2014 6 months and II quarter consolidated unaudited interim report

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| Source: Merko Ehitus
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Tallinn, Estonia, 2014-08-07 15:30 CEST (GLOBE NEWSWIRE) --  

MANAGEMENT REPORT

Overview of the 6 months and II quarter results

REVENUE
Revenue in 6M 2014 was EUR 113.7 million (6M 2013: EUR 113.7 million), which is at the same level compared to the same period last year. Q2 revenue was EUR 64.8 million (Q2 2013: EUR 65.9 million). The share of revenue earned outside of Estonia has incresed in 6M 2014 to 30.7% (6M 2013: 18.4%).
 
PROFITABILITY
Net profit in 6M was EUR 4.4 million (comparable figure in 6M 2013: EUR 4.0 million). Q2 net profit was EUR 3.6 million (Q2 2013: EUR 2.3 million). Gross margin in 6M was 8.9% (6M 2013: 8.6%), which has increased by 2.6% compared to the same period last year.
 
CASH POSITION
At the end of the reporting period, the group had EUR 43.4 million in cash and cash equivalents and equity EUR 119.0 million (48.8% of total assets). Comparable figures as at 30 June 2013 were accordingly EUR 33.8 million (incl EUR 2.5 million short-term deposits) and EUR 115.5 million (48.8% of total assets).
 
SECURED ORDER BOOK
In Q2 2014, group companies signed new contracts in the amount of EUR 21.7 million (Q2 2013: EUR 51.3 million). 6M 2014 new contracts signed in amount of EUR 70.3 million (6M 2013: EUR 95.5 million). As at 30 June 2014, the group’s secured order book stood at EUR 191.6 million (30 June 2013: EUR 184.4 million).

 

    6M ’14 6M ’13 Variance Q2 ’14 Q2 ’13 Variance 12M ‘13
Revenue million EUR 113.7 113.7 0.0% 64.8 65.9 -1.6% 262.7
Gross profit million EUR 10.1 9.8 +2.6% 6.1 5.6 +9.9% 22.7
Gross profit margin % 8.9 8.6 +2.6% 9.5 8.5 +11.7% 8.6
Net profit (parent) million EUR 4.4 4.0 +7.7% 3.6 2.3 +59.8% 10.4
Net profit margin % 3.8 3.6 +7.7% 5.6 3.5 +62.4% 4.0
EPS EUR 0.25 0.23 +7.7% 0.21 0.13 +59.8% 0.59

 

    30.06.14 30.06.13 Variance 31.12.13
ROE (on yearly basis) % 8.9 9.6 -7.4% 8.8
Equity ratio % 48.8 48.8 -0.1% 50.9
Secured order book million EUR 191.6 184.4 +3.9% 213.7
Total assets million EUR 243.9 236.6 +3.1% 239.2
Number of employees people 851 943 -9.8% 860

 

OPERATING RESULTS

Business activities

Key financial indicators (in million euros)

  6 months 2014 6 months 2013 II quarter 2014 II quarter 2013 12 months 2013
Revenue          
Estonia 78.8 92.8 46.2 55.3 211.9
Latvia 29.2 17.5 15.2 9.2 44.4
Lithuania 5.7 3.4 3.4 1.4 6.4
Revenue total 113.7 113.7 64.8 65.9 262.7
Gross profit 10.1 9.8 6.1 5.6 22.7
EBITDA 6.1 6.3 4.3 3.4 15.1
Operating profit (EBIT) 5.0 5.1 3.7 2.8 12.3
Net profit          
attributable to equity holders of the parent 4.4 4.0 3.6 2.3 10.4
attributable to non-controlling interest (0.2) 0.0 0.0 (0.1) 0.0
Net profit total 4.2 4.0 3.6 2.2 10.4
Earnings per share (EPS), euros 0.25 0.23 0.21 0.13 0.59
Cash and cash equivalents closing position 43.4 33.8* 43.4 33.8* 46.6

* incl short-term deposits in the amount of EUR 2.5 million

 

Revenue and gross profit

Merko Ehitus group generated a total of EUR 113.7 million in revenue in 6 months of 2014 (6 months of 2013: EUR 113.7 million). 69.3% of the revenue was generated in Estonia, 25.6% in Latvia and 5.1% in Lithuania (6 months of 2013: 81.6% in Estonia, 15.4% in Latvia and 3.0% in Lithuania). Compared to the first 6 months of 2013 the group revenue remained unchanged. In the 6 months of 2014 the share of Latvian revenue has increased from 15.4% to 25.6%, which is an ongoing trend in 2014. Revenue in Q2 2014 was EUR 64.8 million, which has decreased 1.6% compared to the previous year (Q2 2013: EUR 65.9 million).The main changes in the revenue structure compared to the same period last year, can be mainly attributed to projects pursued in the general construction and real estate development segment. At the same time there has been a significant reduction in sales revenue from engineering construction and road construction segments, which is primarily due to the end of major projects financed from EU structural funds and the reduced project volumes. A similar trend was already seen in the first quarter of 2014.

In 6 months of 2014 the group’s gross profit from development and construction activities totalled EUR 10.1 million (6 months of 2013: EUR 9.8 million). The gross profit in Q2 2014 was EUR 6.1 million (Q2 2013: EUR 5.6 million).The 6 months gross profit margin (8.9%) has increased compared to the same period last year (6 months of 2013: 8.6%). The growth of the profit margin has been supported by growth - both on a semi-annual and quarterly basis - in the higher volumes and with the higher profitability of the real estate development segment. In addition, the growth of profit margins in civil engineering segment and stability of profit margins in the road construction segment have been significant. Profitability has been negatively impacted by a drop in the profitability of the general construction segment in conjunction with a simultaneous growth in volumes. The scarcity of projects and the ever-tightening competition in the construction sector poses a great challenge in the maintaining of the current gross profit margin for new procurements in all segments, but especially in general construction, where competition and the number of companies participating at the procurements is the highest

Net profit

In 6 months of 2014, the group’s profit before tax totalled EUR 4.7 million and net profit attributable to equity holders of the parent was EUR 4.4 million as compared to the pre-tax profit or EUR 4.5 million and net profit attributable to equity holders of the parent of EUR 4.0 million in 6 months of 2013. Group’s net profit margin was 3.8% (6 months of 2013: 3.6%). The net profit for the 6 months of 2014 was affected by the income tax expenses paid on the dividends received from OÜ Gutsaf Tallinn in the amount of EUR 0.3 million. This increases the income tax expenses as extraordinary one-off item, compared to the 6 months  of 2013.

