Tallinn, Estonia, 2015-08-06 07:00 CEST (GLOBE NEWSWIRE) --
COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD
Sales revenue for Merko Ehitus group for 6 months rose to EUR 116.2 million and the second quarter figure reached EUR 70.6 million, which was significantly influenced by an increasingly active real estate segment and the growth of Latvian and Lithuanian construction service revenue. The share of construction service revenue earned outside Estonia rose to 31% in the first half-year. The management is pleased of the launche of the first electrical engineering project in the Latvian electrical construction market, where we entered last year, and also that in the second quarter the first construction contract of sizeable volume was signed in Finland.
The group’s management is satisfied with the volume of new construction contracts signed in the second quarter in Estonia, yet maintaining and growing the contract portfolio will continue to be a big challenge for construction companies as the competition is tight and the market is price-sensitive, due to which major risks are being taken in bidding on contracts. The group’s focus continues to lie on offering a comprehensive selection of design and construction services, we’re glad that most of the contracts from the last quarter are design-build contracts signed with private customers. In a number of the cases, it should be noted that the actual construction activity will go ahead only in 2016, and the design and engineering must be tackled first. At the same time the management is not satisfied with the profitability during the first half of the year, which was impacted negatively by additional income tax expense and lower margin from real estate development projects as the group sold some apartments in projects with lower return that were started at a time in order to create the basis for improving future return on capital. Achieving last year’s profitability will not be easy, considering also that there are no similar volumes of civil engineering projects compared to last year.
The gross profit margin for Merko Ehitus in the second quarter was 7.6% and profit before tax was EUR 2.7 million, with the respective six-month figures being 7.7% and EUR 3.6 million. The company earned EUR 1.6 million in net profit in second quarter and EUR 2.4 million in 6 months. Net profit was influenced by EUR 0.9 million in additional income tax expense in Estonia on dividends paid to shareholders.
Revenue in the field of real estate development has grown according to plan – revenue increased by 57% during the first six months and the share of group’s total revenues to 28%. The group has launched several apartment development projects this year and is engaged in preparations for new ones, including the Noblessner residential district to be developed in cooperation with BLRT Group. The sales results show that even with the active supply on the Baltics’ apartment market, there is still demand for quality residential space developed, built and sold by Merko. Yet the supply of new apartments has continued to grow, above all in Tallinn and Vilnius, and thus we’re constantly monitoring the market and considering the possibility that sales periods may become longer in the future.
In the Baltics in 6 months 2015, Merko sold 168 apartments with a total price of EUR 31.7 million; and the corresponding figures for second quarter alone were 106 apartments and EUR 20.9 million (amounts not including VAT). Revenue in the real estate development sector grew 57% in the 6 months, which was influenced by sales transactions involving apartments in a development project more exclusive than the average. This year the company has launched construction of a total of 335 apartments (6 months 2014: 136 apartments), including ones in Tallinn city centre (Tartu mnt 52) in the Kalamaja district (Jahu tn 1a), Paepargi (Perepargi), Tartu rural municipality (Kaupmehe street) and downtown Vilnius, Lithuania (Krokuvos 73).
OVERVIEW OF THE 6 MONTHS AND II QUARTER RESULTS
PROFITABILITY
Profit before tax in 6M 2015 was EUR 3.6 million (6M 2014: EUR 4.7 million), which is equivalent to a profit before tax margin of 3.1% (6M 2014: 4.1%). Gross margin in 6M was 7.7% (6M 2014: 8.9%), which has decreased by 13.2% compared to the same period last year. Q2 2015 profit before tax was EUR 2.7 million (Q2 2014: EUR 3.6 million). Net margin in 6M 2015 decreased to 2.1% (6M 2014: 3.8%) and net profit was EUR 2.4 million (6M 2014: EUR 4.4 million), having decreased by 44.5% compared to the same period last year. Q2 net profit was EUR 1.6 million (Q2 2014: EUR 3.6 million).
REVENUE
Revenue in 6M 2015 was EUR 116.2 million (6M 2014: EUR 113.7 million), which has increased by 2.2% compared to the same period last year. Q2 revenue was EUR 70.6 million (Q2 2014: EUR 64.8 million). The share of construction service revenue earned outside of Estonia has incresed in 6M 2015 to 31.4% (6M 2014: 24.4%) and the number of apartments sold in 6 months of 2015 (168 pcs, revenues of EUR 31.7 million) has decreased by 15.2% (6 months of 2014: 198 apartments, revenues of EUR 18.6 million), while the revenue from apartment sales has increased by 71.2%.
