2016 6 months and II quarter consolidated unaudited interim report

Tallinn, Estonia, 2016-08-04 07:00 CEST (GLOBE NEWSWIRE) --  

COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

In Q2 of 2016, Merko Ehitus posted revenue of EUR 58.7 million, EBIDTA of EUR 3.4 million and profit before taxes of EUR 2.4 million. Gross profit margin increased to 9% in the second quarter and the group’s construction contract order book reached EUR 279 million. The Baltic construction market – in a slump with regard to new buildings and infrastructure construction contracts – continues to be supported by residential construction, and Merko is on track with its investment plan in the apartment development sector. In the 6 months of 2016, the company sold close to 160 apartments and launched the construction of 280 new flats.

The group’s management is satisfied with the improved profitability – the second quarter gross profit margin of 9% outperforms the expectations to some degree and is better than it was a year ago. Considering the general depressed state of construction contracts on the market, the management also appreciates the volume of new contracts signed in the second quarter and the level of the secured order book. According to the management the integration of the Norwegian company acquired in the first quarter has also gone according to plan.

The sales revenue in the first half-year has been kept back by the slower than planned launch of construction work on several projects due to customer-side changes either related to the project design solutions or the completion timetable. The ratio of new contracts to sales revenue was also lower than expected as a result of the sluggish Baltic construction market in regard to buildings and infrastructure contracted for by the state – a trend that has lasted a couple of years now. The drop in the share of sales revenue from construction services in Latvia and Lithuania was as expected, as several large projects were completed last year in Latvia and the work volumes are lower this year. The construction market is largely supported by residential construction, yet the group companies are actively continuing to tender for contracts on all markets in which the group operates, including road construction and other infrastructure project procurements in Estonia.

The group’s Q2 revenue was EUR 58.7 million, EBITDA was EUR 3.4 million, profit before taxes was EUR 2.4 and net profit was EUR 1.7 million. The respective figures for 6 months of 2016 were: revenue of EUR 105.6 million, EBITDA of EUR 4.6 million, profit before taxes of EUR 2.7 and net profit of EUR 1.8 million. The 6 months net profit was impacted by income tax expenses amounting to EUR 0.9 million, including EUR 0.6 million additional income tax expense on dividends in the second quarter.

The development of the apartment market in the Baltic capital cities was in line with expectations in the second quarter, supply has increased and the price level has stabilised. The launch of the group’s development projects and sale of apartments has conformed to plans and the group will continue fulfilling it’s investment plan. This year, Merko has launched construction of more than 280 new apartments, including 100 apartments in the Tallinn’s Paepargi neighbourhood and 66 apartments in the first phase of Noblessner Homeport development and, in Riga, 137 flats in the Skanstes Parks development. In the six months of 2016, Merko sold 159 apartments for a total price of EUR 17.4 million (without VAT), including 58 apartments and EUR 6.0 million (without VAT) in Q2.

In Q2 of 2016, the group’s companies entered into new construction contracts amounting to EUR 87 million. In Estonia, these included the Juuliku traffic junction and the Viru infantry battalion equipment depot; in Lithuania, the expansion of the Radisson Blu Hotel Lietuva; and a warehouse complex in Riga, Latvia. As at 30 June 2016, the group had a secured order book of EUR 279 million. Major projects in progress for Merko in Q2 in Estonia included the Hilton Tallinn Park in Tallinn, opened in early June, Maakri Quarter, an office building at Mustamäe tee 3, the Öpiku Maja office building, the T1 shopping centre, Tallink Tennis Centre, the Bauhaus DIY store in Rocca al Mare and the tram line that will serve the airport. In Latvia, the largest projects in progress were the kindergarten and school complex in Pinki near Riga and phase II of the passenger terminal at Riga Airport; in Lithuania, the Kauno/Algirdo residential complex with office space and the Narbuto 5 office building were ongoing.