In Q2 of 2014, the group’s pre-tax profit totalled EUR 3.6 million and net profit was EUR 3.6 million as compared to the pre-tax profit or EUR 2.6 million and net profit of EUR 2.3 million in Q2 of 2013. Both the group’s quarterly net profit (EUR 3.6 million) and the net profit margin (5.6%) have increased compared to the same period last year (6 months of 2013: EUR 2.3 million and 3.5%, respectively).

In the second quarter of 2014, the group paid EUR 7.3 million in dividends, which incurred no additional income tax expense in connection with previously received and taxed distribution of profits from subsidiaries. The situation in the third quarter of 2013 was alike, when the group paid EUR 5.3 million in dividends.

 

Business segments

The group operates mainly in Estonian, Latvian and Lithuanian market through its subsidiaries and depending on the country provide services across the following segments: general construction, civil engineering (including electrical and external networks), road construction, real estate development (including apartment development and sales, long-term real estate investments and commercial real estate projects) and other comprising sale of raw materials obtained from pit mining, equipment lease, consulting and construction supervision. The groups management structure is country based and is in turn divided by business segments.

General construction

General construction consists of the construction of different buildings, from commercial and office buildings, retail and entertainment centres to public sector and residential and specialised industrial buildings. Group companies provide strategic consulting and quality complete solutions as part of the general contracting service of construction according to the customer's requirements: preparation, design, construction, interior and warranty service.

million EUR

  6 months 2014 6 months 2013 Change II quarter 2014 II quarter 2013 Change 12 months 2013
Revenue 56.9 33.5 +70.0% 31.1 20.9 +48.8% 86.6
% of total revenue 50.0% 29.4% +70.1% 48.0% 31.7% +51.2% 32.9%
Gross profit (loss) 1.5 1.2 +21.1% 1.3 0.8 +68.1% (0.5)
Gross profit margin 2.6% 3.7% -28.8% 4.1% 3.7% +13.0% -0.6%

In the 6 months of 2014, the revenue of the general construction segment was EUR 56.9 million (6 months of 2013: EUR 33.5 million), having increased by 70.0% from the same period last year. The segments gross profit has increased by 21.1% and the segments overall gross profit for the period is EUR 1.5 million (6 months of 2013: EUR 1.2 million). The segment continues to be mainly influenced by the pressure on the margins exerted by tightening competition. In the 6 months the revenue of the general construction segment formed the largest proportion in the group’s revenue with a 50.0% share. This proportional increase was expected, especially given the knowledge that the volumes in the civil engineering and road construction segments were decreasing.

The tight competition in the general construction segment has left it’s mark on the segments gross margin (6 months of 2014: 2.6%), having decreased 28.8% compared to the same period last year. The sector is significantly impacted by even tighter competition and increasing price pressure on asking prices in a situation where input prices are generally continuing to see marginal growth. While we saw a rise in the proportion of private sector orders starting in 2013, unfortunately the same tendency has not continued for the group in the first half year of 2014. Nevertheless, with regard to projects in progress in the general construction segment, private sector orders still outstrip public procurements as at the end of the quarter.

Our major projects in the first quarter included the construction of Tondiraba ice arena and Hilton Tallinna Park hotel construction works in Tallinn, the reconstruction work at the North-Estonia Medical Centre in Mustamäe in Tallinn, the construction of Polipaks NT manufacturing and logistics centre in Marupe and the multifunctional concert hall in Liepaja.

Among the projects completed and delivered to the customer in 6 months of 2014 the one to highlight is the Nurmevälja logistics center.

Civil engineering

The civil engineering segment includes port, waste management and road structures (bridges, tunnels, overpasses, roads), electrical construction of up to 330 kV, various environmental protection structures, water treatment plants, both open-cut and trenchless construction of water and sewerage pipelines and other various engineering projects. Complex and unique engineering projects require specialised knowledge and a good partnership with the customer and local authorities.

million EUR

  6 months 2014 6 months 2013 Change II quarter 2014 II quarter 2013 Change 12 months 2013
Revenue 24.3 45.5 -46.6% 14.9 24.8 -39.9% 94.5
% of total revenue 21.4% 40.0% -46.6% 23.0% 37.6% -38.9% 36.0%
Gross profit 3.2 3.9 -20.0% 2.1 1.6 +33.9% 12.5
Gross profit margin 13.0% 8.7% +49.8% 14.3% 6.4% +122.7% 13.2%

The revenue of the civil engineering segment amounted to EUR 24.3 million in the 6 months of 2014 (6 months of 2013: EUR 45.5 million), which is 46.6% less than in 2013. The decrease from the previous year is mainly due to a drop in the volume of pipeline projects. If the civil engineering segment revenues of 6 months of 2013 formed the largest proportion in the group’s revenue (6 months of 2013: 40.0%), then during 6 months of the current year the segments revenues formed 21.4% of total revenue being down 46.6% compared to the previous year. The 6 month gross profit of the civil engineering segment amounted to EUR 3.2 million (6 months of 2013: EUR 3.9 million) and the gross profit margin was 13.0% (6 months of 2013: 8.7%), which increased by 49.8% compared to the same period previous year. We consider this a very good result, given that the volumes of the segment have decreased by nearly a half. We continue to closely monitor the changes in the volumes, to maintain an effective cost base.

In the second quarter of 2014, the main ongoing projects included were the design and renovation of the infrastructure of Tallinn tram line No. 4, the reconstruction of pipelines in Vääna-Jõesuu and Narva-Jõesuu and the closing of industrial waste and semi-coke landfill in Kohtla-Järve.

The civil engineering segment includes challenges, primarily in connection with the end of the 2007-2013 EU budgeting period and due to the fact that the pace of launching new projects has decreased, this applies particularly to water management projects.