CASH POSITION
At the end of the reporting period, the group had EUR 24.4 million in cash and cash equivalents and equity EUR 122.2 million (54.3% of total assets). Comparable figures as at 30 June 2014 were accordingly EUR 43.4 million and EUR 119.0 million (48.8% of total assets). As at 30 June 2015 the group had net debt of positive EUR 10.7 million (30 June 2014: negative EUR 9.2 million).
SECURED ORDER BOOK
In Q2 2015, group companies signed new contracts in the amount of EUR 98.9 million (Q2 2014: EUR 21.7 million). 6M 2015 new contracts signed in amount of EUR 121.3 million (6M 2014: EUR 70.3 million). As at 30 June 2015, the group’s secured order book stood at EUR 217.2 million (30 June 2014: EUR 191.6 million).
| 6M ‘15 | 6M ‘14 | Variance | Q2 ‘15 | Q2 ‘14 | Variance | 12M ‘14 | ||
| Revenue | million EUR | 116.2 | 113.7 | +2.2% | 70.6 | 64.8 | +8.9% | 252.3 |
| Gross profit | million EUR | 8.9 | 10.1 | -11.3% | 5.4 | 6.1 | -12.5% | 24.7 |
| Gross profit margin | % | 7.7 | 8.9 | -13.2% | 7.6 | 9.5 | -19.6% | 9.8 |
| EBITDA | million EUR | 5.6 | 6.1 | -9.3% | 3.7 | 4.3 | -13.6% | 16.4 |
| EBITDA margin | % | 4.8 | 5.4 | -11.2% | 5.2 | 6.6 | -20.7% | 6.5 |
| Profit before tax | million EUR | 3.6 | 4.7 | -23.9% | 2.7 | 3.6 | -23.1% | 13.3 |
| PBT margin | % | 3.1 | 4.1 | -25.6% | 3.9 | 5.5 | -29.4% | 5.3 |
| Net profit (parent) | million EUR | 2.4 | 4.4 | -44.5% | 1.6 | 3.6 | -55.9% | 12.4 |
| Net profit margin | % | 2.1 | 3.8 | -45.7% | 2.3 | 5.6 | -59.5% | 4.9 |
| EPS | EUR | 0.14 | 0.25 | -44.5% | 0.09 | 0.21 | -55.9% | 0.70 |
| 30.06.2015 | 30.06.2014 | Variance | 31.12.2014 | ||
| ROE (on yearly basis) | % | 8.4 | 8.9 | -5.4% | 10.1 |
| Equity ratio | % | 54.3 | 48.8 | +11.2% | 51.0 |
| Secured order book | million EUR | 217.2 | 191.6 | +13.3% | 179.1 |
| Total assets | million EUR | 225.2 | 243.9 | -7.7% | 249.3 |
| Number of employees | people | 825 | 851 | -3.1% | 765 |
OPERATING RESULTS
Revenue and gross profit
Merko Ehitus group generated a total of EUR 116.2 million in revenue in 6 months of 2015 (6 months of 2014: EUR 113.7 million). 40.6% of the revenue was generated in Estonian construction service, 31.4% in Latvian and Lithuanian construction service and 28.0% in and real estate development segment (6 months of 2014: 57.4% in Estonian construction service, 24.4% in Latvian and Lithuanian construction service and 18.2% in real estate development segment). Compared to the 6 months of 2014 the group revenue has increased by 2.2%. Compared to the 6 months of the previous year in the 6 months of 2015 the share of Latvian and Lithuanian construction service revenue in the group’s revenue has increased from 24.4% to 31.4%. Revenue in Q2 2015 was EUR 70.6 million, which has increased 8.9% compared to the previous year (Q2 2014: EUR 64.8 million).The main changes in the revenue structure compared to the same period last year, can mainly be attributed to increase in revenue of projects pursued in the Latvian and Lithuanian construction service and real estate development segments. At the same time there has been a reduction in sales revenue from Estonian construction service segment, which is primarily due to the end of major projects financed from EU structural funds and the reduced project volumes. This trend has been similar and anticipated since the beginning of 2014.
In 6 months of 2015 the group’s gross profit from development and construction activities totalled EUR 8.9 million (6 months of 2014: EUR 10.1 million) and in Q2 2015 EUR 5.4 million (Q2 2014: EUR 6.1 million). The 6 months gross profit margin (7.7%) has decreased by 1.2 pp compared to the same period last year (6 months of 2014: 8.9%). Maintaining the stability of profit margins during the 6 months of 2015 in the Estonian construction service segment has been vital for the group, despite the decline in sales volumes, the profitability has been supported by the slight decrease in input prices, which may not necessarily continue over the whole of 2015. Gross profit margin has also been impacted by the reduced profitability in the real estate development segment, which depends largely on the price of the land as part of the total specific project expenses and is thus different on a project basis. 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. The number of companies participating in tenders and the risk of low pricing bids is high in all three Baltic states.