OVERVIEW OF THE 6 MONTHS AND II QUARTER RESULTS

PROFITABILITY

Q2 2016 profitability improved and the gross margin increased to 9.3% (comparable figure in Q2 2015: 7.6%). Q2 net profit was EUR 1.7 million (Q2 2015: EUR 1.6 million) and net profit margin increased to 2.9% (Q2 2015: 2.3%). Q2 net profit was influenced by additional income tax expense on dividends in the amount of EUR 0.6 million (Q2 2015: EUR 0.9 million). Profit before tax in 6M 2016 was EUR 2.7 million (6M 2015: EUR 3.6 million), which is equivalent to a profit before tax margin of 2.6% (6M 2015: 3.1%). Gross margin in 6M was 8.0% (6M 2015: 7.7%), which has increased by 4.6% compared to the same period last year. Q2 2016 profit before tax was EUR 2.4 million (Q2 2015: EUR 2.7 million). Net margin in 6M 2016 decreased to 1.7% (6M 2015: 2.1%) and net profit was EUR 1.8 million (6M 2015: EUR 2.4 million), having decreased by 24.6% compared to the same period last year.

REVENUE

Revenue in 6M 2016 was EUR 105.6 million (6M 2015: EUR 116.2 million), which has decreased by 9.2% compared to last year. Q2 revenue was EUR 58.7 million (Q2 2015: EUR 70.6 million). The share of revenue earned outside Estonia has expectedly decreased in 6M 2016 to 32% (6M 2015: 38%) in connection with the slump in orders on the Latvian and Lithuanian construction market and the share of revenue earned in Estonia has accordingly increased to 68% (3M 2015: 62%). The number of apartments (159 units) sold in 6 months of 2016 has decreased by 5.4% and the revenue from apartment sales (EUR 17.4 million) by 45.2% (6 months of 2015: 168 units, revenues of EUR 31.7 million).

CASH POSITION

At the end of the reporting period, the group had EUR 21.7 million in cash and cash equivalents and equity EUR 118.5 million (54.8% of total assets). Comparable figures as at 30 June 2015 were accordingly EUR 24.4 million and EUR 122.2 million (54.3% of total assets). As at 30 June 2016 the group had net debt of EUR 13.3 million (30 June 2015: EUR 10.7 million).

SECURED ORDER BOOK

As at 30 June 2016, the group’s secured order book had grown to EUR 279.4 million (30 June 2015: EUR 217.2 million). In 6M 2016, group companies signed new contracts in the amount of EUR 109.0 million (6M 2015: EUR 121.3 million). Q2 2016 new contracts signed in amount of EUR 86.6 million (Q2 2015: EUR 98.9 million).

OPERATING RESULTS

Revenue and gross profit

Merko Ehitus group generated a total of EUR 105.6 million in revenue in 6 months of 2016 (6 months of 2015: EUR 116.2 million). 50.3% of the revenue was generated in Estonian construction service, 22.3% in Latvian and Lithuanian construction service and 27.4% in and real estate development segment (6 months of 2015: 40.6% in Estonian construction service, 31.4% in Latvian and Lithuanian construction service and 28.0% in real estate development segment). Compared to the 6 months of 2015 the group revenue has decreased by 9.2%, which is mainly due to the slower than expected launch of several large-scale sites in the first half of the year – above all due to circumstances related to the customer’s side. Compared to the 6 months of the previous year in the 6 months of 2016 the share of Latvian and Lithuanian construction service revenue in the group’s revenue has decreased from 31.4% to 22.3% and the share of Estonian construction service has increased from 40.6% to 50.3%. Revenue in Q2 2016 was EUR 58.7 million, which has decreased by 16.8% compared to the previous year (Q2 2015: EUR 70.6 million). The main changes in the revenue structure compared to the same period last year lie in the growth in revenue from Estonian construction services’ general construction projects and in one-off increase in the sales revenue from immovable properties in the real estate development segment and. At the same time, revenue is down in the Latvian and Lithuanian constructions service segment. This trend has been in line with the group’s expectations, considering the slump in new construction orders in Latvia and Lithuania in 2015 and the distribution of the secured order book as at the end of 2015. The Latvian and Lithuanian subsidiaries are actively continuing to secure new orders.

