2013 6 months and II quarter consolidated unaudited interim

Tallinn, Estonia, 2013-08-08 15:31 CEST (GLOBE NEWSWIRE) --  

MANAGEMENT REPORT

Overview of the 6 months and Q2 results

Background information and major changes introduced in the corporate structure

AS Merko Ehitus is a holding company incorporating construction and real estate development companies offering integrated construction solutions in Estonia, Latvia and Lithuania. Major construction companies incorporated under the holding company include AS Merko Ehitus Eesti (100%), SIA Merks (100%), UAB Merko Statyba (100%), as well as the AS Merko Ehitus Eesti group companies Tallinna Teede AS (100%) and AS Merko Infra (100%).

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

AGM and changes in the management structure of AS Merko Ehitus

The general meeting of the shareholders was held on 5 June 2013. The general meeting resolved to approve the annual report and the profit allocation proposal for 2012. Pursuant to the profit allocation proposal, a dividend payable of EUR 5.3 million (EUR 0.3 per share) was recognised in the consolidated balance sheet as at 30 June 2013. The dividends were paid out to shareholders on 3 July 2013.

In addition, the annual general meeting resolved to recall Member of the Supervisory Board Tõnu Toomik in connection with the Supervisory Board's resolution to appoint Tõnu Toomik as Member of the Management Board of AS Merko Ehitus. The Supervisory Board of AS Merko Ehitus resolved to recall Member of the Management Board Viktor Mõisja from 5 June 2013, with Mr Mõisja continuing service in the engineering division of the company’s subsidiary AS Merko Ehitus Eesti, and to appoint the former member of the Supervisory Board Tõnu Toomik as a new member of the Management Board.

Changes in the legal structure of the group

In the second quarter of 2013, OÜ Baltic Electricity Engineering, a 100% subsidiary of AS Merko Ehitus, was renamed OÜ Merko Investments. The private limited company has a share capital of EUR 10,000.

On 22 May 2013, AS Merko Ehitus concluded an intra-group transaction, disposing a 100% stake in SIA Merks, a subsidiary engaged in construction, to OÜ Merko Investments, which is fully owned by AS Merko Ehitus. The transaction served the technical purpose of reorganising the legal structure of the group.

By 4 July 2013, the liquidation of Merko Ukraine LLC, initiated in the autumn of 2012, was completed, with the company deleted from the registers.

On 10 June 2013, the shareholders of OÜ Unigate, a 50%-owned joint venture of AS Merko Ehitus, resolved to increase the nominal value of the share of the joint venture by EUR 887.07 to EUR 6,000 with the aim of bringing the company’s share capital into line with the requirements arising from the Commercial Code. A monetary contribution of EUR 350,000 was made by both shareholders, with the nominal value of the share capital amounting to EUR 444 and the share premium to EUR 349,556.

On 17 July 2013, UAB Merko Bustas, a 100% subsidiary of AS Merko Ehitus, established a 100% subsidiary UAB Kražiu Projektas in Lithuania, with a share capital of LTL 10,000 (EUR 2,896). The subsidiary was established with the aim of acquiring registered immovables for development purposes in Lithuania.

OPERATING RESULTS Business activities

Key financial indicators (in million of euros):

* incl short-term deposits in the amount of EUR 2.5 million Revenue and gross profit

Merko Ehitus group generated a total of EUR 113.7 million in revenue in 6 months of 2013. 81.6% of the revenue was generated in Estonia, 15.4% in Latvia and 3.0% in Lithuania (6 months of 2012: 84.0% in Estonia, 14.0% in Latvia and 2.0% in Lithuania). Compared to the 6 months of 2012 the group revenue increased by 6.4%. During the reporting period, orders from the private sector have increased, but the majority of revenue is still related to projects financed with support from the EU structural funds – state orders. Revenue in Q2 2013 was EUR 65.9 million, which has increased 11.5% compared to the previous year (Q2 2012: EUR 59.1 million). The increase in revenue, compared to last year, can be mainly attributed to projects pursued in the general construction segment.

