Shikun & Binui Announces Full Year 2017 Financial Results

AIRPORT CITY, Israel, April 1, 2018 /PRNewswire/ -- Shikun & Binui Ltd. (TASE: SKBN.TA), a global construction and infrastructure company headquartered in Israel, today reported its financial results for the fourth quarter and full year, ended December 31, 2017.

Financial Highlights for 2017

• Revenues for 2017 were ~NIS 6.4 billion, an increase of 20% compared with those of 2016, driven primarily by growth from Solel Boneh Israel, due to the ramp-up of construction work mainly on the Ashalim project, as well as from the International Construction segment due to the renewal of work in Nigeria.
• Gross profit for the year totaled ~NIS 851 million, or 13.2% of revenues, compared with ~NIS 837 million, or 15.6% of revenues, in 2016.
• Net profit for the year totaled ~NIS 298 million compared with ~NIS 480 million in 2016.
• Operating cash flow excluding investments in land inventories and concessions arrangements, was a positive ~NIS 212 million. Including investment activities, the operating cash flow was ~NIS (310) million.

1. CONSTRUCTION

Solel Boneh

• Total revenues for 2017 were ~NIS 3.5 billion.
• During October, Solel Boneh won engineering contracts from Israel's Ministry of Defense amounting to ~NIS 640 million for projects in Israel's southern region. This project is not included in the company's backlog for the end of 2017.
• In February, Solel Boneh completed the acquisition of Menora, a privately-held company that engages in the execution, construction and maintenance of complex electrical systems for lighting, railroad crossings, traffic control and other applications, employing ~235 workers. The acquisition is in line with Shikun & Binui's strategy to expand construction offerings and will be complementary and synergistic to other activities in Israel and throughout the world.
• Primary mega projects in process: Gilboa Pumped Storage, Ashalim Thermo Solar, Tel Aviv Light Rail (Western Section), the Generi 2 Government Building campus and others.

SBI

• Total revenues for 2017 were ~NIS 1.9 billion, driven by continued execution of contracting projects throughout the world, including mega projects in the US and Colombia
• Won projects in two new countries: Tanzania and Mozambique
• In February 2018, the company signed an agreement to build a new airport in Uganda for ~USD 309 million. The company has received a deposit of ~10% of the total contract amount.
• Beginning in the third quarter, the company began buying significant quantities of dollars in Nigeria at the NIFEX exchange rate (of approximately 330 naira to the US dollar) due to a change in the policy of the Central Bank of Nigeria. Given the current ability to receive dollar allocations according to the NIFEX methodology, the company has decided to translate its financial reports based on the NIFEX exchange rate, beginning with the third quarter of 2017.
• Began delivery on stage 1 of the Colombia Toll Roads Project as part of the trial period; work on stages 2 and 3 is expected to be delayed due to a current lack of instructions from the ordering entity. Regarding stages 4 and 5, changes in the route of the project maybe required due to the discovery of water sources in the area. As a result, the project's funders have stopped the draw-down of funds until a new plan has been drawn up an approved by the government. During the reporting period, a provision of ~USD 5 million was made in respect of the project.

2. RESIDENTIAL REAL ESTATE DEVELOPMENT

Apartment Sales

• Early implementation of the IFRS Standard in 2017: According to the IFRS Standard, the company reports revenues from Israeli apartment sales over time according to the progress made in the each project's building and sales processes. The policy for revenue recognition from apartment sales in other countries remains unchanged: that is, all revenues are recognized at the time of delivery.
• During 2017, the company sold 1,623 apartments (100% share) totaling ~NIS 1,507 million, including 539 units in Israel and 1,084 units in Europe.
• In Europe, most of apartment sales were in Poland, where 547 units were sold; in Serbia, 201 units were sold; in the Czech Republic, 193 units were sold; and in Romania, 143 units were sold.
• In Israel, the company began planning for the construction of 657 apartments and commercial space in Or Yam in Or Akiva. In addition, it initiated marketing efforts for new projects in Givat Shmuel, Ashkelon, Kfar Yona and Harish, and building began for projects in Rishon Letzion and Givat Shmuel.

The table below shows additional data regarding the company's sale of apartments (signed contracts) during 2017:

The table following shows data regarding the Company's delivery of apartments to customers during 2017:

Land in Israel

• The sale of the company's rights in various land plots in North Tel Aviv was completed in December 2017. The company recorded a ~NIS 89 million profit in respect of the transaction.
• Progress with the plan for the Old Tel Aviv Bus Station: the plan was approved for filing. Under the plan's framework, tens of new residential towers will be built to house a combined total of 1,160 apartments, commercial space, a dance center and an international food court.
• During the year, the company secured land for the construction of ~1,300 residential units in future developments. The land parcels are located in Or Akiva (~660 units), Jerusalem (~200 units), Harish (~180 units), Hod Hasharon (~135 units) and Givat Shmuel (~110 units).

