation costs and cash flows. An important factor shaping the results of both residential and commercial, as well as power and industrial segments in 2023, will be the size of final payments and indexation obtained from investors, especially concerning contracts signed before the outbreak of the war in Ukraine.
The sales of the development segment after the third quarter of 2023 amounted to PLN 209.8 million compared with PLN 258.9 million in the corresponding period of the previous year. The decrease in this segment turnover is primarily due to the non-commencement of new investments for formal reasons. It is worth noting that sales on the existing investments have been very favourable, better than expected.
In the first three quarters of 2023, the Group recognised (based on the handover inspection reports) the sale of 441 residential units (including 271 under joint ventures), compared to 452 residential units (including 284 under joint ventures) in the corresponding period of 2022. The financial results for the first half of 2023 are mainly influenced by the handovers in the following investments: Fama housing estate in Poznań (270 – sales under PRS, Private Rented Sector formula), Osiedle Idea housing estate in Radom (87), and Latte housing estate in Warsaw (83). The development segment sales for the three quarters of 2023 reached the volume of 309 residential units, compared with 318 residential units in the corresponding period of 2022.
The Unidevelopment Group achieved operational income at the level of PLN 35.9 million, compared with PLN 62.9 million in the third quarter of 2022. As indicated in the introductory section of the commentary, the decline in profitability of this segment was caused by the sales of a significant number of premises to institutional clients, which always entails a lower margin. Despite the decrease in profitability of this segment, there are still no visible negative trends in the development market according to the Board. To the contrary, in the Management Board’s view, the demand for new apartments in 2023 exceeded that of 2022, greatly influenced by the implementation of the governmental housing programme “Safe 2% credit”. According to our BIK (Credit Information Bureau) data in September 2023, the value of granted mortgage loans reached nearly PLN 7.2 billion, indicating a close to 233% year-on-year increase and almost a 39% increase month-to-month. The increased demand for new apartments coincided with a limited supply of apartments in both primary and secondary markets, instilling optimism about the sales and profitability of this segment of our business as we look ahead to the nearest quarters.
At the same time, the development segment is facing challenges, including the extended time required to obtain all permits before commencement of construction. It can potentially delay the commencement in the implementation of some investments.
In the current market situation, our main task within the Development segment is the efficient commencement of new investments according to schedule and the provision of attractive, market-oriented offers.
In the third quarter of 2023, the Modular Construction segment, operated and supervised by Unihouse SA, achieved the sales of PLN 169 million, marking a year-on-year decrease by approx. PLN 2.2 million. The operational profitability in that period declined by approx. 3.3 percentage points, primarily due to margin adjustments on contracts, caused by higher production costs (rising prices of materials and subcontracting services, increased freight and transportation costs), for which provisions were made back in 2022. While a significant portion of these contracts was still being implemented during the period covered by this commentary, due to the provisions made in 2022, they not only failed to contribute to the 2023 result but also, by consuming the production capacity for their execution, they prevented the coverage of current fixed and financial costs. Additional factors contributing to the negative results of the third quarter of 2023 included the verification of assumptions regarding the final level of contract revaluations after final settlements with investors (on completed projects), the change in revenue and cost recognition principles mentioned at the beginning of the commentary, as well as the costs incurred in acquiring contracts in the Polish market (such as nurseries, kindergartens, schools, and municipal apartments).
In the third quarter of 2023, the increase in production volume was maintained, reaching 23,843 sq m in the analysed period. In the same period of the last year, 22,345 sq m were produced.
In the discussed period, the contracting amounted to approximately PLN 190 million, resulting in a backlog of orders in this segment worth PLN 123 million. Additionally, approximately PLN 85 million consists of conditional contracts, the implementation of which depends on final decisions of the ordering parties, fulfilling administrative requirements, obtaining funding, or reaching a particular apartment sales level. The current contracting level has already exceeded the value from the entire last year. However, it is still insufficient to fully utilise the production capacity.
The main task within the Modular Segment is to acquire additional orders calculated based on the current cost forecast and negotiated indexation clauses, which in the near term would allow for efficient preparation and ensure production continuity.