Profit before tax and net profit
In 6 months of 2015, the group’s profit before tax totalled EUR 3.6 million and net profit attributable to equity holders of the parent was EUR 2.4 million as compared to the pre-tax profit or EUR 4.7 million and net profit attributable to equity holders of the parent of EUR 4.4 million in 6 months of 2014. The 6 months of 2015 group’s higher than usual additional income tax expense in the amount of EUR 0.9 million was incurred in connection with the announcement and disbursement of dividends. The 6 months of 2014 higher tax expense was affected besides the ordinary Latvian and Lithuanian income tax by the income tax expenses on the dividends received from OÜ Gutsaf Tallinn in the amount of EUR 0.3 million, which increased the comparison base as an extraordinary one-off item. Group’s profit before tax margin was 3.1% (6 months of 2014: 4.1%) and the net profit margin was 2.1% (6 months of 2014: 3.8%). Both the group’s profit before tax (EUR 3.6 million) and the profit before tax margin (3.1%) have decreased compared to the same period last year (6 months of 2014: EUR 4.7 million and 4.1%, respectively).
In Q2 of 2015, the group’s pre-tax profit totalled EUR 2.7 million and net profit was EUR 1.6 million as compared to the pre-tax profit of EUR 3.6 million and net profit of EUR 3.6 million in Q2 of 2014. Similarily to the 6 months of 2015, also both the group’s quarterly profit before tax (EUR 2.7 million) and the quarterly profit before tax margin (3.9%) have decreased compared to the same period last year (Q2 2014: EUR 3.6 million and 5.5%, respectively).
In the second quarter of 2015, the group paid EUR 7.3 million in dividends, which incurred additional income tax expense in the amount of EUR 0.9 million. The situation in the second quarter of 2014 was alike, when the group paid EUR 7.3 million in dividends, with the exception that then the group incurred no additional income tax expense in connection with previously received and taxed distribution of profits from subsidiaries.
Business segments
The group operates mainly in Estonian, Latvian and Lithuanian market through its subsidiaries and depending on the country provide construction services and real estate development services across the following business segments: Estonian construction service (incl. construction services in Finland), Latvian and Lithuanian construction service and real estate development.
As of 21 April 2015, the management board of AS Merko Ehitus decided to change the segment reporting structure in the group’s financial reports and harmonise it with the group’s new internal reporting structure, which corresponds to the group’s country-based management structure and takes into account the changes in the operational volumes of business segments.
As a result of the change, instead of the previous five segments presented (general construction, civil engineering, road construction, real estate development and other segments), the group will start submitting segment reporting from the current period in the following three segments: Estonian construction service, Latvian and Lithuanian construction service and Real estate development.
As a result of the change the operating segments presented in the group’s external financial reporting structure are grouped together according to the requirements applicable to disclosure of operating segments pursuant to the conditions specified in the International Financial Reporting Standards (IFRS 8).
Estonian construction service (incl. construction services in Finland) and Latvian and Lithuanian construction service segments include all projects of the respective countries pertaining to construction services:
- 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. In the field of general construction the group operates in all three Baltic countries.
- The civil engineering pürojects the group constructs include 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. In this area the group operates in Estonia and Latvia.
- In the road construction division, the group carries out road construction and builds the associated infrastructure, road maintenance and maintenance repair. In the area or road construction the group operates only in Estonia.
Real estate development is based on the development of real estate in the ownership of the group, encompassing development of apartment projects, long-term investments into real estate and real estate projects executed for business purposes, and to a minor extent also real estate maintenance and lease. In this segment, similarly to before, the group recognises projects being developed in all of the different countries.
Estonian construction service
In the 6 months of 2015, the revenue of the Estonian construction service segment was EUR 47.2 million (6 months of 2014: EUR 65.3 million), having decreased by 27.7% from the same period last year. The 6 months revenue also includes revenue from the Finnish pile works project in the amount of EUR 0.8 million. The decrease of revenues is largely due to the fact that in the first six months of 2015, the group did not have large-scale projects in progress as it did in the same period of the previous year (such as the Tondiraba Ice Arena and the Vääna-Jõesuu and Narva-Jõesuu water supply and sewerage system renovation projects). In this segment, the group earned a gross profit of EUR 4.3 million for 6 months (6 months of 2014: EUR 5.4 million). The Estonian construction service segment revenues for 6 months 2015 were 40.6% of the group’s revenue, forming the largest proportion in the group’s revenue, but still having decreased by 29.3%.