In 6 months of 2016 the group’s gross profit from development and construction activities totalled EUR 8.5 million (6 months of 2015: EUR 8.9 million) and in Q2 2016 EUR 5.4 million (Q2 2015: EUR 5.4 million). The 6 months gross profit margin (8.0%) has increased by 0.3 pp compared to the same period last year (6 months of 2015: 7.7%). The group’s aim is to preserve the profitability both in the Estonian but also Latvian and Lithuanian construction service domain in spite of the prevailing competition situation on the construction market and the decrease in sales volumes in regard to previously higher-margin civil engineering projects, which was supported by somewhat of a drop in input prices, but which may not continue in 2016. Considering the small size of the Estonian market, the current situation – where 4-6 large-scale building construction projects have been launched simultaneously – means occasionally limited capability for subcontractors to carry out work or to do so under reasonable conditions, which in turn puts pressure on the general contractors’ margins. Gross profit margin has also been impacted to some extent by the recovery in 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 2016, the group’s profit before tax totalled EUR 2.7 million and net profit attributable to equity holders of the parent was EUR 1.8 million as compared to the pre-tax profit or EUR 3.6 million and net profit attributable to equity holders of the parent of EUR 2.4 million in 6 months of 2015. Group’s profit before tax margin was 2.6% (6 months of 2015: 3.1%) and the net profit margin was 1.7% (6 months of 2015: 2.1%). Both the group’s profit before tax (EUR 2.7 million) and the profit before tax margin (2.6%) have decreased compared to the same period last year (6 months of 2015: EUR 3.6 million and 3.1%, respectively).

In Q2 of 2016, the group’s pre-tax profit totalled EUR 2.4 million and net profit was EUR 1.7 million as compared to the pre-tax profit of EUR 2.7 million and net profit of EUR 1.6 million in Q2 of 2015. Contrary to the 6 months of 2016 group’s quarterly profit before tax (EUR 2.4 million) has decreased compared to the same period last year (Q2 2015: EUR 2.7 million), while the quarterly profit before tax margin (4.1%) increased 3.9%).

In the second quarter of 2016, the group paid EUR 9.0 million in dividends, which incurred additional income tax expense in the amount of EUR 0.6 million. The situation in the second quarter of 2015 was alike, when the group paid EUR 7.3 million in dividends, with the exception that then the group incurred additional income tax expense in the amount of EUR 0.9 million.

Business segments

The group operates mainly in Estonian, Latvian and Lithuanian market through its subsidiaries. By purchasing a majority shareholding the group has formed the basis for entering the Norwegian market starting from Q1 2016. Depending on the country the group provides construction services and real estate development services across the following business segments: Estonian construction service (incl. construction services on project basis in Finland), Latvian and Lithuanian construction service (incl. construction services in Norway) and real estate development. The group’s segment structure is aligned with group’s management structure.

Estonian construction service (incl. construction services on project basis in Finland) and Latvian and Lithuanian construction service (incl. construction services in Norway) 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 and starting from Q1 2016 also in Norway.

• The civil engineering projects 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

The Estonian construction services segment consists of various services in the field of general construction, civil engineering (including construction of electrical and external networks) and road construction and construction services on project basis in Finland.

In the 6 months of 2016, the revenue of the Estonian construction service segment was EUR 53.1 million (6 months of 2015: EUR 47.2 million), having increased by 12.5% from the same period last year. The 6 months revenue also includes revenue from Finnish projects in the amount of EUR 0.4 million (6 months of 2015: EUR 0.4 million). The revenues have clearly decreased in the field of civil engineering and increased in the field of general construction. The increase in revenue in the field is primarily due to the fact that large-scale general construction projects launched in 2015 – where previously design development took place – are starting to reach a stage of more extensive construction activity. The Estonian construction service segment revenues for 6 months 2016 were 50.3% of the group’s revenue, forming the largest proportion in the group’s revenue, having increased by 23.9% in the yearly comparison.