Road construction

In the road construction segment, the company carries out road construction and builds the associated infrastructure, road maintenance and maintenance repair.

million EUR

  6 months 2014 6 months 2013 Change II quarter 2014 II quarter 2013 Change 12 months 2013
Revenue 11.2 22.5 -50.4% 8.1 14.8 -45.2% 49.5
% of total revenue 9.8% 19.8% -50.4% 12.5% 22.4% -44.3% 18.8%
Gross profit 1.6 2.7 -41.0% 1.1 2.3 -49.1% 5.9
Gross profit margin 14.5% 12.2% +18.9% 14.2% 15.2% -7.1% 12.0%

The revenue of the road construction segment amounted to EUR 11.2 million in the first half of 2014 (6 months of 2013: EUR 22.5 million), which means a 50.4% decrease from the same period 2013. In the 6 months of 2014, the segment earned a gross profit of EUR 1.6 million (6 months of 2013: EUR 2.7 million), which yields a gross profit margin of 14.5%. The drop in revenue has been affected the most by the lack of large-scale construction projects (such as the last year’s Ülemiste junction in Tallinn) in the contracts portfolio of the group in 2014. On a positive note, in the 6 months of 2014 the road construction segment was supported by a growth in the volume of road repair and maintenance work, compared to the same period last year. This was mostly due to favorable weather conditions, that allowed the seasonal road works to be started earlier compared to the last year.

The largest projects in work in the first quarter were the maintenance works done under the service agreement with Tallinn and Jõgeva county.

Real estate development

The real estate development segment includes residential construction, the development of apartment projects, long-term real estate investments and commercial real estate projects.  

million EUR

  6 months 2014 6 months 2013 Change II quarter 2014 II quarter 2013 Change 12 months 2013
Revenue 20.6 11.7 +77.0% 10.3 5.2 +100.3% 31.0
% of total revenue 18.2% 10.3% +77.1% 15.9% 7.8% +103.6% 11.8%
Gross profit 3.7 1.9 +99.5% 1.5 1.0 +55.1% 5.1
Gross profit margin 18.1% 16.1% +12.7% 14.5% 18.7% -22.6% 16.5%

A total of 198 apartments were sold in 6 months of 2014 at the total value of EUR 18.6 million (excl. VAT), (6 months of 2013: 94 apartments and EUR 10.8 million, respectively; 12 months of 2013: 263 apartments and EUR 28.3 million, respectively). In Q2 of 2014 a total of 99 apartments were sold at the total value of EUR 9.6 million (excl. VAT), (Q2 2013: 37 apartments and EUR 4.6 million). Both the 6 months and Q2 real estate development segment revenues have increased compared to the same period last year – 77.0% and 100.3%, repectively. The share of revenue from the real estate development segment also increased in the first half-year (77.1% to 18.2% of the group’s total revenue); this was planned and occasioned by the strategic decisions made in 2013 to increase the segment’s investments into various new real estate development projects.

In 6 months of 2014, the group has earned EUR 1.4 million of revenue from the sale of properties (6 months of 2013: EUR 0.2 million). Q2 revenue from the sale of properties was EUR 0.4 million (Q2 2013: EUR 0.2 million).

At the end of the period, Merko Ehitus group’s inventory comprised 21 completed but not yet sold apartments (11 in Estonia, 1 in Latvia and 9 in Lithuania) and 25 completed and pre-sold apartments (7 in Estonia, 7 in Latvia and 11 in Lithuania).

As at 30 June 2014, Merko Ehitus group had a total of 234 apartments for active sale (as at 30 June 2013: 401 apartments; as at 31 December 2013: 300 apartments), this comprises apartments for which no pre-sale agreements have been signed.

Apartment projects in progress and indicative date of completion

Project Municipality/Country Completion date No of apartments *
Pärna avenue 6 Tartu municipality, Estonia Completed 1
Eha st. 4 / Paldiski road 17 Tallinn, Estonia Completed 1
Pärna avenue 8 Tartu municipality, Estonia Completed 1
Pärna avenue 7 Tartu municipality, Estonia Completed 9
Tedre 55 Tallinn, Estonia Completed 6
Skanstes virsotnes 4 tower Riga, Latvia Completed 6
Grostonas 17 Riga, Latvia Completed 2
Mokslininku stage I Vilnius, Lithuania Completed 2
Mokslininku stage II Vilnius, Lithuania Completed 18
      46
       
Grostonas 19 Riga, Latvia Autumn 2014 82
Vana-Kalamaja 31+Suur-Laagri 2 ** Tallinn, Estonia Autumn 2014 12
Paepargi 17, 19, 21 ** Tallinn, Estonia Autumn 2014 54
Kentmanni 6 Tallinn, Estonia End of 2014 93
Pärna avenue 10 ** Tartu municipality, Estonia End of 2014 42
Grostonas 21 Riga, Latvia Spring 2015 125
      408
       
Started in Q2 2014      
Pärna avenue 9 ** Tartu municipality, Estonia End of 2014 28
      28
       
Total     482

* The completed apartments indicate the number of apartments that are unsold and where possession has not been given to consumers.
** Project launched in 2014.

In 6 months of 2014, we launched the construction of a total of 136 new apartments in the Baltic States (6 months of 2013: 271 apartments). In 2013 we launched the construction of a total of 409 new apartments. We will continue to invest in residential real estate projects and depending on the apartment market developments in 2014, the group plans to launch the construction of approximately 500-550 new apartments in the Baltic States. The implementation of planned projects has been slightly delayed, primarily due to coordination of technical designs and obtaining building permits from local municipalities. In 2014, the group’s planned investments in both development projects initiated in the previous years and new projects to be launched in 2014 will be in the range of EUR 45-50 million.

As at 30 June 2014, the group has 60 apartments in Tartu where the construction activity has been frozen (as at 30 June 2013, the respective number in Tallinn and Tartu was 158 apartments). During 2014, we have re-launched two development projects that were frozen in prior years:

  • Development of Pärna avenue 10 in Tartu municipality in the 1st quarter (the number of apartments for sale is 42);
  • Development of Pärna avenue 9 in Tartu municipality in the 2nd quarter (the number of apartments for sale is 28).