In 6 months of 2015, the gross margin of the Estonian construction service segment was 9.2%, which increased by 11.6% compared to the 6 months of 2014 (8.2%). In light of the close competition on the Estonian construction services market and the drop in volumes of work for nearly all market participants, we consider this as a good result, which is mainly due to improvement of internal efficiencies in project management. Due to the decrease in public procurement volumes, above all in civil engineering, we continue to monitor closely the changes in volumes of all projects in progress, in order to maintain as effective cost base as possible for the purpose of responding to additional market changes.
Latvian and Lithuanian construction service
The revenue of the Latvian and Lithuanian construction service segment amounted to EUR 36.5 million in the 6 months of 2015 (6 months of 2014: EUR 27.8 million), which is 31.5% more than in the 6 months of 2014. If the Latvian and Lithuanian construction service segment revenues of 6 months of 2014 formed 24.4% of the group’s revenue, then during 6 months of the current year the segments revenues have increased to 31.4%. This proportional increase was expected, especially given the knowledge that group’s continued focus has been on increasing the revenues outside Estonia. The 6 month gross profit of the Latvian and Lithuanian construction service segment amounted to EUR 1.5 million (6 months of 2014: EUR 1.0 million) and the gross profit margin was 4.2% (6 months of 2014: 3.5%), which increased by 19.3% compared to the same period previous year.
Real estate development
The group sold a total of 168 apartments in 6 months of 2015 at the total value of EUR 31.7 million (excl. VAT), compared to 198 apartments and EUR 18.5 million in 6 months of 2014. In Q2 of 2015 a total of 106 apartments were sold at the total value of EUR 20.9 million (excl. VAT), (Q2 2014: 99 apartments and EUR 9.5 million). In 6 months of 2015, the group has earned EUR 0.2 million of revenue from the sale of immovable properties (6 months of 2014: EUR 1.4 million). Despite a lower number of apartments sold and a lower sales revenue of immovable properties, 6 months real estate development segment revenues have increased 57.4% compared to the same period last. The growth is primarily influenced by sales of apartments in more exclusive developments where the sales price per apartment is higher than the apartments sold last year during the same period. The share of revenue from the real estate development segment also increased as anticipated in the 6 months to 28.0% of the group’s total revenue (6 months of 2014: 18.2%). The overall increase in the real estate development segment volumes has been planned and occasioned by the strategic decisions made already in 2012 to increase the segment’s investments into various new real estate development projects.
The 6 month gross profit of the segment amounted to EUR 3.1 million (6 months of 2014: EUR 3.7 million) and the gross profit margin was 9.5% (6 months of 2014: 18.1%), which decreased by 47.6% compared to the same period previous year. The profitability of the apartment development projects varies by project and depends greatly on the cost structure of the specific project, incl. the land acquisition price. In addition, the gross profit obtained from sales of the immovable property during 2014 makes up an important part of the 6-month comparison base with previous year.
At the end of the period, Merko Ehitus group’s inventory comprised 215 apartments where a preliminary agreement had been signed: 63 completed apartments (10 in Estonia and 53 in Latvia) and 152 apartments under construction (127 in Estonia and 25 in Lithuania). The sale of these apartments had not yet been finalised and delivered to customers, because the development site is still under construction or the site was completed at the end of the reporting period and the sales transactions have not all been finalised yet.
As at 30 June 2015, Merko Ehitus group had a total of 467 apartments for active sale (as at 30 June 2014: 234 apartments), for which there are no pre-sale agreements and of which 89 have been completed (18 in Estonia, 69 in Latvia and 2 in Lithuania) and 378 are under construction (229 in Estonia, 139 in Lithuania and 10 in Finland).
In 6 months of 2015, we launched the construction of a total of 335 new apartments in the Baltic States (6 months of 2014: 136 apartments) – including the first stage of Tartu mnt 52 development project, the preparation works of which took place in 2014. In the 6 months of this year, the group has invested a total of EUR 19.1 million in new development projects launched in 2015 as well as projects already in progress from previous year.
We will continue to invest in residential real estate projects and depending on the apartment market developments in 2015, the group plans to launch the construction of approximately 450-500 new apartments in the Baltic States (2014: construction of 369 new apartments launched). In 2015, the group’s planned investments in both development projects initiated in the previous years and new projects to be launched in 2015 will be in the range of EUR 45-50 million (2014: EUR 46.9 million invested).
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. At 31 March 2015, the group's inventories included land with development potential of EUR 59.4 million (30.06.2014: EUR 38.1 million; 31.12.2014: EUR 55.2 million).