In this segment, the group earned a gross profit of EUR 4.1 million for 6 months (6 months of 2015: EUR 4.3 million). In 6 months of 2016, the gross margin of the Estonian construction service segment was 7.8%, which decreased by 1.4 pp compared to the 6 months of 2015 (9.2%), mainly due to the scarcity of projects in the field of civil engineering. 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. Due to the decrease in the volume of public procurements, we are critically monitoring any changes in the volume of work-in-progress and also constantly improving the efficiencies of internal project management processes. We have reduced and re-allocated staff within the group and, in order to maintain the efficiency of the cost base, made preparations for responding to further market changes.

Our major projects in the second quarter in Tallinn included the construction works of Hilton Tallinn Park hotel, the design and construction works of Öpik Office Building, BAUHAUS DIY store, Tallink Tennis Centre, Maakri Kvartal, Poordi st 1 residential and commercial building and T1 shopping centre, the reconstruction work an office building located at Mustamäe tee 3 and the road maintenance works done under the service agreement with Tallinn.

Latvian and Lithuanian construction service

The Latvian and Lithuanian construction service segment consists of general construction work in both of the aforementioned Baltic countries and stating from the first quarter of 2016 also in Norway and provision of civil engineering services in Latvia.

The revenue of the Latvian and Lithuanian construction service segment amounted to EUR 23.5 million in the 6 months of 2016 (6 months of 2015: EUR 36.5 million), which is 35.6% less than in the 6 months of 2015. If the Latvian and Lithuanian construction service segment revenues of 6 months of 2015 formed 31.4% of the group’s revenue, then during 6 months of the current year the segments revenues have decreased to 22.3%. The change in this percentage was in line with expectations, considering the lower level of new contracts signed in Latvia and Lithuania during 2015 and the 2015 comparison base, where large-scale projects were finished in Latvia, such as the construction of Liepaja Concert Hall and Polipaks NT manufacturing and logistics centre. The group’s continued focus is on increasing the revenues outside Estonia.

The 6 month gross profit of the Latvian and Lithuanian construction service segment amounted to EUR 1.3 million (6 months of 2015: EUR 1.5 million) and the gross profit margin was 5.5% (6 months of 2015: 4.2%), which increased by 31.0% compared to the same period previous year.

In the second quarter of 2016, the main ongoing projects included were the construction of kindergarten and school buildings complex near Riga in Pinki, the construction works of the second phase of the passenger terminal in Riga International Airport and the construction works of Kauno/Algirdo residential complex with office premises in Vilnius.

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.

The group sold a total of 159 apartments in 6 months of 2016 at the total value of EUR 17.4 million (excl. VAT), compared to 168 apartments and EUR 31.7 million in 6 months of 2015. In Q2 of 2016 a total of 58 apartments were sold at the total value of EUR 6.0 million (excl. VAT), (Q2 2015: 106 apartments and EUR 20.9 million). In 6 months of 2016, the group has earned EUR 8.6 million of revenue from the sale of immovable properties (6 months of 2015: EUR 0.2 million). Q2 2016 revenue from the sale of immovable properties was EUR 1.1 million (Q2 2015: EUR 0.2 million). In 6 months of 2016 real estate development segment revenues have decreased 11.0% compared to the same period last year. The decline is primarily influenced by sales of apartments in more exclusive developments in the reference period where the sales price per apartment was higher than the apartments sold during the current year. In the 6 months of 2016 the share of revenue from the real estate development segment formed as anticipated 27.4% of the group’s total revenue (6 months of 2015: 28.0%), having decreased in a year by 2.0%.