One of our objectives is to keep a moderate portfolio of land plots to ensure stable inventory of property development projects considering the market conditions. The group is searching for new land plots for real estate development purposes in Estonian and Lithuania. The real estate portfolio in Latvia is extensive enough, so in the short-term there are no plans for active portfolio expansion. In the first six months of 2014, the group has purchased new land plots at an acquisition cost of EUR 1.2 million (6 months of 2013: EUR 0.0 million). Also in the second quarter, the group realized an option agreement to acquire the Rästa 18 land plot in Tallinn.

The real estate market has not changed significantly over the last 6 months, even though the events in Ukraine are likely to have somewhat slowed down customers' investment decisions. Customers have become more knowledgeable as to what they desire, and thus project location, development volume, design solutions and target consumer group play an important role for the group before launching each project and in the course of assessing the risks. Taking into account low interest rates on loans and limited supply on the market of new apartments, in the last three years the demand and transaction activity on the apartment market has grown moderately. The number of transactions and the average price per square meter are showing a marginal growth trend, especially in Estonia and Latvia. There is still room for new development projects in the Baltic capital cities, though one should proceed with care in Vilnius. An increased supply of apartments will influence the stabilisation of prices and lengthening of sales periods in the future.

Other

The segment other includes the sale of raw materials obtained from pit mining, equipment lease, consulting, construction supervision and other non-core activities.

million EUR

  6 months 2014 6 months 2013 Change II quarter 2014 II quarter 2013 Change 12 months 2013
Revenue 0.7 0.5 +20.8% 0.4 0.2 +43.5% 1.1
% of total revenue 0.6% 0.5% +20.9% 0.6% 0.5% +45.9% 0.5%
Gross profit (loss) 0.1 0.1 +287.5% 0.1 (0.1) +382.4% (0.3)
Gross profit margin 9.1% 2.8% +220.7% 20.6% 6.1% +236.1% -29.9%

 

Secured order book

As at 30 June 2014, the group’s secured order book (without own developments) amounted to EUR 191.6 million as compared to EUR 184.4 million as at 30 June 2013. The secured order book excludes the group's own residential development projects and work related to developing real estate investments.

In second quarter of 2014, EUR 21.7 million worth of new contracts were signed (without own developments) as compared to EUR 51.3 million in same period last year.

Largest construction contracts signed in the second quarter of 2014

Brief description of contract Country Completion time Cost
million eur
Construction works of HVDC converter station in Klaipeda Lithuania December 2015 6.0

After the balance sheet date, a contract was concluded on 1 August 2014 between UAB Merko Statyba, which is a part of AS Merko Ehitus group, and Pro Kapital Bonum UAB, which is part of AS Pro Kapital Grupp group, to perform the design and construction works of an apartment building located in Lithuania Vilnius, at Saltiniu Namai residential building complex, in the amount of EUR 2.9 million.

Whereas the share of public procurements was still predominant among new construction contracts at the start of 2013, the private customer segment became more active in the construction markets of all three Baltic countries in the second half of 2013. Of the contracts signed in 2013, at 31 December close to half were connected to private contracting entities. The majority of the contracts signed in the first six months of the year were public tenders and the company did not manage to garner as much work from private sector customers as it had envisaged. It is the general construction segment that is seeing the stiffest competition and where competitors are making aggressive offers that the construction companies in the Merko Ehitus group have thus far not gone along with. As at 30 June 2014, the group’s secured order book was dominated by public sector orders, which made up nearly two-thirds of the portfolio. Considering the end of the previous EU funding period and the beginning phase of the current EU funding period, one can forecast continued decline in the volume of public procurements for 2014. In this respect, it continues to be a great challenge to maintain the group’s secured order book at the level of 2013 or growing it.

Traditionally the share of Estonian construction activity has been the highest in the group's revenues. Given the weak growth outlook of the Estonian construction market, the group's goal is to continue to look for construction orders from outside Estonia. Thus, we are closely monitoring the development and opportunities in the neighbouring markets. AS Merko Ehitus Eesti has selectively and on project basis started to participate in public procurements in Finland, Sweden and Norway in order to gain experience and sufficient knowledge in the qualification conditions, requirements established and risks associated in these countries.

 

Cash flows

The cash position of the group is stable. As at 30 June 2014 the group had cash equivalents in the amount of EUR 43.4 million (30.06.2013: EUR 31.3 million, and additionally EUR 2.5 million in short-term deposits with a maturity term of more than 3 months). Compared to the same period last year, the group's strategic cash level and investment capacity have strengthened.

The 6-month cash flow from operating activity was positive at EUR 6.6 million (6 months of 2013: positive EUR 3.2 million), cash flow from investing activity was negative at EUR 0.9 million (6 months of 2013: negative EUR 3.2 million) and the cash flow from financing activity was negative at EUR 9.0 million (6 months of 2013: negative EUR 3.9 million).

The cash flow from operating activity was mostly influenced by the operating profit EUR 5.0 million (6 months of 2013: EUR 5.1 million), by the positive change in receivables and liabilities related to construction contracts recognised under the stage of completion method EUR 6.0 million (6 months of 2013: positive change of EUR 4.1 million), by the negative change in provisions EUR 1.3 million (6 months of 2013: negative change of EUR 2.2 million), by the negative change in trade and other receivables related to operating activities EUR 3.9 million (6 months of 2013: negative change of EUR 16.2 million), by the negative change in inventory EUR 7.6 million (6 months of 2013: negative change of EUR 1.1 million), and by the positive change in trade and other payables related to operating activities EUR 8.0 million (6 months of 2013: positive change of EUR 13.1 million). The negative change in inventories is mainly due to the gradual completion of larger apartment developments (Grostonas 21 in Riga and Kentmanni 6 in Tallinnas), which is partially positively offset by prepayments received from pre-sales.

The group’s cash flows from operating activities continue to have contracts (incl. both government and private sector) with long payment terms (by contract, an average of 56 days after registered delivery of the work) and there is an persistent burden on working capital, including optimal management of cash flows. This is especially true, considering the increase in Latvian construction volumes and the need for additional working capital. To support cash flows arising from operating activity, the group has been prudent in raising additional external capital, including factoring. At the same time, the debt ratio has remained at a moderate level (14.0% as at 30.06.2014; 13.9% as at 30.06.2013).