In the 6 months of 2015, the group has purchased new land plots in Estonia at an acquisition cost of EUR 6.6 million (6 months of 2014: EUR 1.2 million). Also in the first quarter, the group signed a notarised contract of sale of registered immovables, under which all of the real estate governed by an option agreement were realised for total of EUR 4.0 million. Similarly in the second quarter of 2014, the group realized an option agreement to acquire the Rästa 18 land plot in Tallinn. The group is searching for new land plots for real estate development purposes primarily in Estonian and Lithuania. On 23 April 2015, AS Merko Ehitus group 50% joint venture Kalaranna Arenduse OÜ additionally signed a contract for the acquisition of approximately 1.7 hectares of land in the Noblessner quarter, an historically prestigious industrial area with great potential, for development purpose.
Secured order book
As at 30 June 2015, the group’s secured order book (without own developments) amounted to EUR 217.2 million as compared to EUR 191.6 million as at 30 June 2014. The secured order book excludes the group's own residential development projects and construction work related to developing real estate investments.
In second quarter of 2015, EUR 98.9 million worth of new contracts were signed (without own developments) as compared to EUR 21.7 million in same period last year. The value of new contracts signed (without own developments) in the 6 months of 2015 amounted to EUR 121.3 million (6 months of 2014: EUR 70.3 million).
After the balance sheet date, on 10 July 2015, UAB Merko Statyba – a subsidiary of AS Merko Ehitus – signed a contract with GE WIND ENERGY GmbH to perform the construction works of 24 reinforced concrete foundations for wind turbine generators in Šilute wind farm in Lithuania. The value of the contract is approximately EUR 6.5 million. The works are scheduled for completion in November 2015.
Of the contracts signed in the 6 months of 2015, private sector orders accounted for the majority proportion, which is also represented in the group’s secured order book as at the end of the reporting period, where private sector orders from projects in progress constitute already more than 3/4 (as at 31.12.2014 approximately 1/2). The group will continue to focus on comprehensive design and construction contracts. In this regard, three important contracts were signed in Estonia in the last quarter, although it should be noted that for the most part, the actual construction activity on these projects will largely start only in 2016.
Since a large proportion of new contracts signed since the beginning of the year is coming from one single contract, the total level of contracts signed with private customers is below expectations. In particular, the buildings construction segment is seeing the stiffest competition, and is where competitors are making aggressive offers, incurring risks for both customers and contractors. Considering the end of the previous EU funding period and the beginning phase of the current EU funding period, one can forecast the volume of public procurements to stay at the previous years level or even a slight decline for 2015. We forecast that the volume of public procurements will start to increase at the end of 2015 or at the beginning of 2016. In this respect, it continues to be a great challenge to maintain the group’s secured order book at the level of 2014 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 increase the volume of construction orders from outside Estonia. Thus, we will continue to identify the groups competitive advantages and are closely monitoring the development and opportunities both in the Baltic States and the Nordic countries. Starting from 2014 AS Merko Ehitus Eesti has selectively and on project basis started to participate in 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. The group has set the goal of earning real sales revenue from new markets starting in 2015-2016.
Cash flows
The liquidity of the group is strong and the cash position is stable. As at 30 June 2015 the group had cash equivalents in the amount of EUR 24.4 million (30.06.2014: EUR 43.4 million). The group's cash level is lower compared to the same period last year.
The 6-month cash flow from operating activity was negative at EUR 16.8 million (6 months of 2014: positive EUR 6.6 million), cash flow from investing activity was at EUR 0.0 million (6 months of 2014: negative EUR 0.9 million) and the cash flow from financing activity was negative at EUR 10.3 million (6 months of 2014: negative EUR 9.0 million).
The cash flow from operating activity was mostly influenced by the operating profit EUR 4.0 million (6 months of 2014: EUR 5.0 million), by the positive change in receivables and liabilities related to construction contracts recognised under the stage of completion method EUR 0.8 million (6 months of 2014: positive change of EUR 6.0 million), by the negative change in the provisions EUR 3.4 million (6 months of 2014: negative change of EUR 1.3 million), by the negative change in trade and other receivables related to operating activities EUR 10.7 million (6 months of 2014: negative change of EUR 3.9 million), by the positive change in inventory EUR 6.3 million, incl. negative cash flow from purchase of new land plots in the amount of EUR 6.6 million (6 months of 2014: negative change of EUR 7.6 million, incl. negative cash flow from purchase of new land plots in the amount of EUR 1.2 million), by the negative change in trade and other payables related to operating activities EUR 13.4 million, incl. significant negative outflow from the realization of an option agreement in the amount of EUR 4.0 million but also from the advances for real estate development projects (6 months of 2014: positive change of EUR 8.0 million) and by the corporate income tax paid EUR 1.4 million (6 months of 2014: EUR 0.1 million).