The 6 month gross profit of the segment amounted to EUR 3.1 million (6 months of 2015: EUR 3.1 million) and the gross profit margin was 10.6% (6 months of 2015: 9.5%), which increased by 11.4% 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. The profitability of the apartments sold in the 6 months of 2016 was higher than in the reference period, but on the other hand the sector’s gross profit of the first six months was also significantly influenced by the fact that the one-time effect of revenues from the sale of immovable properties that are strategically not needed by the group, the profitability of which is not comparable with a situation where the value of land is increased by passing through all phases of the development process made up a noteworthy share of total revenue in the segment.

At the end of the period, group’s inventory comprised 298 apartments where a preliminary agreement had been signed: 21 completed apartments (15 in Estonia, 5 in Latvia and 1 in Lithuania) and 277 apartments under construction (200 in Estonia, 24 in Latvia and 53 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 2016, Merko Ehitus group had a total of 510 apartments for active sale (as at 30 June 2015: 467 apartments), for which there are no pre-sale agreements and of which 58 have been completed (16 in Estonia, 25 in Latvia, 12 in Lithuania and 5 in Finland) and 452 are under construction (293 in Estonia, 114 in Latvia and 45 in Lithuania). The number of apartments on sale as at 30 June 2016 has somewhat increased, compared to 30 June 2015, mainly due to the volume of projects launched in the first half of the current year.

In 6 months of 2016, we launched the construction of a total of 284 new apartments in the Baltic states (6 months of 2015: 335 apartments). In the 6 months of this year, the group has invested a total of EUR 25.1 million (6 months of 2015: EUR 19.1 million) in new development projects launched in 2016 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 2016, the group plans to launch the construction of approximately 500-550 new apartments in the Baltic states (2015: construction of 574 new apartments launched). In 2016, the group’s plans investments in both development projects initiated in the previous years and new projects to be launched in 2016 in the range of EUR 40-45 million (2015: EUR 42.4 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 30 June 2016, the group's inventories included land plots with the development potential, where the construction works have not started, of EUR 50.3 million (30.06.2015: EUR 59.4 million; 31.12.2015: EUR 58.0 million).

In the 6 months of 2016, the group has not purchased any new land plots for real estate development purposes (6 months of 2015: different new land plots in Tallinn, Estonia acquired at an acquisition cost of EUR 6.6 million). In Q1 2015, the group also signed a notarised contract of sale of registered immovables, under which all of the real estate governed by an option agreement in Tallinn were realised for total of EUR 4.0 million. In Q2 2015 AS Merko Ehitus group 50% joint venture Kodusadam OÜ additionally signed a contract for the acquisition of approximately 1.7 hectares of land in the Noblessner quarter, an historically prestigious industrial area in Tallinn with great potential, for development purpose to build approximately 200 apartments. The group is searching for new land plots for real estate development purposes primarily in Estonian and Lithuania.

In the second quarter of 2016, the group completed the competition for an international development and architectural concept for the Latvian Zakusala development area (close to 1,500 apartments). Entries came in from Estonia, Norway, Poland and Latvia. The competition was organised based on the regulations handed down by the Latvian Architects Union. Six entries from among the works submitted met the qualifications. A five-member jury picked an entry by RUUME arhitekti (https://ruumearhitekti.wordpress.com/), a practice of young Latvian architects, as the winner. The group will continue preparations in order to launch construction in the development area in 3-5 years’ time.

Secured order book

As at 30 June 2016, the group’s secured order book (without own developments) amounted to EUR 279.4 million as compared to EUR 217.2 million as at 30 June 2015, having increased by approximately 30% in the annual comparison. The secured order book excludes the group's own residential development projects and construction work related to developing real estate investments.

In 6 months of 2016, EUR 109.0 million worth of new contracts were signed (without own developments) as compared to EUR 121.3 million in same period last year. The value of new contracts signed (without own developments) in the second quarter of 2016 amounted to EUR 86.6 million (Q2 2015: EUR 98.9 million, which included the T1 shopping centre contract in the amount of EUR 70.0 million).

