2011 9 months and III quarter consolidated unaudited interim report

Tallinn, Estonia, 2011-11-17 15:30 CET (GLOBE NEWSWIRE) --

MANAGEMENT REPORT

General information

AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction group offering complete solutions in the construction field. The largest companies belonging to the group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna Teede AS (100%), AS Gustaf (85%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%), AS Merko Infra (100%) and AS Tartu Maja Betoontooted (25%).

Operating results

In 2011 9 months, the revenue of the construction group was EUR 153.4 million. Estonia contributed 69.8%, Latvia 20.8% and Lithuania 9.4% to the group’s revenue. As compared to 2010 9 months, the group’s revenue increased by21.5%, including +17.5% in Estonia, +371.3% in Lithuania and -0.6% in Latvia.

Group’s revenue for Q3 2011 was EUR 78.3 million, which constitutes an annual increase of EUR 22.9 million (+41.4%).

As of 30 September 2011, the group’s portfolio on unfinished construction contracts totalled EUR 195 million. The contract portfolio does not include residential development projects developed by the Company and the works related to construction of investment properties.

In 2011 9 months, the group sold 113 apartments for EUR 12.3 million, (exclusive of VAT). As of 30.09.2011, the inventories included 64 unsold apartments with a total cost of EUR 6.6 million and 483 apartments in the stage of construction with a total cost of EUR 17.8 million as of the balance sheet date. Of the finished buildings 30 apartments are located in Tartu and 34 in Riga. At the moment the group is building an apartment building with 93 apartments at Tartu road 50A in Tallinn (completion time Q4 2011), two apartment buildings (21 apartments in each) at Hane Street in Tallinn (completion time summer 2012) and an apartment building with 133 apartments at Skanstese street in Riga (completion time October 2012). An apartment building with 15 apartments at Kristiina 12, Tallinn was in finishing stage as of balance sheet date.

In 2011, the share of infrastructure facilities has grown, which has significantly increased the impact of seasonality on the group’s quarterly performance (EUR 26.2 million in Q1 and EUR 48.9 million revenue in Q2 compared to EUR 78.3 million in Q3 2011). In Q3, revenue was influenced by the cyclical nature of property developments as follows: apartment sales reached EUR 10.1 million which constituted 82.3% of 2011 9 months apartments total sales, and the group earned EUR 11.1 million as revenue upon the delivery of Balsiu school to the tenant.

The consolidated revenue of the group’s largest entities:

In the first 9 months of 2011, the group made a gross profit of EUR 0.4 million, incl. EUR 2.8 million in Q3.  Generation of a profit was supported by the stabilisation of construction prices which decreased discount losses and thereby improved the average profitability of works completed.

Marketing and general administrative expenditures of the group decreased by 4.1% with the 9 months of 2011. Work on cutting the marketing and general administrative expenditures continues and the management has set the goal to maintain the proportion of the respective costs under 5.5% of revenue by the end of 2011.

The group’s loss before taxes for the first 9 months of 2011 was EUR 7.1 million, with a net loss of EUR 7.3 million – in 0 months 2010, the group had a profit of EUR 5.9 million before taxes and a net profit of EUR 5.2 million. The loss was caused by a faster increase in construction prices than predicted in the tenders prepared in 2009/2010, and by the devaluation of loss-making projects in the first half of 2011 when the estimates were corrected. As of 30.09.2011, the group had allocated a total of EUR 3.5 million as appropriations to cover the costs of completing loss-making projects. As predicted, Q3 2011 was better than the first six months, with the group earning a net profit of EUR 0.3 million.