Cash flows from investment activities include negative cash flow from the cash balance excluded from the group in connection with the sale of subsidiary Gustaf Tallinn OÜ in the amount of EUR 0.4 million, while the balance of non-current asset acquisition was EUR 0.6 million (6 months of 2013: EUR 0.5 million). Cash flows from investment activities in 6 months of 2013 was negatively impacted by the acquisition of short-term deposit with a maturity term of more than 3 months in the amount of EUR 2.5 million and by EUR 0.3 million in other investments. The group mainly invested in non-current assets for the purpose of renewing its fleet of machinery in the road construction segment.

The largest single negative item in cash flows from financing was the dividend payment of EUR 7.3 million and the premature repayment of a working capital loan in the amount of EUR 3.5 million, instead of which the group entered into an overdraft contract with an overall limit of EUR 3.5 million. Project specific loans obtained using investment property as collateral were repaid in the amount of EUR 0.3 million (6 months of 2013: negative cash flow of EUR 0.2 million), net of loans received and loans repaid in connection with development projects amounted to positive cash flow of EUR 2.8 million (6 months of 2013: negative cash flow of EUR 2.2 million), factoring in the amount of EUR 0.0 million (6 months of 2013: negative cash flow of EUR 0.4 million) and finance lease principal repayments of EUR 0.5 million (6 months of 2013: EUR 0.6 million). The group has not used bank loans to finance all of the ongoing development projects – and this is the case particularly in Estonia, where many advance sales were agreed in the early phase of construction.

The Q2 2014 cash flow from operating activity was negative at EUR 2.3 million (Q2 2013: negative EUR 1.9 million), cash flow from investing activity was negative at EUR 0.4 million (Q2 2013: negative EUR 0.5 million) and the cash flow from financing activity was negative at EUR 5.8 million (Q2 2013: positive EUR 0.4 million).

The quarterly cash flows from operating activities were negative primarily as a result of the need for working capital to cover large-scale development projects. Cash flow from operating activities was also impacted negatively by the acquisition cost of land plots for development activity and the realization of an option agreement for Rästa 18 land plot in Tallinn total in the amount of EUR 2.5 million.

Cash flows from investment activities was negative primarily due to the acquisition of non-current asset in the amount of EUR 0.5 million, which is mainly related to the renewal of equipment in the road construction segment.

Cash flow from financing activities included the dividend payment of EUR 7.3 million as an one-time negative cash flow, which was offset by the net positive cash flow of EUR 2.2 million of loans received and loans repaid to finance the construction costs of development projects.

 

Ratios

(attributable to equity holders of the parent)

    6M ‘14 6M ‘13 6M ‘12 Q2 ‘14 Q2 ‘13 Q2 ‘12 12M ‘13
Income statement summary                
Revenue million EUR 113.7 113.7 106.9 64.8 65.9 59.1 262.7
Gross profit million EUR 10.1 9.8 5.0 6.1 5.6 2.5 22.7
Gross profit margin % 8.9 8.6 4.7 9.5 8.5 4.3 8.6
Operating profit million EUR 5.0 5.1 1.1 3.7 2.8 0.5 12.3
Operating profit margin % 4.4 4.5 1.0 5.7 4.3 0.9 4.7
Profit before tax million EUR 4.7 4.5 0.8 3.6 2.6 0.4 11.1
EBT margin % 4.1 4.0 0.8 5.5 3.9 0.7 4.2
Net profit million EUR 4.2 4.0 0.5 3.6 2.2 0.4 10.4
attributable to equity holders of the parent million EUR 4.4 4.0 0.6 3.6 2.3 0.4 10.4
attributable to non-controlling interest million EUR (0.2) 0.0 (0.1) 0.0 (0.1) 0.0 0.0
Net profit margin % 3.8 3.6 0.5 5.6 3.5 0.7 4.0
                 
Other income statement indicators                
EBITDA million EUR 6.1 6.3 2.3 4.3 3.4 1.1 15.1
EBITDA margin % 5.4 5.5 2.2 6.6 5.2 1.9 5.7
General expense ratio % 5.1 5.0 4.6 4.4 4.7 4.2 4.7
Labour cost ratio % 12.6 12.8 11.4 11.7 12.3 10.9 11.8
Revenue per employee thousand EUR 144 130 118 82 75 65 308

 

Other significant indicators   30.06.2014 30.06.2013 30.06.2012 31.12.2013
Return on equity % 8.9 9.6 -5.3 8.8
Return on assets % 4.4 4.8 -2.7 4.4
Return on invested capital % 7.8 8.5 -3.3 8.0
Equity ratio % 48.8 48.8 48.5 50.9
Debt ratio % 14.0 13.9 17.6 14.8
Current ratio times 2.0 1.9 1.8 2.0
Quick ratio times 1.0 1.1 0.9 1.1
Accounts receivable turnover days 57 59 56 58
Accounts payable turnover days 38 46 48 43
Average number of employees people 791 878 903 853
Secured order book million EUR 191.6 184.4 233.2 213.7

 

Employees and labour costs

Compared to the same period last year, the number of group’s employees decreased by 92 (-9.8%) and as at 30 June 2014, the group had a total of 851 employees (including fixed-term and part-time employees). Compared to the end of the previous financial year the number of empolyees has decreased by 9 (-1.0%).

In 2014, the number of employees mainly declined because of the sale of subsidiary Gustav Tallinn OÜ, the change of the principal area of activity of subsidiary AS Gustaf, but also due to the proportion of the civil engineering segment declined within the work volumes of the group. On the other hand the number of employees had increased at the expense of seasonal workers mainly in road construction segment. In 2014, the reduction in the number of employees will continue due to the streamlining of the group corporate structure and the decrease in ownership interest in immaterial subsidiaries, however not materially.

The group’s objective is to pay its employees competitive salary. The interests of employees and the company are balanced by performance-based remuneration.

The group defines labour cost as salary (incl. fixed salary, additional pay (night work, overtime and public holidays), holiday pay and bonus), taxes based on salary, fringe benefits and taxes based on fringe benefits. In 6 months 2014, the labour cost was EUR 14.4 million (6 months 2013: EUR 14.6 million), down 1.3% from the previous year.