After the balance sheet date, the group concluded one large construction contract:

• On 21 July 2016, SIA Merks – a subsidiary of AS Merko Ehitus – signed a contract with SIA Jasmīnu residence to perform the construction works of a residential complex consisting of four houses, located at Jasmīnu st. 10, Jurmala, Latvia. The value of the contract is approximately EUR 4.9 million. The works are scheduled for completion by August of 2017.

In the second quarter of 2016, Merko Ehitus Eesti AS (a 100% owned Merko subsidiary) entered into a design-build contract worth EUR 19.7 million with the group’s 50% joint venture Kodusadam OÜ for the establishment of the apartment building at Staapli 4 and the underground parking level connecting the entire Noblessner development area. The sales revenue and profit from the contract will become realised in the Estonian construction service segment pursuant to provision of construction service.

Of the contracts signed in the 6 months of 2016, 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 approximately 80% (30.06.2015: approximately 75%; 31.12.2015: approximately 80%). Apart from a few large-scale procurements where Merko companies were not as optimistic as our competitors in bidding at a low price, the share of government contracts in the 6 months of 2016 has been modest. The group continues to focus on comprehensive design and construction contracts. In this regard, four important contracts were signed in the 6 months of 2016 (incl. two in Q2 2016).

The portfolio of contracts stands strong, especially in Estonia. At the same time, the group has not managed to conclude new contracts in the estimated volume, especially in Latvia and Lithuania. This is due to a lower-than-estimated number of orders on the market, which will also affect the volumes for 2016. Considering the beginning phase of the current EU funding period, one can forecast the volume of public procurements to stay at the previous years level. We forecast that the volume of public procurements will start to increase in the end of 2016.

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 and strengthen the groups competitive advantages and are closely monitoring the development and opportunities both in the Baltic states and the Nordic countries. In the last few years, the group has taken part in various individual Finnish, Swedish and Norwegian construction procurements in a selective and project-based manner in order to gain experience and regarding the conditions and requirements set out in these countries for qualifying for construction company procurements, as well as assess the risks so as to evaluate potential competitive advantages for entering these markets. In March 2016, the group concluded a transaction through which it acquired a controlling holding in Peritus Entreprenør AS, a Norwegian construction company that provides general construction services. In 2016, the group will continue implementing its chosen strategy with the goal of increasing revenue earned on new markets, focusing above all on the Norwegian market and taking part in a project-based manner in Finnish construction procurements as well.

Cash flows

As at 30 June 2016 the group had cash equivalents in the amount of EUR 21.7 million (30.06.2015: EUR 24.4 million; 31.12.2015: EUR 39.9 million). The group's cash level is lower compared to the same period last year; still, the financial position is strong, as the group has not utilised its credit lines of existing overdrafts and loan agreements and has not concluded loan agreements for financing all of the projects in development.

The 6-month cash flow from operating activity was negative at EUR 13.2 million (6 months of 2015: negative EUR 16.8 million), cash flow from investing activity was at EUR 0.0 million (6 months of 2015: EUR 0.0 million) and the cash flow from financing activity was negative at EUR 4.9 million (6 months of 2015: negative EUR 10.3 million).

The cash flow from operating activity was mostly influenced by the EBITDA (operating profit adjusted with depreciation and amortisation) EUR 4,6 million (6 months of 2015: EUR 5.6 million), by the negative change in receivables and liabilities related to construction contracts recognised under the stage of completion method EUR 0.3 million (6 months of 2015: positive change of EUR 0.8 million), by the negative change in the provisions EUR 2.7 million (6 months of 2015: negative change of EUR 3.4 million), by the negative change in trade and other receivables related to operating activities EUR 18.8 million, incl. a positive change in financing co-financed projects of EUR 0.3 million (6 months of 2015: negative change of EUR 10.7 million, incl. a negative change in financing co-financed projects of EUR 3.6 million), by the negative change in inventory EUR 1.6 million, incl. positive cash flow from sale of immovable properties in the amount of EUR 8.4 million (6 months of 2015: positive change of EUR 6.3 million, incl. negative cash flow from purchase of new land plots in the amount of EUR 6.6 million and positive cash flow from sale of immovable properties in the amount of EUR 0.2 million), by the positive change in trade and other payables related to operating activities EUR 7.7 million (6 months of 2015: negative change of 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) and by the corporate income tax paid EUR 1.3 million (6 months of 2015: EUR 1.4 million).

