Shikun & Binui Announces First Quarter 2018 Financial Results

AIRPORT CITY, Israel, May 28, 2018 /PRNewswire/ --

Highlights

• Q1 2018 revenues totaled NIS 1.4 billion, a decline of 28% compared with Q1 2017
• Q1 2018 net profit totaled NIS 27 million compared with NIS 88 million for Q1 2017
• The backlog of orders increased to NIS 13.7 billion;
• The backlog does not include an additional NIS 3.2 billion of projects that the Company has won
• The Company will hold an investor conference call on May 29 at 10am ET, 5pm Israel Time

Shikun & Binui Ltd. (TASE: SKBN.TA), a global construction and infrastructure company headquartered in Israel, reported its financial results for the first quarter ended March 31, 2018.

Main Financial Results for the First Quarter of 2018:

Revenues totaled NIS 1.4 billion, a decrease of 28% compared with the first quarter of 2017. The decline was primarily due to the pace of progress in Solel Boneh Israel compared with the previous year, mainly the Ashalim and Mesilot (Railroad Tracks) projects, together with a decline in revenues from the International Construction (excluding the US) segment due to the slowdown of its activities in Nigeria and the completion of its projects in the previous year in Ghana, Togo and Uganda.

Gross margin was 12% compared with 11% in the first quarter of 2017. The gross profit for the quarter totaled NIS 156 million compared with NIS 206 million for the first quarter of 2017.

Net profit for the quarter totaled NIS 27 million compared with NIS 88 million for the first quarter of 2017. It is emphasized that the net profit in the first quarter of 2017, as published in the financial statements of last year, was before the effect of adopting accounting standard IFRS 15.

The Company's cash flow for the quarter, excluding investments in land inventories and concessions arrangements, totaled NIS (381) million. Cash flow including those investments totaled NIS (728) million.

1. CONSTRUCTION

Solel Boneh

• Continued significant activity and broadening of construction offering: total revenue for the quarter was NIS 740 million.
• During February 2018, Solel Boneh completed the acquisition of Menora Izo Aharon, a private company that engages in the execution, construction and maintenance of complex electrical systems for lighting, railroad crossings, intersection traffic control and other applications. The company employs 235 workers. The acquisition is a pillar of the strategy to broaden construction offerings and is expected to be complementary and synergistic with other activities.
• Primary mega projects in process during the first quarter of 2018: Gilboa Pumped Storage, Ashalim thermo solar, Tel Aviv Light Rail (Red Line of the Western Section), Tze'elim, the Southern Barrier (on the Gaza border) and others.

International Infrastructure & Construction (excluding the United States)

• Total revenues for the first quarter of 2018 were NIS 320 million.
• In February 2018, the Company signed an agreement to build a new airport in Uganda for USD 309 million.
• The Company continues to buy significant quantities of dollars in Nigeria at the NIFEX exchange rate, given the ability to receive dollar allocations at the current rate of exchange and the Company is translating its financial reports based on the NIFEX exchange rate (339 naira/dollar as of March 31, 2018).
• Segment 1 of the Colombia Toll Roads Project is in the handover process; work on segments 2 and 3 is expected to be completed after the originally scheduled time period and negotiations are currently underway to extend the work period. Significant changes in the route of Segments 4 and 5 may be required due to the discovery of water springs. As a result, the project's funders have halted further fund withdrawals until a new plan has been approved for expediting the construction.
• Subsequent to the balance sheet date, the Company decided to examine the realization of its indirect holdings in its subsidiary, SBI International Holdings AG, either by way of a share transaction or by the sale of activities and / or assets (in whole or in part); this includes seeking appropriate proposals and examining the implications of such proposals. It should be clarified that no decision to sell this activity has been made and there is no certainty at this stage regarding the results of the above-mentioned examination and/or the feasibility of such a transaction, its scope and terms. At this stage there is no impact of the above on the company's financial results

US Infrastructure & Construction

• Total revenues for the first quarter of 2018: NIS 106 million from the Texas SH-288 project.
• As of the beginning of the first quarter of 2018, the Company is reporting the results of the US Infrastructure & Construction segment separately in order to better track its progress in accordance with Shikun & Binui's strategic objectives.

Development of the Backlog* (in NIS millions)

*Backlog as of March 31, 18, does not include contracting projects in both Israel and internationally, totaling NIS 3.2 billion, which the Company has won as of that date of the financial report and thereafter, including projects in the roads sector in Nigeria for $300 million, $120 million in Ethiopia and $120 million in Guatemala, and including a project for the construction of a sorting and recycling facility at the Dan Region Sewage complex in Rishon LeZion for NIS 750 million (Shikun & Binui's portion of which is 50%); the establishment of this project is conditional upon completion of the financial closing. These do not include the execution of those projects carried out during the period up to the date of this report. In addition, the relative decrease in the backlog as of December 31, 2017 and thereafter is attributed, amongst others factors, on the effects of the early adoption of accounting standard IFRS 15.

