MANAGEMENT REPORT
General information
Merko Ehitus is a leading building corporation offering integrated solutions
since 1990, with branches currently in Estonia, Latvia and Lithuania. Largest
companies of the Group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna
Teede AS (100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%),
OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%).
On April 5 2007 AS Merko Ehitus acquired 75% holding of OÜ Fort Ehitus
(Registry Code 10722444). Principal activities of OÜ Fort Ehitus are hydraulic
engineering and pile works. The holding was acquired in order to strengthen
competence of the group in the field of pile works and hydraulic engineering
construction (http://www.baltic.omxgroup.com/market/?pg=news&news_id=213583).
Business operations
Group's revenue for the first nine months in 2007 were 3863.6 million kroons,
which constitutes an annual increase of 25.8%. 62.1% of the sales originated
from Estonia, 23.4% from Latvia and 14.5% from Lithuania. As compared with the
respective period in 2006, company's sales in Lithuania increased by 57.2%,
in Estonia by 24.6% and in Latvia by 14.6%.
Group's revenue in the third quarter of 2007 were 1367.9 million having
increased by 9.5 million kroons as compared to the same period in 2006.
The seasonality of road construction works had a positive effect on the
revenue and, similarly, underperformance in sales of housing projects had
a negative impact on the revenue.
Companies of the Group 9M 2007 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):
9M 2007 9M 2006
EEK EUR EEK EUR
Estonian companies
AS Merko Ehitus (parent company) 1 608 086 102 775 1 310 319 83 745
AS Gustaf (75% partnership) 111 062 7 098 71 762 4 586
OÜ Gustaf Tallinn (80% partnership) 102 936 6 579 97 740 6 247
AS Merko Tartu (66% partnership) 181 502 11 600 172 451 11 022
Tallinna Teede AS (100% partnership) 253 327 16 191 206 762 13 214
OÜ Woody (100% partnership) 198 125 12 662 167 745 10 721
Latvian company
SIA Merks (100% partnership) 779 876 49 843 713 260 45 586
Lithuanian company
UAB Merko Statyba (100% partnership) 525 819 33 606 330 445 21 119
Compared to 9M 2006 the cost of goods sold increased by 30.5% and the marketing
and general administration costs 28.6% forming respectively 87.7% and 3.7% of
the sales. Increase in expenses exceeding the growth in income led to a lower
gross margin of 12.3% as compared to 15.5% in 2006. Also, the operating profit
margin fell from 11.8% to 8.6%.
The net profit of the Group for 9M 2007 was 358.0 million kroons, with a yearly
growth of 6.8%. Due to the decrease of the gross and operating profit margin,
the net profit margin decreased during the reference period from 10.9% to 9.3%.
Group's net cash flow of the first 9 months of the year was -554.4 million
kroons, including cash flow from operating activities -647.6 million kroons,
from investing activities -52.9 million kroons and financing activities
+146.2 million kroons. The cash flow from operating activities were mostly
influenced by the change in inventories arising from development activities
(-569.2 million kroons) and change in trade receivables related to operating
activities (-234.4 million kroons). The negative cash flow of the period was
covered with additional loans (net cash flow of the period from borrowings
+275.1 million kroons) and liquid assets of the Group.
Construction market
Stricter loan terms of banks and negative prospects on the future economic
growth have decreased companies' investments enthusiasm and several projects
have been postponed for coming years. Despite strong growth during the first
six months of 2007 (own account construction works increased by 51.9% in
Lithuania, 45.9% in Latvia and 31.1% in Estonia in current prices as compared
to the first half of 2006), the prevailing trend of decreasing economic growth
in the area is likely to cause slow down also in the construction sector.
Construction prices continued soaring during the 3rd quarter, increasing by
23.8% in Latvia, by 14.6 % in Lithuania and by 12.1% in Estonia, including
labour costs increase of 40.4% in Latvia and 21.1% in Estonia as compared to
the same period in 2006. However, simultaneous decrease in demand and better
availability of building materials and workforce are likely to create better
environment for stabilizing construction prices in the near future.