To support cash flows arising from operating activity, the group has been cautious in raising additional external capital, including factoring. At the same time, the debt ratio has remained at a moderate level (16.2% as at 30.06.2016; 15.6% as at 30.06.2015; 14.8% as at 31.12.2015).

Cash flows from investment activities include negative cash flow from the acquisition of non-current asset in the amount of EUR 1.7 million (6 months of 2015: EUR 0.3 million) and the positive cash flow from the sale of non-current assets in the amount of EUR 0.4 million (6 months of 2015: EUR 0.3 million). The group mainly invested in non-current assets for the purpose of renewing its fleet of machinery in the road construction segment. Cash flows from investment activities in 6 months of 2015 was also positively impacted by the acquisition of majority shareholding in subsidiary Peritus Entreprenør AS (related to the offering of construction services on Norwegian market) in the amount of EUR 1.2 million.

The largest single negative item in cash flows from financing was the dividend payment of EUR 9.0 million (6 months of 2015: 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 2015: negative cash flow in the amount of EUR 0.3 million). Net of loans received and loans repaid in connection with development projects amounted to positive cash flow of EUR 6.6 million (6 months of 2015: net negative cash flow of EUR 1.9 million) and finance lease principal repayments of EUR 0.4 million (6 months of 2015: EUR 0.8 million). In addition, over the first six months of 2016, the group made repayments in the amount of EUR 1.0 million to related party AS Järvevana pursuant to the terms and conditions of an overdraft agreement between the parties. 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.

The Q2 2016 cash flow from operating activity was negative at EUR 11.6 million (Q2 2015: negative EUR 9.0 million), cash flow from investing activity was negative at EUR 0.9 million (Q2 2015: positive EUR 0.2 million) and the cash flow from financing activity was negative at EUR 0.2 million (Q2 2015: negative EUR 7.7 million).

The quarterly cash flows from operating activities were negative primarily as a result of the need for working capital for construction projects due to the start of the construction season and to cover investments in development projects. On the positive side the quarterly cash flows included a positive change in financing co-financed projects of EUR 2.0 million. Cash flows from operating activities was also negatively impacted by the corporate income tax paid EUR 1.1 million (Q2 2015: EUR 1.4 million).

The second quarter cash flows from investment activities was negative primarily due to the purchase of non-current asset in the amount of EUR 1.1 million, which is mainly related to the renewal of equipment in the road construction segment.

The quarterly cash flow from financing activities included the dividend payment of EUR 9.0 million as an one-time negative cash flow, which was supplemented on the positive side by the increased borrowings in in the net amount of EUR 9.0 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 27 April 2016 approved the Supervisory Board’s proposal to pay the shareholders the total amount of EUR 9.0 million (EUR 0.51 per share) as dividends from net profit brought forward, which is equivalent to a 90% dividend rate and a 6.0% dividend yield for the year 2015 (using the share price as at 31 December 2015), (comparable figures in 2015 were accordingly: EUR 7.3 million (EUR 0.41 per share) as dividends, which is equivalent to a 58% dividend rate and a 5.7% dividend yield (using the share price as at 31 December 2014)).

According to the Estonian Income Tax Law §50 section 1¹ AS Merko Ehitus can pay certain portion of 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 during 2016, the group incurred additional income tax expense in connection with the disbursement of dividends of EUR 0.6 million (Q2 2015: EUR 0.9 million) in Estonia in the second quarter of 2016.The dividend payment to the shareholders took place on 20 May 2016.

Ratios
(attributable to equity holders of the parent)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited

in thousand euros

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited

in thousand euros

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) group 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 2015, the group employed 791 people and the company’s 2015 revenue was EUR 251 million.