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 (15.6% as at 30.06.2015; 14.0% as at 30.06.2014).
Cash flows from investment activities include negative cash flow from the acquisition of non-current asset in the amount of EUR 0.3 million (6 months of 2014: EUR 0.6 million) and the positive cash flow from the sale of non-current assets in the amount of EUR 0.3 million (6 months of 2014: EUR 0.0 million). Cash flows from investment activities in 6 months of 2014 was negatively impacted by 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. 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 (6 months of 2014: EUR 7.3 million). Project specific loans obtained using investment property as collateral were repaid in the amount of EUR 0.3 million (6 months of 2014: negative cash flow in net amount of EUR 0.3 million), net of loans received and loans repaid in connection with development projects amounted to negative cash flow of EUR 1.9 million (6 months of 2014: positive cash flow of EUR 2.8 million) and finance lease principal repayments of EUR 0.8 million (6 months of 2014: EUR 0.5 million). The group has not used bank loans to finance all ongoing development projects – and this is the case particularly in Estonia, where many advance sales were agreed in the early phase of construction. Cash flows from financing activities in 6 months of 2014 was negatively impacted by 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
The Q2 2015 cash flow from operating activity was negative at EUR 9.0 million (Q2 2014: negative EUR 2.3 million), cash flow from investing activity was positive at EUR 0.2 million (Q2 2014: negative EUR 0.4 million) and the cash flow from financing activity was negative at EUR 7.7 million (Q2 2014: negative EUR 5.8 million).
The quarterly cash flows from operating activities were negative primarily as a result of the need for working capital to cover group’s own 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 land plots in Tallinn governed by an option agreement for the total amount of EUR 5.5 million and by the corporate income tax paid EUR 1.4 million (Q2 2014: EUR 0.1 million).
Cash flows from investment activities was positive primarily due to the sale of non-current asset in the amount of EUR 0.2 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 supplemented by the finance lease principal repayments of EUR 0.4 million.
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 29 April 2015 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 58% dividend rate and a 5.7% dividend yield for the year 2014 (using the share price as at 31 December 2014), (comparable figures in 2014 were accordingly: EUR 7.3 million (EUR 0.41 per share) as dividends, which is equivalent to a 70% dividend rate and a 5.7% dividend yield (using the share price as at 31 December 2013)).
According to the Estonian Income Tax Law §50 section 11 AS Merko Ehitus can pay dividends without any additional income tax expense and liabilities occurring due to previously received and taxed distribution of profits from subsidiaries. Taking into account the dividends already paid to the parent company by the subsidiaries, the group incurred additional income tax expense in connection with the disbursement of dividends of EUR 0.9 million (2014: EUR 0.0 million) in Estonia in the second quarter of 2015.The dividend payment to the shareholders took place on 26 May 2015.
Share capital reduction
The general meeting of the shareholders held on 29 April 2015 resolved to approve the Supervisory Boards proposal to reduce the share capital by EUR 4 071 000 (EUR 0.23 per share).
Pursuant to subsection §50 section 2 of the Income Tax Act in force in Estonia, income tax does not have to be paid on the portion of payments made from the equity upon reduction of the share capital or contributions, upon redemption of shares or contributions or in other cases, and on the portion of the paid liquidation distributions made by way of previous monetary contributions. About EUR 4.0 million in the said monetary contributions have been made in AS Merko Ehitus.
Based on the resolution of the general meeting of the shareholders, share capital will be reduced by EUR 4,071,000 (EUR 0.23 per share), from the amount EUR 12.0 million to EUR 7.9 million. Share capital is reduced by way of reducing the book value of the shares and as a result of the reduction the book value of one share will be reduced from EUR 0.677966 to EUR 0.447966; the number of shares will remain the same – 17,700,000 shares.
Pursuant to the articles of association of Merko Ehitus, the minimum share capital of the company is EUR 6.0 million and the maximum share capital is EUR 24.0 million. The new share capital will amount to EUR 7.9 million, which is in line with the company’s articles of association.
Considering the perspectives of the Baltic construction market in the coming years and the related need for capital by the group, the share capital would be reduced in order to improve the group’s capital structure and support return on equity. AS Merko Ehitus lacks the need to possess share capital in the existing amount and the requirements that legislation imposes on share capital will also be fulfilled in the case of the reduced share capital.
The monetary payments to the shareholders in the amount of EUR 4,071,000, related to the reduction of share capital shall be made within the period prescribed by law, i.e. latest within 3 (three) months after the registration of the reduction of share capital in the Commercial Register, which is expected to take place in August 2015 with the disbursement to shareholders scheduled for November 2015. The company will notify the shareholders via the stock market system about the corresponding Commercial Register entry once it is made and the specific date of the share capital payout. Shareholders, that were entered into the share register of AS Merko Ehitus on 22 May 2015, at 23.59, are entitled to the monetary payments from the reduction of share kapital.