 

Share and shareholders

INFORMATION ON SECURITY
Issuer AS Merko Ehitus
Name of security Share of Merko Ehitus
Ticker MRK1T
Residency of issuer Estonia
Stock Exchange List NASDAQ OMX Tallinn, Baltic Main List
Industry Construction
ISIN EE3100098328
Nominal value without nominal value
Number of securities 17,700,000
Volume of issue 12,000,000
Currency EUR
Listing date 11.08.2008

The shares of Merko Ehitus are listed in the Main List of NASDAQ OMX Tallinn. As at 30 June 2014, the company has 17,700,000 shares. The number of shares has not changed during 2014.

A total of 1,098 transactions were conducted with the shares of Merko Ehitus in 6 months of 2014, with 0.68 million shares (3.8% of total shares) traded, generating a turnover of EUR 5.11 million (comparable figures in 6 months 2013 were accordingly: 1,051 transactions with 0.36 million shares traded (2.0% of total shares) and generating a turnover of EUR 2.45 million). The lowest share price amounted to EUR 6.96 and the highest to EUR 7.99 per share (6 months of 2013: EUR 5.71 and EUR 7.70). The closing price of the share was EUR 7.18 on 30 June 2014 (30.06.2013: EUR 6.44). As at 30 June 2014, the market value of AS Merko Ehitus amounted to EUR 127.1 million, which has risen 11.5% compared to the same period end last year (as at 30 June 2013: EUR 114.0 million).

  30.06.2014 30.06.2013 30.06.2012
Number of shares 17,700,000 17,700,000 17,700,000
Earnings per share (EPS), euros 0.25 0.23 0.03
Equity per share, euros 6.82 6.55 6.27
P/B ratio 1.05 0.98 0.99
P/E ratio 11.87 8.86 -18.68
Market value, million EUR 127.1 114.0 110.4

Structure of shareholders as at 30.06.2014

NUMBER OF SHARES NUMBER OF SHAREHOLDERS % OF SHAREHOLDERS NUMBER OF SHARES % OF SHARES
1,000,001 - … 1 0.07% 12,742,686 71.99%
100,001 – 1,000,000 10 0.70% 2,938,675 16.60%
10,001 – 100,000 33 2.31% 994,872 5.62%
1,001-10,000 232 16.25% 692,322 3.91%
101-1,000 742 51.96% 309,324 1.75%
1-100 410 28.71% 22,121 0.13%
Total 1,428 100% 17,700,000 100%

Shareholders of AS Merko Ehitus as at 30.06.2014 and change compared to the previous quarter

  Number of shares % of total 30.06.2014 % of total 31.03.2014 Change
AS Riverito 12,742,686 71.99% 71.99% -
ING Luxembourg S.A. AIF Account 974,126 5.50% 5.50% -
Skandinaviska Enskilda Banken S.A. 479,527 2.71% 2.72% -1,852
Skandinaviska Enskilda Banken AB, Swedish customers 305,060 1.72% 1.72% -
Firebird Republics Fund Ltd 302,395 1.71% 1.71% -
Firebird Avrora Fund Ltd 170,000 0.96% 0.32% +114,226
State Street Bank and Trust Omnibus Account a Fund No OM01 153,018 0.86% 0.86% -
SEB Elu- ja Pensionikindlustus AS 148,020 0.84% 0.84% -
Clearstream Banking Luxembourg S.A. customers 143,652 0.81% 0.80% +2,600
Skandinaviska Enskilda Banken AB, Finnish customers 131,692 0.74% 0.75% -705
Total largest shareholders 15,550,176 87.84% 87.21% +114,269
Total other shareholders 2,149,824 12.16% 12.79% -114,269
Total 17,700,000 100% 100% -

 

Dividends and dividend policy

The distribution of dividends to the shareholders of the company is recorded as a liability in the financial statements as of the moment when the payment of dividends is approved by the company’s shareholders.

At the meeting held on 8 April 2013, the Management Board and Supervisory Board of AS Merko Ehitus reviewed the company’s strategic development trends and approved the long-term financial objectives until 2018, under which a new objective of paying the shareholders 50-70% of the annual profit as dividends was established. The achievement of this objective is an important priority for the group.

The annual general meeting of shareholders of AS Merko Ehitus held at 30 April 2014 approved the Supervisory Boards proposal to pay the shareholders the total amount of EUR 7.3 million (EUR 0.41 per share) as dividends from net profit brought forward, which is equivalent to a 70% dividend rate and a 5.7% dividend yield for the year 2013 (using the share price as at 31 December 2013).

According to the Estonian Income Tax Law §50 section 11 AS Merko Ehitus can pay these dividends without any additional income tax expense and liabilities occruing due to previously received and taxed distribution of profits from subsidiaries. The dividend payment to the shareholders took place on 20 May 2014.

In 2013 the total amount of EUR 5.3 million (EUR 0.30 per share) was paid to shareholders as dividends, which is equivalent to a 70% dividend rate and a 5.1% dividend yield for the year 2012 (using the share price as at 31 December 2012).

 

Corporate governance and structure

AS Merko Ehitus operates as a holding company whose companies in Estonia, Latvia and Lithuania offer complete solutions in the field of construction and real estate development. In the construction sector, the group’s largest companies are AS Merko Ehitus Eesti (100%), SIA Merks (100%), UAB Merko Statyba (100%) and the companies belonging to the AS Merko Ehitus Eesti group: Tallinna Teede AS (100%) and AS Merko Infra (100%).

The main activity of the holding company is development and implementation of the strategies of Merko Ehitus group’s separate business areas primarily through long-term planning of resources. The holding company AS Merko Ehitus has a two-member Management Board: Andres Trink and Tõnu Toomik.

It is important to maintain a simple organisational structure in the group and in management to be guided primarily by the group's objectives and requirements. For the purposes of maximum efficiency in the group management, we in some cases differentiate the management structure and legal structure. The groups management is carried out on a country basis.

Changes in the legal structure of the group

In 2014, AS Merko Ehitus has decided to streamline its group companies' structure to improve management effectiveness and produce administrative cost savings. As part of the action plan, ownership interests of insignificant subsidiaries are reviewed and potential mergers or disposals are decided. The action plan does not concern material subsidiaries of the group and does not have a material near-term effect on the group's financial results. First changes are under way and the implementation of the action plan will continue in 2014.