In 2011 9 months, the change in short-term investments, and cash and cash equivalents of Merko Ehitus group was EUR -7.1 million and as of 30 September 2011, the cash and cash equivalents in the bank accounts and term deposits of the group were in the amount of EUR 5.5 million. The cash flows from operating activities totalled EUR -22.2 million, cash flows from investing activities totalled EUR +3.3 million and cash flows from financing activities totalled EUR +11.8 million. The cash flows from operating activities in the reporting period were mostly affected by the change in trade and other receivables related to operating activities of EUR -38.6 million, change in trade and other payables related to operating activities of EUR +18.3 million and operating loss EUR -6.7 million. Of the cash flows from investing activities, purchase of investment property totalled EUR -2.5 million, the balance of issued and repaid loans totalled EUR +5.1 million and investments in property, plant and equipment totalled EUR -0.9 million. Of the cash flows from financing activities the balance of gained and repaid loans totalled EUR +15.0 million, dividends paid EUR -1.8 million and EUR -1.5 million was spent on finance lease principal payments.

The ratios and methodology for calculating the financial ratios describing the group’s main operations

Net profit margin: Net profit* / Revenue
Profit before taxes margin: Profit before taxes / Revenue
Operating profit margin: Operating profit / Revenue
Gross profit margin: Gross profit / Revenue
EBITDA margin: (Operating profit + Depreciation and impairment charge) / Revenue
Return on equity: Net profit x 4/3*/Avg equity during the period*
Return on assets: Net profit x 4/3* / Avg assets during the period
Equity ratio: Owners equity* / Total assets
Current ratio: Current assets / Current liabilities
Quick ratio: (Current assets – Inventories) / Current liabilities
General expense ratio: General expenses / Revenue
Gross remuneration ratio: Gross remuneration / Revenue
Debt to assets: Interest-bearing liabilities / Total assets
Accounts receivable turnover: Trade receivables / Revenue x 365/ 4/3
Accounts payable turnover: Payables to supplies / Cost of goods sold x 365/ 4/3
Revenue per employee: Revenue / Average number of full-time employees

* attributable to equity owners of the parent

Members of the Supervisory and Management Board of AS Merko Ehitus

Supervisory Board

The general meeting of shareholders elects the Company’s Supervisory Board. The Supervisory Board plans the Company’s activities and arranges its management as well as performs supervision over the Management Board. The general meeting of shareholders, held on 28 June 2011, elected an additional member (Mr Toomas Annus) to the current Supervisory Board of AS Merko Ehitus. Thus, the Supervisory Board of AS Merko Ehitus now has 5 members.

Toomas Annus - Born at 5 October 1960. Finished Tallinn Technical School of Building and Mechanics and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. Since 1987 the chairman of the Management Board of EKE MRK, the predecessor of Merko Ehitus, since 1991 the chairman of the Management Board of AS Merko Ehitus. In the years 1997-2008 and again from June 2011 the chairman of the Supervisory Board of AS Merko Ehitus.

Tõnu Toomik – Born at 8 March 1961. Finished Raatuse Gymnasium in Tartu (former Tartu Secondary School no. 3) and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. From 1993, started to work as a project manager at AS Merko Ehitus. Between 1997-2008, was a member of the Management Board of AS Merko Ehitus, being responsible for the management and development of the Company. From August 2008, is the member of the Supervisory Board of AS Merko Ehitus.

Teet Roopalu – Born at 30 August 1949. Finished Tallinn Secondary School no. 10 (current Nõmme Gymnasium) and graduated from the Faculty of Economics of Tallinn University of Technology, majoring in construction economics and organisation. Has worked at construction companies, including as a director of finance, managed the economic activities in EKE (Estonian Collective Farm Construction) system as a chief economist, as a bank director and has also been involved in design work. Since November 2002, works at AS Merko Ehitus and is responsible for the Company’s financial and legal areas. Is a member of the Supervisory Board of AS Riverito and those of several subsidiaries and associates of AS Merko Ehitus.

Indrek Neivelt – Born at 17 March 1967. Finished a mathematics and physics - biased class at Tallinna Secondary School no. 1 (current Gustav Adolf Gymnasium), graduated from Tallinn University of technology, majoring in civil engineering economics and management, and received his MBA in banking and finance from Stockholm University. Between 1991-2005, worked in various positions at Hansapank, over the last six years as the general director of the group and chairman of the Management Board. From 2005, is a Chairman of the Supervisory Board of Bank Saint Petersburg and is a member of supervisory boards of several entities. From October 2008, is member of the Supervisory Board of AS Merko Ehitus.