Considering the resolutions of the general meeting of the shareholders to pay EUR 7.3 million from retained earnings to shareholders as dividends (EUR 0.41 per share) and to reduce share capital by EUR 4.7 million (EUR 0.23 per share), and considering the share price as at 31 December 2014, return on the investment in 2014 was 9.0%.
Ratios
(attributable to equity holders of the parent)
| 6M ‘15 | 6M ‘14 | 6M ‘13 | Q2 ‘15 | Q2 ‘14 | Q2 ‘13 | 12M ‘14 | ||
| Income statement summary | ||||||||
| Revenue | million EUR | 116.2 | 113.7 | 113.7 | 70.6 | 64.8 | 65.9 | 252.3 |
| Gross profit | million EUR | 8.9 | 10.1 | 9.8 | 5.4 | 6.1 | 5.6 | 24.7 |
| Gross profit margin | % | 7.7 | 8.9 | 8.6 | 7.6 | 9.5 | 8.5 | 9.8 |
| Operating profit | million EUR | 4.0 | 5.0 | 5.1 | 3.0 | 3.7 | 2.8 | 14.0 |
| Operating profit margin | % | 3.4 | 4.4 | 4.5 | 4.2 | 5.7 | 4.3 | 5.5 |
| Profit before tax | million EUR | 3.6 | 4.7 | 4.5 | 2.7 | 3.6 | 2.6 | 13.3 |
| PBT margin | % | 3.1 | 4.1 | 4.0 | 3.9 | 5.5 | 3.9 | 5.3 |
| Net profit | million EUR | 2.4 | 4.2 | 4.0 | 1.6 | 3.6 | 2.2 | 12.3 |
| attributable to equity holders of the parent | million EUR | 2.4 | 4.4 | 4.0 | 1.6 | 3.6 | 2.3 | 12.4 |
| attributable to non-controlling interest | million EUR | (0.0) | (0.2) | 0.0 | 0.0 | 0.0 | (0.1) | (0.1) |
| Net profit margin | % | 2.1 | 3.8 | 3.6 | 2.3 | 5.6 | 3.5 | 4.9 |
| Other income statement indicators | ||||||||
| EBITDA | million EUR | 5.6 | 6.1 | 6.3 | 3.7 | 4.3 | 3.4 | 16.4 |
| EBITDA margin | % | 4.8 | 5.4 | 5.5 | 5.2 | 6.6 | 5.2 | 6.5 |
| General expense ratio | % | 5.0 | 5.1 | 5.0 | 4.0 | 4.4 | 4.7 | 4.9 |
| Labour cost ratio | % | 12.0 | 12.6 | 12.8 | 10.8 | 11.7 | 12.3 | 11.9 |
| Revenue per employee | thousand EUR | 154 | 144 | 130 | 93 | 82 | 75 | 319 |
| Other significant indicators | 30.06.2015 | 30.06.2014 | 30.06.2013 | 31.12.2014 | |
| Return on equity | % | 8.4 | 8.9 | 9.6 | 10.1 |
| Return on assets | % | 4.3 | 4.4 | 4.8 | 5.0 |
| Return on invested capital | % | 8.0 | 7.8 | 8.5 | 8.8 |
| Equity ratio | % | 54.3 | 48.8 | 48.8 | 51.0 |
| Debt ratio | % | 15.6 | 14.0 | 13.9 | 15.1 |
| Current ratio | times | 2.5 | 2.0 | 1.9 | 2.3 |
| Quick ratio | times | 1.0 | 1.0 | 1.1 | 1.1 |
| Accounts receivable turnover | days | 47 | 57 | 59 | 56 |
| Accounts payable turnover | days | 41 | 38 | 46 | 39 |
| Average number of employees | people | 757 | 791 | 878 | 790 |
| Secured order book | million EUR | 217.2 | 191.6 | 184.4 | 179.1 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros
|
2015 6 months |
2014 6 months |
2015 II quarter |
2014 II quarter |
2014 12 months |
|
| Revenue | 116,204 | 113,701 | 70,605 | 64,833 | 252,323 |
| Cost of goods sold | (107,265) | (103,622) | (65,227) | (58,690) | (227,591) |
| Gross profit | 8,939 | 10,079 | 5,378 | 6,143 | 24,732 |
| Marketing expenses | (1,521) | (1,509) | (742) | (655) | (3,190) |
| General and administrative expenses | (4,245) | (4,292) | (2,052) | (2,172) | (9,128) |
| Other operating income | 1,003 | 837 | 575 | 431 | 1,901 |
| Other operating expenses | (213) | (83) | (196) | (33) | (340) |
| Operating profit | 3,963 | 5,032 | 2,963 | 3,714 | 13,975 |
| Finance income/costs | (392) | (337) | (228) | (157) | (667) |
| incl. finance income/costs from joint ventures | (76) | (70) | (32) | (36) | (130) |
| finance income/costs from other long-term investments | 1 | 1 | 1 | 1 | 2 |