3. PROJECTS & IGAs (INCOME GENERATING ASSETS)

The company continues to implement its strategy aimed at realizing value and freeing cash for investment in new projects:

• The company has entered into a process for selling 45% of its rights in the Carmel Tunnels project and 40% of its rights in the North Roads project. Purchase offers have been received from a limited group of investors (including institutional investors), and the company intends to serve as the General Partner. Upon completion of the transaction, the company expects to recognize a profit of between NIS 250-300 million and cash flow of ~NIS 580 million.
• Sale of 50% of the company's rights in the office space KBP in Poland: the company's proceeds from the sale included ~NIS 57 million in pre-tax profit and profit from revaluation of the investment, and ~NIS 580 million in cash flow.
• Sale of 100% of the company's holdings in the concessionaire of the Tel Aviv Courthouse project: the company's proceeds from the sale included ~NIS 8.5 million in pre-tax profit and ~NIS 13.5 million in cash flow.
• The company has entered into a process for selling 100% of its rights in the Generi 2 Government Campus project. If and when the sale is completed, the company expects to recognize between NIS 25-30 million in post-tax profit and ~NIS 70 million in cash flow. The earliest that the deal is expect to be completed would be January 2019.

New Concessions projects in Israel (to be executed by Solel Bonei):

• Regional government campus in Nazareth: total project value - ~NIS 400 million
• Courthouse in Hadera: total project value - ~NIS 150 million

Progress with portfolio of existing Renewable Energy projects:

• Financial closing of the 120MW Tze'elim photovoltaic project, in 2018 Construction of the project was initiated
• Received pending license for the conversion of the Etgal power plant to natural gas and for expanding its generation capacity from 26MW to 186MW
• Began construction of 6 high voltage PV projects totaling up to 60MW
• Won an Israel Electric Company tender to construct high voltage PV projects totaling up to 25MW

ADO GROUP Shareholders' Agreement: If and when the deal is completed, the company expects to consolidate the financial results of the ADO GROUP. As a result, it expects to record a profit of ~NIS 400 million due to the revaluation of the company's investment in ADO GROUP.

Provision for a decline in value of Elcon: The decline in the value of Elcon has led the company to make the following adjustments:

• Goodwill: NIS 31.5 million
• Unrealized wastewater treatment technology assets: NIS 28.6 million
• Fixed assets: NIS 20.1 million

Changes in the company's credit ratings:

Ma'alot:  In March 2017, the company's rating and bonds from series 4 to 8 were rated (ilA) and with positive outlook. After the date of the report, Ma'alot put this rating onto the watchlist with negative outlook.

Midroog: In October 2017, Midroog left the rating unchanged at A1 with a negative outlook. After the date of the report, Midroog reduced these bonds to a rating of A2 with a negative outlook.

Early adoption of IFRS 15 Standard as of the December 31 2017 results

• The standard has been implemented with the approach of the accumulated effect, in coordination with starting balances as of January 1, 2017 and without a restatement of the comparable numbers. The main impact of this first implementation of the standard on the Group's revenue recognition policy relates to the company's residential real estate development activities in Israel. According to the rules of the standard, apartment sales are recognized over time based on certain criteria, in contrast to the rules of the IAS 11, in which the Group recognizes apartment sales in full at the time of delivery to the buyer. Revenue recognition from the sales of apartments outside of Israel is at the time of delivery without any changes from previous policy
  
  
• In addition, this first implementation of the standard affects the Group's accounting treatment of the variable payments made for contracting projects. According to the rules of the standard, a higher level of certainty is required to enable recognition of a contract's variable revenues as compared to the level that was required under the IAS 11.
  
  
• The total effect of the implementation since January 1, 2017 has been a ~NIS 82.3 million increase in the Group's Shareholders Equity (reflecting an ~NIS 163 million increase in the Israel Real Estate Development division, countered by an ~NIS 81 million reduction in the International Construction and Infrastructure and Israel Construction & Infrastructure divisions). The main source of the change was an NIS 1,403 million reduction in Inventory of Buildings for Sale, countered by a ~NIS 1,022 reduction in customer advances and an ~NIS 429 million increase in future revenues.