Olari Taal – Born at 7 August 1953. In 1971, finished Varstu Secondary School and in 1976, graduated as a civil engineer from Tallinn University of Technology. Has managed Tartu Elamuehituskombinaat (Tartu Housing Plant; Tartu Maja) and Eesti Hoiupank (Estonian Savings Bank). Has served the Republic of Estonia as the Minister of Construction, Minister of Economic Affairs, Minister of Internal Affairs and as a member of the 10^th Riigikogu (Parliament of Estonia). From October 2008, Olari Taal is a member of the Supervisory Board of AS Merko Ehitus.

Management Board

The Management Board is the Company’s governing body, which represents and manages the Company. The Management Board shall adhere to the lawful regulations of the Supervisory Board. The Management Board is under the obligation to act in most economically purposeful manner. As of 21.12.2010, the Management Board of AS Merko Ehitus has 6 members.

Tiit Roben – Born at 5 January 1966. Finished Mustamäe Gymnasium (former name: Tallinn Secondary School no. 44) in Tallinn and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. Worked as a project manager at AS Merko Ehitus between 1998-2002. Between 2002-2008, worked at AS Riverito’s entity E.L.L.Kinnisvara AS, from 2005, is a member of the Company’s Management Board. From August 2008, is the Chairman of the Management Board of AS Merko Ehitus, being responsible for the management and development of the Company.

Jaan Mäe – Born at 26 September 1964. Finished Viljandi Secondary School no. 5. and graduated from Tallinn University of Technology, majoring in industrial and civil engineering. From December 1997, works at AS Merko Ehitus, has been project manager, division manager and member of the Management Board. Between 2006-2010, was a member of the Supervisory Board of AS Merko Ehitus and several group entities. From June 2010, is a member of the Management Board of AS Merko Ehitus, being responsible for attainment of goals in the area of development and is the Chairman of the Supervisory Board of Latvian and Lithuanian subsidiaries.

Alar Lagus – Born at 15 February 1969. Finished Rapla Secondary School and graduated from the Faculty of Chemistry of Tallinn University of Technology, majoring in organisation and technology of public catering. After graduation, worked in various positions at Hansapank. From 2004, works as a manager in the finance area and is responsible for the Company’s financial and managerial accounting and investor relations.

Veljo Viitmann – Born at 13 March 1962. Finished Türi Secondary School and graduated from Tallinn University of Technology, majoring in road engineering and bridges. From 1994, works at AS Merko Ehitus and is responsible for preparation of tenders for new projects.

Andres Agukas – Born at 15 July 1965. Finished Pärnu-Jaagupi Secondary School and graduated from Tallinn University of Technology, majoring in road engineering. At 2 February 1998, started to work at AS Merko Ehitus as the first employee in the area of civil engineering. From October 2005, as a member of the Management Board is responsible for the whole area of the construction service.

Viktor Mõisja – Born at 6 January 1951. Graduated as a civil engineer from Tallinn University of Technology. Viktor Mõisja has worked at AS Merko Ehitus since the foundation of the Company and most of the time as a manager of the department of concrete works. From 21 December 2010, is a member of the Company’s Management Board and his area of responsibility are quality management and supervision.

Information about the shares held by the members of the Supervisory and management Boards is disclosed in chapter “Share and shareholders” of the report.

Employees and remuneration

Due to the growth of the contract portfolio and the increase in the share of facilities in the structure of contracts, the number of group’s employees increased by 70 (+7,9%) employees and as of 30.09.2011, the group had 961 employees. The gross remuneration paid to employees in 2011 9 months amounted to EUR 12.36 million an increase of 6.6% compared to previous year. The group’s labour costs have increased due to the employment of new personnel. Salaries accounted for 85.1% of the gross remuneration, and performance-related pay accounted for 14.9%.