| interest expense | (366) | (333) | (216) | (155) | (662) |
| foreign exchange gain (loss) | 2 | (1) | (1) | - | (12) |
| other financial income (expenses) | 47 | 66 | 20 | 33 | 135 |
| Profit before tax | 3,571 | 4,695 | 2,735 | 3,557 | 13,308 |
| Corporate income tax expense | (1,206) | (482) | (1,111) | 40 | (1,055) |
| Net profit for financial year | 2,365 | 4,213 | 1,624 | 3,597 | 12,253 |
| incl. net profit attributable to equity holders of the parent | 2,417 | 4,360 | 1,608 | 3,649 | 12,417 |
| net profit attributable to non-controlling interest | (52) | (147) | 16 | (52) | (164) |
| Other comprehensive income | |||||
| Currency translation differences of foreign entities | (1) | - | 1 | - | 4 |
| Comprehensive income for the period | 2,364 | 4,213 | 1,625 | 3,597 | 12,257 |
| incl. net profit attributable to equity holders of the parent | 2,416 | 4,360 | 1,609 | 3,649 | 12,421 |
| net profit attributable to non-controlling interest | (52) | (147) | 16 | (52) | (164) |
| Earnings per share for profit attributable to equity holders of the parent (basic and diluted, in EUR) | 0.14 | 0.25 | 0.09 | 0.21 | 0.70 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros
| 30.06.2015 | 30.06.2014 | 31.12.2014 | |
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 24,428 | 43,434 | 51,583 |
| Trade and other receivables | 50,505 | 63,850 | 46,382 |
| Prepaid corporate income tax | 139 | 26 | 3 |
| Inventories | 113,656 | 95,223 | 117,638 |
| 188,728 | 202,533 | 215,606 | |
| Non-current assets | |||
| Long-term financial assets | 15,226 | 20,890 | 11,476 |
| Deferred income tax assets | 1,580 | 1,592 | 1,535 |
| Investment property | 4,495 | 4,556 | 4,619 |
| Property, plant and equipment | 14,321 | 13,242 | 15,003 |
| Intangible assets | 865 | 1,095 | 1,011 |
| 36,487 | 41,375 | 33,644 | |
| TOTAL ASSETS | 225,215 | 243,908 | 249,250 |
| LIABILITIES | |||
| Current liabilities | |||
| Borrowings | 13,462 | 15,298 | 14,287 |
| Payables and prepayments | 57,416 | 82,043 | 71,122 |
| Income tax liability | 292 | 54 | 352 |
| Short-term provisions | 4,930 | 5,457 | 6,239 |
| 76,100 | 102,852 | 92,000 | |
| Non-current liabilities | |||
| Long-term borrowings | 21,621 | 18,904 | 23,359 |
| Deferred income tax liability | 763 | 614 | 738 |
| Other long-term payables | 1,167 | 1,770 | 1,671 |
| 23,551 | 21,288 | 25,768 | |
| TOTAL LIABILITIES | 99,651 | 124,140 | 117,768 |
| EQUITY | |||
| Non-controlling interests | 3,381 | 802 | 4,455 |
| 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 | (666) | (669) | (665) |
| Retained earnings | 109,649 | 106,435 | 114,492 |
| 122,183 | 118,966 | 127,027 | |
| TOTAL EQUITY | 125,564 | 119,768 | 131,482 |
| TOTAL LIABILITIES AND EQUITY | 225,215 | 243,908 | 249,250 |
Interim report and the investor presentation are attached to the announcement and are also published on NASDAQ Tallinn and Merko’s web page (group.merko.ee).
Signe Kukin
Group CFO
AS Merko Ehitus
+372 650 1250
signe.kukin@merko.ee
AS Merko Ehitus (group.merko.ee) consists of Estonia’s leading construction company AS Merko Ehitus Eesti, the Latvian-market-oriented SIA Merks, UAB Merko Statyba that is operating on the Lithuanian market and the real estate development business unit along with real estate holding companies. As at the end of the year 2014, the group employed 765 people and the company’s revenue for 2014 was EUR 252.3 million.