Pessimistic and lethargic mood was prevailing in the housing market. The
number of apartments put on the market increased and prices in different
parts of the region differed more clearly. The selling period of apartments
is now longer due to changes in the market. Reduced financial resources
and ability to handle liquidity risks due to the longer selling period
will be the challenges for developers in near future. Companies' strong
capitalization and availability of internal liquid resources will have
a crucial influence to companies further succeed.
The ratios and calculation methods characterizing the operating activities
of the Group
2007 9 months 2006 9 months
Net profit margin 9,3 % 10,8 %*
Operating profit margin 8,6 % 11,8 %
Return on equity per annum 27,9 % 36,5 %
Return on assets per annum 13,5 % 17,7 %
Current ratio 2,1 2,0
Equity ratio 47,0 % 47,5 %
General expenses to sales 3,7 % 3,7 %
Staff costs to sales 9,5 % 7,4 %
Average number of full-time employees 995 841
* less extraordinary profit
Net profit margin: Net profit* / Sales
Operating profit margin: Operating profit / Sales
Return on equity: Net profit x 4/3* / Average equity during the period*
Return on assets: Net profit x 4/3* / Average assets during the period
Current ratio: Current assets / Current liabilities
Equity ratio: Owners equity* / Total assets
General expenses to sales: General expenses / Sales
Staff costs to sales: Staff costs / Sales
* calculated from the share of the parent company's shareholders
In 30.09.2007, the number of employees in the Group's service was 1099,
including 1064 full-time employees. The number of the Group's employees
increased by 26.2% (228 new employees were recruited). The gross remuneration
paid to full-time personnel in 9 months 2007 amounted to 290.6 million kroons
an increase of 51.5% compared to previous year.
Shares and shareholders
The shares of Merko Ehitus are listed in the main list of Tallinn Stock
Exchange. In 2007 9M the number of transactions with Merko Ehitus' shares was
3841, during which 4.5 million shares changed ownership and the turnover of
the transactions was 1588.3 million kroons. The cheapest bargain with a share
was 289.78 kroons and highest 402.12 kroons per share. The closing share price
with a state of 28.09.2007 was 293.22 kroons.
INCOME STATEMENT III quarter 2007
consolidated, unaudited in thousand EEK and EUR
EEK EUR
IIIq 2007 IIIq 2006 IIIq 2007 IIIq 2006
Revenue 1 367 855 1 358 336 87 422 86 813
Cost of goods sold (1 198 290) (1 140 620) (76 585) (72 899)
GROSS PROFIT 169 565 217 716 10 837 13 914
Marketing expenses (7 788) (4 196) (498) (268)
Administrative and general expenses(42 725) (34 178) (2 731) (2 184)
Other operating income 2 856 4 612 183 295
Other operating expenses (1 393) (1 919) (89) (123)
OPERATING PROFIT 120 515 182 035 7 702 11 634
Financial income and expenses
from stocks of subsidiaries 0 2 324 0 149
Financial income and expenses from stocks of
associate comp. and joint ventures 8 711 7 640 557 488
Financial income and expenses from
other long-term financial investments 0 2 0 0
Interest expense (7 827) (7 562) (500) (483)
Foreign exchange gain (3 317) (872) (212) (56)
Other financial income 4 225 1 656 270 106
Other financial expenses (68) (0) (4) (0)
Total financial income and expenses 1 724 3 188 111 204
PROFIT BEFORE TAX 122 239 185 223 7 813 11 838
Corporate income tax expense (3 267) (14 871) (209) (950)
NET PROFIT FOR CURRENT PERIOD 118 972 170 352 7 604 10 888