During the nine months of 2023, the Unibep Group secured contracts totalling approximately PLN 1.351 billion. Consequently, the backlog for implementation from the fourth quarter of 2023 amounts to approximately PLN 3.4 billion, which means that it is at a similar level compared to the corresponding period of the previous year. Simultaneously, the value contracts to be signed (offers of Unibep which secured top position in the bidding process) amounts to PLN 1.4 billion. In the next 6 to 8 months we expect to see some stabilisation of material and contracting services prices, with the possibility of a slight decrease, alongside intermittent declines in market orders and increased competition. We believe that the structure of our portfolio ensures a safe passage through this period.
In the Board’s assessment, the greatest prospects for contracting lie within the infrastructure and power and industry sectors. As for the first of them, the value of contracts awaiting signing amounts to approximately PLN 964 million. These are mainly additional road sections along the future S19 expressway. After their signing, the backlog of orders of the Infrastructure Branch will amount to approximately PLN 2 billion, which in the Management’s view will enable its very stable operation over the next three years. In the coming quarters, the activity of the Infrastructure Branch will focus on further utilising the potential associated with the geographic diversification and increasing the share of large contracts in the backlog of orders. We assume an increasing utilisation of the technical office to achieve possible optimisations in executed and planned contracts.
Within the energy-industrial activity, we are engaged in advanced discussions on several large investments, including those involving potential technological partners. Still, we consider a great chance in placing offers on the hydrotechnical market and development of power transfer and distribution in the renewable energy market.
The main actions will therefore aim to restructure the organisational structures, increase human and equipment resources, so as to significantly increase the share in the revenues and the margin of the construction segment by 2026.
In the field of office and residential construction, efforts will be directed towards increasing the participation in public investments and preparing to actively participate in the reconstruction of Ukraine. In the near future, the Management Board will continue negotiations aiming to finalise the adjustments for some contracts nearing completion and to agree on the indexation clauses in newly signed agreements. Enhancing the indexation rates by the contracting parties in both office and residential construction, as well as infrastructure projects would mitigate the effects of the ongoing increases in material and service costs. We undertake measures to adjust our compensation both in the public and private sectors.
We anticipate stable development and the achievement of goals in the Development Segment despite recent differences of opinion emerging in discussions with our partner concerning the continuation and settlement of the Fama investment in Poznań. As mentioned earlier, the launch of the government housing programme „Safe 2% credit” significantly influenced the noticeable increase in demand for new apartments, and the number of clients, starting from Q2 2023 was higher than in 2022. As of today, we have the potential to construct approx. five thousand of residential units under multistage investments. In the nearest future, the Group will focus its activities on launching new projects within the timelines established in the budget and on acquiring suitable land for investments in Warsaw.
In the modular segment, the greatest emphasis has been placed on redefining the markets of the conducted operations. The Management Board of Unihouse SA is implementing the strategy outlined in the previous comment, which involves replacing revenue from the Norwegian market with increased sales in the German market (through collaboration with existing, regular customers) and the Polish market (mainly through the execution of projects within social housing initiatives, as well as the construction of nurseries, kindergartens, hotels, and facilities for the military and police). However, it should be stressed that these actions have not yielded the expected results so far. Therefore, the management of Unihouse and Unibep intend to thoroughly analyse the prospects for the development of this segment, primarily focusing on potential actions aiming to improve the segment's performance. It is also possible to employ an external advisor for this purpose. The issuer anticipates that various scenarios for further development of this segment are potentially possible, whether based on internal resources or partially on external financial resources. However, as of the publication date of this report, no decisions have been made in this regard.
Lately, the Management has successfully conducted a highly sought-after market issuance of three-year Series I bonds, amounting to approximately PLN 138 million, enabling the Group to redeem the Series G and H bonds prematurely, totalling approximately PLN 100 million. The surplus resulting from the issuance allows for stable financing of operations in the longer term.
In Q4 2023, the Management’s focus will be on completing the process related to changes in the recognition policy due to contractual risks, final valuation adjustments, subcontractor liabilities, maintenance reserves, and provisions for receivables, which will result in a greater reduction in the Group’s earnings for the full year 2023. Consequently, discussions are being held with banks financing the Group’s operations . The Board considers the actions presented in individual segments of operations, aiming to prepare the ground for the Group’s development in the following years through significant reassessments in 2023, to be realistic yet demanding according to financial institutions.
In summary, in connection with the review of contractual risks and the implementation of a series of operational actions, we expect that the Group may achieve a positive operating result next year, and significantly improve it in the following years.