On 20 December 2013, AS Merko Ehitus initiated a process to merge its fully owned subsidiaries OÜ Woody, OÜ Metsailu and OÜ Käibevara, all engaged in real estate development, in order to have savings in administrative cost related to company management. The acquiring company is OÜ Metsailu. The companies being acquired will be merged into OÜ Metsailu and as a result of the merger the companies being acquired will wind up without liquidation proceedings and OÜ Metsailu will become the legal successor of the companies being acquired. As a result of the merger, AS Merko Ehitus will remain the sole shareholder in OÜ Metsailu, the acquiring company. The closing date of the merger was 1 January 2014 after which all transactions of the acquirees have been deemed to have been made on account of the acquirer. The final merger entry was made in the Commercial Register on 6 June 2014.

On 15 January 2014, a subsidiary of AS Merko Ehitus group, AS Merko Ehitus Eesti, signed an agreement for the transfer of its entire 80% holding in the subsidiary Gustaf Tallinn OÜ to the current co-shareholder and member of the management board Tiit Pomerants. The share capital of Gustaf Tallinn OÜ is EUR 23,967 of which the holding of AS Merko Ehitus Eesti with a nominal value of EUR 19,174 comprises 80% and the holding of Tiit Pomerants with a nominal value of EUR 4,793 made up 20%. The holding was transferred with the purpose of re-arranging the structure of the group companies and reducing holdings in non-significant subsidiaries. The principal area of activity of the construction company Gustaf Tallinn OÜ is construction and finishing work and the company offers prime contractor service for smaller renovations and repair jobs, which are not one of the strategically significant principal areas of activity of the AS Merko Ehitus group. On 15 January 2014, the buyer paid the seller EUR 20,000. The final sales price was 17,201 euros, which was calculated in accordance with the audited 2013 annual report of Gustaf Tallinn OÜ on the basis of the share of equity held by AS Merko Ehitus Eesti, adjusted by dividend payment of EUR 960 000 paid to the seller before transfer of the share as well as by the income tax expense of EUR 255 190 related to the paid dividend. On 2 May 2014, the seller returned the adjusted part of the sales price EUR 2,799 to the buyer’s bank account.

As a result of the sale of the ownership interest and the subsequent deconsolidation of Gustaf Tallinn OÜ, the estimated impact on the consolidated profit of AS Merko Ehitus group is EUR 0, the negative impact on assets and liabilities is EUR 967 thousand and EUR 945 thousand, respectively.

On 22 January 2014, fully owned subsidiary of AS Merko Ehitus, UAB Merko Bustas, formed a fully owned subsidiary in Lithuania, UAB VPSP 1 with a share capital of LTL 10,000 (EUR 2,896). The subsidiary was initially formed to participate in public-private partnership (PPP) procurements organised by the Lithuanian government and later changed to acquiring registered immovables for development purposes in Lithuania.

On 13 June 2014, fully owned subsidiary of AS Merko Ehitus, AS Merko Ehitus Eesti formed a 50% joint venture in Estonia, Kivimäe 32 OÜ with a share capital of EUR 2,600. The joint venture was formed to acquire a property for development in Tallinn, Estonia.

On 31 July 2014, a subsidiary of AS Merko Ehitus group, AS Merko Ehitus Eesti, signed an agreement for the transfer of 7,5% holding in the subsidiary AS Gustaf from the current co-shareholders and members of the management board Raigo Jaanuste and Ago Randorg. After the acquisition of the minority share, AS Gustaf became a 100% subsidiary of AS Merko Ehitus Eesti. The holding was acquired with the purpose of re-arranging the structure of the group companies. The principal area of activity of the construction company AS Gustaf was general contracting of construction, mainly in the western and southern regions of Estonia. Following the acquisition of 100% shares in AS Gustaf, the principal area of activity of the company will be changed to real estate development. On 1 August 2014, AS Merko Ehitus Eesti paid the sellers 95% of the shares sales price of EUR 89,058. The final sales price will be calculated in accordance with the audited 2015 annual report of AS Gustav, on the basis of the designated equity. AS Merko Ehitus Group considers the additional influence of adjustments of the sales price to be immaterial.

On 5 August 2014, a subsidiary of AS Merko Ehitus group, SIA Merks, signed an agreement for the transfer of 25% holding (275 thousand shares) in the joint venture SIA Zakusala Estates from the current co-shareholder Tritan Group AS. After the acquisition of the majority share, SIA Zakusala Estates will become a 75% subsidiary of SIA Merks. The additional 25% holding was acquired with the purpose of gaining a greater control over the assets and the management of SIA Zakusala Estates. The principal area of activity of the real estate company SIA Zakusala Estates is the development of approximately 126 thousand square meters land located on the island Zakusala on Daugava river in Riga. With the increased control the group will be better positioned to lead the overall future development of the project. This is a long term investment for AS Merko Ehitus group. According to the agreement SIA Merks will pay for the additional 25% holding the purchase prices of EUR 696,273, by assigning the corresponding part of a loan given by SIA Merks to SIA Zakusala Estates, to AS Tritan Group.

Changes in the management structure of the group

In conjunction with a streamlining of the management structure, there was a change on 7 March 2014 in the composition of the Management Board of AS Merko Ehitus Eesti, a 100% subsidiary of AS Merko Ehitus. Andres Agukas, the Member of the Management Board was recalled. The Management Board will continue with four members:  Tiit Roben (The Chairman), Jaan Mäe, Veljo Viitmann and Alar Lagus.

As a result of the departure of Andres Agukas, the composition of the Supervisory Boards of AS Merko Infra and Tallinna Teede AS, subsidiaries of the AS Merko Ehitus Eesti group, was changed. Effective 7 March 2014, Tiit Roben was appointed as Chairman of the Supervisory Board of AS Merko Infra to replace Andres Agukas. The Supervisory Board will continue with three members: Tiit Roben (Chairman), Veljo Viitmann and Mihkel Mugur. The Supervisory Board of Tallinna Teede AS will continue with three members after the departure of Andres Agukas: Tiit Roben (The Chairman), Alar Lagus and Veljo Viitmann.