incl. net profit attributable
to equity holders of
the parent company 116 023 166 314 7 415 10 630
minority interest 2 949 4 038 188 258
Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR) 6,55 9,40 0,42 0,60
INCOME STATEMENT 9M 2007
consolidated, in thousand EEK and EUR
EEK EUR
9M 2007 9M 2006 9M 2007 9M 2006
Revenue 3 863 605 3 071 042 246 929 196 275
Cost of goods sold (3 388 412) (2 596 357) (216 559) (165 937)
GROSS PROFIT 475 193 474 685 30 370 30 338
Marketing expenses (20 244) (15 469) (1 294) (989)
Administrative and gen. expenses (124 180) (96 831) (7 937) (6 189)
Other operating income 5 345 14 659 342 937
Other operating expenses (4 338) (15 493) (277) (990)
OPERATING PROFIT 331 776 361 551 21 204 23 107
Financial income and expenses
from stocks of subsidiaries 0 2 325 0 149
Financial income and expenses from stocks of
associate comp. and joint ventures 61 486 12 116 3 930 774
Financial income and expenses from
other long-term financial investments 0 7 0 0
Interest expense (14 355) (10 265) (917) (656)
Foreign exchange gain (3 179) (3 766) (203) (241)
Other financial income 9 295 5 245 594 336
Other financial expenses (70) (0) (4) (0)
Total financial income and expenses 53 177 5 662 3 400 362
PROFIT BEFORE TAX 384 953 367 213 24 604 23 469
Corporate income tax expense (18 346) (25 650) (1 173) (1 639)
NET PROFIT FOR CURRENT PERIOD 366 607 341 563 23 431 21 830
incl. net profit attributable
to equity holders of
the parent company 358 024 335 275 22 882 21 428
minority interest 8 583 6 288 549 402
Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR) 20,23 18,94 1,29 1,21
BALANCE SHEET AS OF 30.09.2007
consolidated, in thousand EEK and EUR
EEK EUR
30.09.2007 31.12.2006 30.09.2007 31.12.2006
ASSETS
Current assets
Cash and cash equivalents 120 199 676 143 7 682 43 213
Trade and other receivables 1 342 235 860 531 85 785 54 998
Inventories 1 912 072 1 356 734 122 204 86 712
Assets held for sale 0 733 0 47
Total current assets 3 374 506 2 894 141 215 671 184 970
Non-current assets
Long-term financial investments 274 937 215 866 17 571 13 796
Investment property 9 358 3 900 598 249
Property, plant and equipment 170 140 90 445 10 874 5 781
Intangible assets 13 097 10 177 837 650
Total non-current assets 467 532 320 388 29 880 20 476
TOTAL ASSETS 3 842 038 3 214 529 245 551 205 446
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings 365 198 283 792 23 340 18 138
Trade and other payables 1 092 718 1 100 264 69 837 70 320
Government grants 1 482 1 498 95 96
Short-term provisions 88 445 33 517 5 653 2 142
Total current liabilities 1 547 843 1 419 071 98 925 90 696
Non-current liabilities
Loans, bonds and
finance lease liabilities 382 307 159 336 24 434 10 183
Other long-term payables 10 440 10 351 667 662
Long-term customer prepayments 49 608 12 925 3 171 826
Total non-current liabilities 442 355 182 612 28 272 11 671
Total liabilities 1 990 198 1 601 683 127 197 102 367
Equity
Minority interest 27 662 18 904 1 768 1 208
Equity attributable to equity holders of the parent company
Share capital 177 000 177 000 11 312 11 312
Statutory reserve capital 17 700 17 700 1 131 1 131
Currency translation adjustment (9 639) (5 751) (616) (368)
Retained earnings 1 639 117 1 404 993 104 759 89 796
Total equity attributable to equity
holders of the parent company 1 824 178 1 593 942 116 586 101 871
Total equity 1 851 840 1 612 846 118 354 103 079
TOTAL LIABILITIES AND EQUITY 3 842 038 3 214 529 245 551 205 446
Alar Lagus
Member of Board
+372 6 805 109