Construction market

Improvement of the economic environment of the Baltic countries in the first half of the year has had a positive impact on the construction market. Volumes of construction works completed by own forces have grown in all Baltic countries during the year. In Lithuania, construction works in the total volume of 1.27 billion euros* were completed during the first 9 months, meaning a growth of +21.9% compared to the 9 months of the previous year, including +23,7% in Q3. In Latvia, construction works by own forces were completed in the total volume of 0.71 billion euros* during the 9 months, meaning annual growth of +4.5%, including an increase of +21.2% in Q3. In Estonia, the 3rd quarter results of the construction market will be published on 29.11.2011. It is reasonable to expect continuation of the trends of the first semester. During the first 6 months of 2011, construction works by own forces were completed in Estonia in the total volume of 0.56 billion euros*, i.e. +19.7% compared to the result of the previous year (2011 Q1 respectively +31.4%).

* in current prices

The construction market of the neighbouring blocks is affected by the following trends:

The sense of security regarding the future that the region’s private contracting entities share has decreased compared to the beginning of the year, which is also why there is no interest in the construction of new buildings/structures. Estonia’s adaptation of the euro has failed to significantly increase foreign investment activities in the area and it has not affected the construction market as positively as expected. Most new construction contracts still originate from the public sector and they are financed from the sources of the Structural Funds of the European Union.

The small number of contracting entities remaining in the market (the state, local governments) enjoy their position – they make the guarantee requirements and payment terms prescribed to contractors more severe, the strain on companies’ circulating capital increases, and the companies’ capability to cope with the management of liquidity and cash flows becomes increasingly decisive.

Due to significant volatility of input prices, it is difficult to budget projects and complete construction works within the limits of planned cost, bringing about additional risks in the performance of fixed-price construction contracts. If in the first half year the rapid increase of construction prices was borne only by contractors, then the second semester has brought the problem also into the attention of the contracting entities. More frequently, contracting entities cancel their procurement procedures due to the fact that the received offers fail to comply with budgets prepared in 2009/2010, and the funds allocated for project financing are insufficient.

Construction of new apartments in Tallinn and Vilnius that enjoyed a growth in the first semester has clearly shrunk in the second half of the year. Due to increasing insecurity in the overall economic environment, the buyers of apartments have taken on a passive role and do not rush into making buying decisions. Significant increase of input construction prices and the currently unchanged level of sales prices of apartments sets limits to the entry of new apartments into the market in the near future. The banks’ willingness to finance development activities and final buyers of residence spaces is good in Lithuania and Estonia, and satisfactory in Latvia.

Insecurity in European and American financial markets has shaken the sense of security of investors, yielding to an expected global decrease in the demand for construction services. Due to decreased demand, the future may hold a decrease in the price of global inputs (steel, crude oil products) that may in turn lead to a short-term improvement of the profitability of such construction contracts that have already been entered into. At the same time, the continued insecurity complicates the medium and long term chances of development in the construction sector.

Share and shareholders

Share information

ISIN                                         EE3100098328
Short name of the security         MRK1T
Stock Exchange List                   Baltic Main List
Nominal                                    no par value
Total no of securities issued       17 700 000
No of listed securities                 17 700 000
Listing date                               11.08.2008

The shares of Merko Ehitus are listed in the main list of NASDAQ OMX Tallinn Stock Exchange. In 2011 9 months 3184 transactions with the shares of Merko Ehitus were performed in the course of which 0.9 million shares were traded and the total monetary value of transactions was EUR 6.99 million. The lowest share price was EUR 4.90 and the highest price was EUR 10.65 per share. The closing share price as of 30.09.2011 was EUR 5.30. AS Merko Ehitus market value as of 30.09.2011 was EUR 94 million.

The main shareholders of AS Merko Ehitus as of 30.09.2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited, in thousand euros

Alar Lagus
Member of Management Board
+372 6 805 109
alar.lagus@merko.ee