The Supervisory Board of AS Merko Infra, a 100% subsidiary AS Merko Ehitus Eesti and with ultimate parent AS Merko Ehitus, decided to appoint Boris Tehnikov as an additional member of the Management Board and to elect the current member, Arno Elias, as the Chairman of the Management Board of AS Merko Infra as of 2 April 2014. The Management Board of AS Merko Infra will continue with three members: Arno Elias (The Chairman), Tarmo Pohlak and Boris Tehnikov.

AS Merko Ehitus board decided to recall a member of the Supervisory Board of UAB Merko Statyba Jaan Mäe and appoint Signe Kukin as the new member of the Supervisory Board as of 2 April 2014. The Supervisory Board will continue with three members: Andres Trink (The Chairman), Tõnu Toomik and Signe Kukin.

OÜ Merko Investments, part of AS Merko Ehitus group, which has 100% holding in SIA Merks, board decided to recall a member of the Supervisory Board of SIA Merks Jaan Mäe and appoint Signe Kukin as the new member of the Supervisory Board as of 2 April 2014. The Supervisory Board will continue with three members: Andres Trink (The Chairman), Tõnu Toomik and Signe Kukin.

On 30 July 2014, the Supervisory Board of Tallinna Teede AS – the subsidiary of AS Merko Ehitus Eesti, part of AS Merko Ehitus group – decided to extend the powers of the Chairman of the Management Board, Jüri Läll for three years, i.e. till 30 July 2017. The Management Board of Tallinna Teede AS will continue with two members: Jüri Läll (The Chairman) and Jüri Helila.

On 31 July 2014, the Supervisory Board of AS Merko Ehitus Eesti, part of AS Merko Ehitus group, decided to extend the powers of the Member of the Management Board, Alar Lagus for three years, i.e. till 31 July 2017. The Management Board of AS Merko Ehitus Eesti will continue with four members: Tiit Roben (The Chairman), Jaan Mäe, Veljo Viitmann and Alar Lagus.

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited

in thousand euros

  2014
 6 months
2013
6 months
2014
 II quarter
2013
II quarter
2013
 12 months
Revenue 113,701 113,743 64,833 65,884 262,719
Cost of goods sold (103,622) (103,918) (58,690) (60,294) (239,996)
Gross profit 10,079 9,825 6,143 5,590 22,723
Marketing expenses (1,509) (1,391) (655) (735) (3,041)
General and administrative expenses (4,292) (4,339) (2,172) (2,383) (9,260)
Other operating income 837 1,218 431 510 2,264
Other operating expenses (83) (186) (33) (142) (425)
Operating profit 5,032 5,127 3,714 2,840 12,261
Finance income/costs (337) (614) (157) (281) (1,116)
incl. finance income/costs from joint ventures (70) (70) (36) (36) (138)
finance income/costs from other long-term investments 1 23 1 10 2
interest expense (333) (416) (155) (206) (814)
foreign exchange gain (loss) (1) (167) - (57) (202)
other financial income (expenses) 66 16 33 8 36
Profit before tax 4,695 4,513 3,557 2,559 11,145
Corporate income tax expense (482) (521) 40 (327) (791)
Net profit for financial year 4,213 3,992 3,597 2,232 10,354
incl. net profit attributable to equity holders of the parent 4,360 4,050 3,649 2,284 10,399
net profit attributable to non-controlling interest (147) (58) (52) (52) (45)
Other comprehensive income          
Currency translation differences of foreign entities - (148) - (7) (157)
Comprehensive income for the period 4,213 3,844 3,597 2,225 10,197
incl. net profit attributable to equity holders of the parent 4,360 3,902 3,649 2,277 10,242
net profit attributable to non-controlling interest (147) (58) (52) (52) (45)
Earnings per share for profit attributable to equity holders of the parent (basic and diluted, in EUR) 0.25 0.23 0.21 0.13 0.59

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited

in thousand euros

  30.06.2014 30.06.2013 31.12.2013
ASSETS      
Current assets      
Cash and cash equivalents 43,434 31,329 46,633
Short-term deposits - 2,500 -
Trade and other receivables 63,850 71,853 57,172
Prepaid corporate income tax 26 33 19
Inventories 95,223 83,844 87,451
  202,533 189,559 191,275
Non-current assets      
Long-term financial assets 20,890 25,949 27,415
Deferred income tax assets 1,592 1,817 1,592
Investment property 4,556 3,418 4,672
Property, plant and equipment 13,242 14,624 13,117
Intangible assets 1,095 1,276 1,167
  41,375 47,084 47,963
       
TOTAL ASSETS 243,908 236,643 239,238
       
LIABILITIES      
Current liabilities      
Borrowings 15,298 12,854 18,916
Payables and prepayments 82,043 80,777 72,162
Income tax liability 54 115 62
Short-term provisions 5,457 4,053 5,906
  102,852 97,799 97,046
Non-current liabilities      
Long-term borrowings 18,904 19,992 16,469
Deferred income tax liability 614 406 505
Other long-term payables 1,770 1,743 2,162
  21,288 22,141 19,136
       
TOTAL LIABILITIES 124,140 119,940 116,182
       
EQUITY      
Non-controlling interests 802 1,180 1,193
Equity attributable to equity holders of the parent      
Share capital 12,000 12,000 12,000
Statutory reserve capital 1,200 1,200 1,200
Currency translation differences (669) (660) (669)
Retained earnings 106,435 102,983 109,332
  118,966 115,523 121,863
TOTAL EQUITY 119,768 116,703 123,056
       
TOTAL LIABILITIES AND EQUITY 243,908 236,643 239,238

 

Interim report and the investor presentation are attached to the announcement and are also published on NASDAQ OMX Tallinn and Merko’s web page (group.merko.ee).

AS Merko Ehitus (group.merko.ee) comprises the leading Estonian construction company AS Merko Ehitus Eesti, the Latvian market based SIA Merks and the Lithuanian market based UAB Merko Statyba as well as the group’s real estate development business unit together with companies holding real estate properties. As at the end of 2013, the group employed 860 people and the 2013 revenue amounted to EUR 262.7 million.

 

Signe Kukin
Group CFO
AS Merko Ehitus
+372 650 1250
signe.kukin@merko.ee