2. RESIDENTIAL REAL ESTATE DEVELOPMENT

Apartment Sales

• During the first quarter of 2018, the Company sold 354 apartments (at a 100% share) totaling NIS 354 million, including 82 units in Israel and 272 units in Europe.
• In Europe, most of the apartment sales were in Poland, where 123 units were sold; Serbia, where 73 units were sold; the Czech Republic, where 52 units were sold; and Romania, where 24 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 following table represents additional data regarding the Company's sale of apartments (signed contracts) during the first quarter 2018:

The following is data regarding the Company's delivery of apartments to customers during the first quarter of 2018:

• Adoption of Standard IFRS 15 – based on this accounting standard, the Company recognizes revenues from Israeli apartment sales gradually based on the rate of construction. Revenues from the sale of apartments outside of Israel are recognized at the time of delivery, unchanged from the previous policy.

3. PROJECTS & IGAs (INCOME GENERATING ASSETS)

• Awarded a project to plan, finance, construct and operate a municipal waste recycling facility: in April 2018, the Tender Committee awarded this project to Shikun & Binui and its partner G.E.S. (in equal shares). The cost of the project's construction phase is expected to total NIS 750 million. The Company's subsidiary, Solel Boneh holds 50% of the rights in the project's construction contract and will build the facility together with G.E.S. Initiation of the project is contingent upon successful completion of the project's financing. The total concession period is 29.5 years.
• The Company continues to carry out its strategy for generating value from projects and freeing up resources for new projects:
  o   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 were received from a group of investors (including institutional investors) under the framework of a special-purpose limited partnership designated for the purchase, whose investors will be the limited partners and an entity controlled by the Company that will serve as General Partner. If the transaction is completed, the Company expects to recognize a profit of NIS 250-300 million and a cash flow of NIS 580 million is expected.
  o   The Company has entered into a process for selling its rights in the Generi 2 Government Campus project. If and when the sale is completed, the Company expects to recognize NIS 25-30 million in post-tax profit and expects NIS 70 million in cash flow. The transaction is expected to be completed in January 2019.
• Significant progress with the Company's portfolio of Renewable Energy projects:
  o   Initiation of the construction of the approximate 120MW Tze'elim photovoltaic (PV) project.
  o   Received a conditional license to convert the Etgal power plant to natural gas and to expand its generation capacity from 26MW to 186MW.
  o   Began construction of 6 high voltage PV projects totaling up to 60MW.
  o   eAdvancement in the financial closing process of the construction of high voltage PV projects totaling up to 25MW.

Changes in the Company's Credit Ratings:

• Ma'alot:  In March 2018, Ma'alot S&P notified the Company that it has added the Company's securities (ilA) to its watch-list with a negative outlook.
• Midroog: In February 2018, Midroog notified the Company that it had placed the Company's ilA1 debentures on its watch-list with a negative outlook. In March 2018, Midroog lowered the rating of the Company's debenture series 4, 5, 6, 7 and 8 from A1.il to A2.il with a negative outlook and removed the Company from its watch-list with a negative outlook.

Suspicions Related to the Activities of SBI:

• In July 2017, a former employee of SBI International Holdings AG, a Swiss company that is a granddaughter subsidiary of the Company (hereinafter: "SBI AG"), filed a claim with the Labor Court in Israel against the Company, SBI AG, its parent company (SBI Infrastructures Ltd.), its associated subsidiary (SBI – E&M Ltd.) and a manager of the Kenyan branch of SBI AG. Amongst others, in the claim the employee alleged entitlement to various payments related to the termination of his employment with the Kenyan branch of SBI AG and that a mediation proceeding (that was subsequently suspended and not completed) had been held between the parties on those allegations. Furthermore, the employee raised allegations of improper conduct at SBI AG, tantamount to allegations of bribery of foreign officials.
• Upon receipt of the claim, SBI AG launched an investigation regarding the allegations of improper conduct, through means of external and independent bodies: a Swiss law firm which hired the services of an international accounting firm specializing in investigative auditing, to assist in the investigation. As a result of the launch of an investigation by the Israeli police, the internal investigation was not complete, there were no findings, and their efforts were directed to collecting material for the World Bank (see below).
• Furthermore, in September 2017, SBI AG, at its own initiative, contacted the general prosecution authorities in Bern, Switzerland, through its Swiss legal advisors, and notified them of the allegations that were raised by the former employee and of the steps SBI AG plans to take to examine the allegations, the main one being an independent investigation as mentioned above. Since then the prosecution authorities in Switzerland have received updates regarding the investigation of the Israeli police (under which employees of the foreign sub-subsidiary were questioned and/or investigated). SBI AG does not know if the Swiss authorities will take investigative steps and what the outcome maybe.
• In February 2018, the Company became aware that SBI AG had been notified by the INT department of the World Bank (the department that examines allegations concerning integrity) that the World Bank plans to conduct an audit in connection with several projects of SBI AG in Kenya. The  audit has commenced and includes the collection of evidence by the World Bank. SBI AG is cooperating with the investigative actions and is acting to provide the materials requested by the World Bank.
• It is further noted that during the years 2014-2015, requests had been received from the INT department of the World Bank to provide materials and cooperate with an audit, and in January 2016 a letter was received that informed of the World Bank's intention to conduct an audit in connection with projects of SBI AG in Guatemala. SBI AG cooperated at that time with the request and provided materials. As of the date of this report, no further request has been received from the World Bank on the matter of Guatemala.
• The Company is unable at this time to assess the results of the World Bank's audits and the exposures in respect thereto. If as a result of the audits of the World Bank, it is found that the conduct of SBI AG was improper, it is possible that the World Bank will impose sanctions, the main one being suspension for a certain period of time from participating in future tenders of projects financed by the World Bank, along with other possible sanctions including refunding money that was received by SBI AG from loans provided by the World Bank or correcting damages. It is noted that even before the audits of the World Bank are completed, it is possible that unilateral or agreed restrictions will be imposed (the in-principle possibility of adopting a self-suspension restriction was raised by the Bank and at this time SBI AG has notified the World Bank that it any case, it has no intention of participating in any tenders for projects financed by the World Bank that are expected in the next six months).
• On February 20, 2018, the Israeli police began an open investigation. Since that date, present and past employees and officers of the Company, SBI AG, and the subsidiary that holds shares of SBI AG (SBI Infrastructures Ltd.), including employees who have had completed their employment with such companies a few years ago were detained for questioning and/or called to testify by the Israeli police. Some of the people that were questioned were at the time placed under arrest for various periods of time and/or released to house arrest and/or released under restrictions. According to minutes of hearings that were held with respect to some of those employees at the Rishon LeZion Magistrates' Court, the investigation probably concerns suspicions of bribing foreign officials, conspiring to commit a crime, false entry in business records and disruption of the judicial process. In addition, bank accounts and current assets of the Company and other Group companies were frozen (and were released after a short time pursuant to an agreed arrangement as described below) and the offices of the Company and other Group companies in Israel and abroad were searched and documents were seized.
• On February 21, 2018, SBI AG reached an interim arrangement with the Israeli police to deposit an amount in dollars equivalent to NIS 250 million in a forfeiture fund managed by the Administrator General in the Ministry of Justice, as seized money. Proximate to that date, SBI AG deposited the aforesaid amount against a release of the freeze on the bank accounts and current assets of the companies that were seized as aforesaid, pursuant to the aforesaid interim arrangement that was approved by the Rishon LeZion Magistrates' Court.  In the arrangement, it was stated that it does not constitute any kind of admission to a debt or liability on the part of the companies.
• The money was transferred directly from the account of SBI AG to an account managed under the Administrator General in the Israeli Ministry of Justice.
• Pursuant to the terms of the arrangement and the provisions of law, if another court decision is not rendered, and if and to the extent a statement of charges is not filed by the end of six months from the issuance date of the Court's decision regarding this matter (that would be August 24, 2018 at the latest), the seized amount will be returned to SBI AG. The Magistrate's Court has the authority to extend the period on terms that will be determined and both parties are permitted to file a request with the Court at the end of the said period.
• In the event of an indictment being filed, the court has the authority to decide that in addition to any punishment, property shall be forfeited that has the same value of the property involved in the crime as well as property that was used to commit the crime, made it possible to commit it or was designated for that purpose and also in the same value of the property that was received, directly or indirectly, as payment for the crime or as a result of committing the crime, or was designated for that purpose.
• A motion to certify a class action was filed against the Company and officers and three motions to disclose documents were filed in the framework of preliminary proceedings of a derivative claim (one of them also against the subsidiary and against SBI AG, which was struck out on May 14, 2018). See Note 4.B to the financial statements for 2017 for details.
• Consolidated subsidiaries of the Group that operate in foreign countries have not received receipts or documents (hereinafter: "supporting documents") in respect of certain expenses paid in cash in connection with work performed by them as mentioned in Note 32.B to the financial statements for 2017. Furthermore, provisions were created in the books without such supporting documents. Those expenses and provisions were approved by the managers of the branches and subsidiaries as applicable.
• In view of the police investigation, the audit of the World Bank and the events that followed as described above, the Company is unable to assess whether the expenses paid as aforesaid included any illegal payments as well as the effects that arise from the payment of all those expenses.

Conference Call

Company management will host a conference call on May 29, 2018 starting at 10am Eastern Time, 7am Pacific Time, 3pm UK Time or 5pm Israel Time.  To participate, please call one of the following teleconferencing numbers:

US:    +1-866-229-7198

UK:     0-800-4048-418

Israel:  03-918-0692

International: +972-3-918-0692

For those unable to participate, the teleconference will be available for replay on the Company's website at http://en.shikunbinui.co.il/ beginning 24 hours after the call.

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 (excluding the United States); 2) US infrastructure and construction contracting; 3) infrastructure and construction contracting within Israel; 4) real estate development within Israel; 5) real estate development outside of Israel; 6) renewable energy; and 7) 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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IR Contacts:

Company                                                                  External Investor Relations              

Inbal Uliansky                                                             Ehud Helft
+972(3)6301058                                                         GK Investor Relations
inbal_u@shikunbinui.com                                           +1-617-418-3096
                                                                                 shikunbinuni@gkir.com