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Swedish builder Skanska says days of massive writedowns are over

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Last year was a tough one for the Swedish construction giant, with operating income hit by project writedowns, goodwill impairments and restructuring charges totaling 3.1 billion kronor (S$448.4 million).

[STOCKHOLM] Skanska AB's days of significant writedowns are over, according to its CEO.

"That we would see a new Poland or what we saw in USA Civil, I can't see that coming," Chief Executive Officer Anders Danielsson said in an interview at the construction site of its 27-floor Sthlm 01 tower in Stockholm.

Last year was a tough one for the Swedish construction giant, with operating income hit by project writedowns, goodwill impairments and restructuring charges totaling 3.1 billion kronor (S$448.4 million). The negative effects came mainly in the US but also at its Polish division, and added to the 2.5 billion kronor of writedowns and charges the year before.

Skanska is now working to restore profitability at the construction unit by being more selective when competing for new work and by improving risk controls. It overhauled its strategy in the US in October when it said it would stop bidding on mega design-build public-private partnerships and for engineering, procurement and construction projects.

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While the measures are yielding results - the operating margin at the construction operations has improved and Mr Danielsson expects that to continue -- investors are still looking for reassurances that there are no surprises lying in wait.

"The most important question, by far, regarding Skanska is whether the turnaround is going as planned given the horrendous 2018, so that no new major writedowns can be expected," Kepler Cheuvreux analyst Albin Sandberg said. "Lots of investors are sitting on the sidelines waiting for confirmation of this before they're ready to dip their toes back in the Skanska share."

The stock has gained 19 per cent so far this year, still trading below where it was at the end of the third quarter and 26 per cent shy of a five-year high in early 2017.

But Mr Danielsson has reassurances for worried investors.

"We have better controls now and focus on profitability over volumes," he said. "We also have better processes in place to analyze risk, calculate the projects, make sure we have the right staffing and choose the right projects."

About one and a half years ago, Skanska made an evaluation of all the projects in the past 10 years, looking at the profitability for projects of different sizes and customer groups and in different niches and geographies.

"We have a good view of our sweet spot, and we are now very consequent," Mr Danielsson said. "We only select projects within that sweet spot. I also see that the projects we're taking since introducing these stricter routines have a different profitability, a more stable profitability."

The last round of writedowns amounted to 900 million kronor for the construction phase of two ongoing US PPP projects as more costs were incurred due to low production rates and delays. Skanska also took a goodwill impairment charge of 400 million kronor, associated with the process of exiting the US power sector.

The orders that sparked the charges during the past two years were booked up until 2016. While most of those Polish projects have already been completed, there are a few such projects left in the US that will continue into 2021, the CEO said.

At a capital markets day in March, Skanska said that total "dead" construction revenue in the US will decline to about 8 billion kronor this year from 10 billion kronor last year, before dropping further in the following years.

"The situation is stabilizing," Mr Danielsson said.

 

BLOOMBERG