Claims Related to the Activities of SBI:

• Claims of a former employee: In July 2017, a former employee of SBI AG (a Switzerland-domiciled granddaughter company of Shikun & Binui) filed a lawsuit in Israel's Labor Court against SBI AG, SBI AG's parent company (SBI Infrastructure), SBI AG's sister company (SBI E&M) and the manager of SBI AG's Kenyan office. In the suit, the worker claimed that he was owed various payments due to his termination from the Kenyan company, and an arbitration process between the two sides was initiated (a process which was recently halted in light of a police investigation, and which has not yet been completed). Under the framework of the lawsuit, the worker also made allegations regarding the propriety of SBI AG's conduct in Africa.
  
  
• Independent investigation: After becoming aware of the allegations regarding its conduct in Africa, SBI AG consulted with unrelated external investigative auditing experts in Switzerland (the country in which it is domiciled) with the goal of investigating the former employee's claims. The investigation, which was carried out intensively over several months, brought a number of facts and documents to light. On February 20, 2018, after the allegations began to be investigated by the Israeli police, the independent investigation was halted at the request of the police, before it had been concluded.
  
  
• Consultation with foreign compliance authorities: While the external investigation was underway, the company consulted with Swiss compliance authorities, informing them about the former employee's allegations and the steps that SBI AG was taking to investigate them, primarily including the independent investigation. The compliance authorities instructed SBI AG to continue with their investigation.
  
  
• Investigation by the World Bank: During January 2018, SBI AG was notified by the INT department of the World Bank, the department that investigates Integrity claims, that it intended to audit a number of SBI AG's completed projects in Kenya, some of which had been completed long ago. SBI AG began fully cooperating with the World Bank, including gathering the materials that has been requested. However, this process was also halted when the investigation by the Israeli police was initiated. The audit has not yet been completed.
  
  
• Israeli Police investigation: On and after February 20, 2018, a number of current and former employees of SBI AG, Shikun & Binui and the Shikun & Binui subsidiary that holds its shares in SBI AG - including employees who had completed their work for the company over five years ago - were held for investigation or summoned for testimony by the Israeli police. Some of those investigated were incarcerated for various lengths of time and/or released to house arrest and/or released with limitations. In parallel, the police seized various bank accounts of Shikun & Binui Ltd. and of some of its subsidiaries – accounts in which were deposited a total of more than NIS 200 million - as well as other assets, and searched and seized documents in SGI AG's offices in Israel and Kenya. The Group cooperated in full throughout the investigation.
  
  
• Deposit of funds in a forfeiture fund: On or near February 22, 2018, in an arrangement with the Israeli police, SBI AG deposited the dollar value of ~NIS 250 million into a closed forfeiture fund to secure the release of the assets and bank accounts that had been seized, as described above.
  
  
• Related lawsuits: Since the beginning of this chain of events, a request has been filed with a court to approve a class action against the company and its employees, and three requests against the company have been filed to allow discovery of documents related to investigation of the request.

At this stage, the Company is unable to assess its exposure regarding the police investigation or to the investigation by the World Bank, should it be renewed.

About the Shikun & Binui Group
The Shikun & Binui Group is a global construction and infrastructure company that operates in Israel and internationally in seven segments: 1) infrastructure and construction contracting outside of Israel; 2) infrastructure and construction contracting within Israel; 3) real estate development within Israel; 4) real estate development outside of Israel; 5) renewable energy; 6) concessions; The Group's activities focus on large, highly complex projects carried out for entities in private and public sectors with a focus on sustainability.

This summary announcement was prepared solely for the convenience of the reader and does not replace Shikun & Binui Ltd.'s (hereafter – "the Company") full report.  The information contained in this announcement is, by its nature, incomplete. All of its contents are provided as a supplement to the Company's report, and are subject to the declarations therein stated.  This announcement includes forecasts, assessments, estimates and other information relating to the Company or its subsidiaries, or to other parties or to future events and matters, the extent of whose realization is not certain and is not under the sole control of the Company (forward-looking information, as defined in the Securities Law-1968).  The key facts and data serving as the basis for this information are facts and data, among others, related to the current status of the Company and its businesses, facts and data relating to the current status of the operating segments in which the Company engages in its areas of operation, and other macroeconomic facts and data known to the Company on the preparation date of this presentation.

It is understood that forward-looking information does not constitute a fact and is based solely on subjective assessments.  Forward-looking information is uncertain and for the most part, is not under the Company's control.  The realization or non-realization of the forward-looking information will be influenced, among others, by the risk factors that characterize the Company's operations, as well as developments in the general environment and external factors that impact the Company's operations.  The Company's future results and achievements could differ significantly from those presented in this presentation.  The Company is not obligated to update or modify the said forecast or assessment, and is not obligated to update this announcement.  This announcement does not constitute an offer to purchase the Company's securities or an invitation to receive such offers.  An investment in securities in general, and in the Company in particular, carries risk.  One must take into account that past data do not necessarily indicate future performance.

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SOURCE Shikun & Binui Ltd.