In 6 months of 2013 the group’s gross profit from development and construction activities totalled EUR 9.8 million (6 months of 2012: EUR 5.0 million). The gross profit in Q2 2013 was EUR 5.6 million (Q2 2012: EUR 2.5 million). Both the six-month (8.6%) and the quarterly (8.5%) gross profit margin has improved by approximately 4%, compared to the same period last year (first six months of 2012: 4.7%; Q2 2012: 4.3%). Key contributors to the rise in the profit margin are the road construction segment and the real estate development segment. At the same time, the margin has fallen at the expense of the profitability of the general construction and engineering segments. The scarcity of projects and the ever-tightening competition in the construction sector pose a huge challenge in the maintaining of the current gross profit margin for new procurements in all segments, but especially in general construction, where competition and the number of companies participating at the procurements is the highest.

Net profit

In 6 months of 2013, the group’s pre-tax profit totalled EUR 4.5 million and net profit was EUR 4.0 million as compared to the pre-tax profit or EUR 0.8 million and net profit of EUR 0.6 million in 6 months of 2012. Group’s net profit margin was 3.6% (6 months of 2012: 0.5%).

In Q2 of 2013, the group’s pre-tax profit totalled EUR 2.6 million and net profit was EUR 2.3 million as compared to the pre-tax profit or EUR 0.4 million and net profit of EUR 0.4 million in Q2 of 2012. Group’s quarterly result is comparable to years 2010 and 2009 level, but the profit margins were higher in those years.

Business segments

The group manages business activities in the following areas at activity:

• General construction - includes the construction of buildings for different purposes including offices, hotels, museums, culture and business centres, social, production and service buildings as well as buildings of various industrial structures.
• Engineering construction - The engineering construction segment of Merko builds port structures, landfilling areas at landfills, various road structures (tunnels, overpasses, bridges), water and sewerage pipelines, water treatment plants and other complex engineering and environmental projects.
• Road construction - In this segment, Merko carries out road construction and builds the associated infrastructure. In addition, we carry out road maintenance works and maintenance repair.
• Real estate development - including development of apartment projects, long-term financial investments and commercial real estate projects.

General construction

In the first half-year of 2013, the revenue of the general construction segment increased by 44.3% from the same period last year. At the same time, the gross profit of the segment has decreased, mainly due to the pressure on the margins exerted by tightening competition caused by the scarcity of projects. While in 2012 the market was primarily dominated by public sector projects, the 2013 has seen an increase also in private sector orders. Nevertheless, public procurements continue to make up a bulk of the work-in-progress.

Our major projects in the II quarter included reconstruction work at the North-Estonia Medical Centre in Mustamäe, construction of KTN Tallinn logistics centre (II construction phase, I stage) and Tondiraba ice arena.

Engineering or infrastructure construction

The revenue of the civil engineering segment amounted to EUR 45.5 million in the first half-year (6 months of 2012: EUR 55.3 million), which is 17.7% less than in 2012. The decrease from the previous year is mainly due to a drop in the volume of pipeline projects. In the second quarter of 2013, our main projects included the reconstruction of pipelines in Vääna-Jõesuu and the closing of industrial waste and semi-coke landfill in Kohtla-Järve. The said area continues to form the largest proportion in the group’s revenue (6 months of 2013: 40.0%). The gross profit of the civil engineering segment amounted to EUR 3.9 million (6 months of 2012: EUR 3.3 million) and the gross profit margin was 8.7% (6 months of 2012: 6.0%). The positive shift is mainly due to the fact that the results of loss-making projects had already been recorded in the previous period.

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

Road construction

The revenue of the road construction segment amounted to EUR 22.6 million in the first half-year of 2013, which means a 21.9% increase from 2012. In the first half-year of 2013, the segment earned a gross profit of EUR 2.7 million, which yields a gross profit margin of 12.2%. The increase in both revenue and profit was supported by the increase in road construction and maintenance volumes in the second quarter of 2013.

We continue with our largest construction project of constructing the Ülemiste traffic junction, the final completion of which is scheduled for the end of 2013.

Real estate development

A total of 94 apartments were sold in 6 months of 2013 at the total value of EUR 10.8 million (excl. VAT), (6 months of 2012: 67 apartments and EUR 8.0 million, respectively). At the end of the period, Merko Ehitus group’s inventory comprised 62 completed but not yet sold apartments (24 in Estonia, 14 in Latvia and 24 in Lithuania).

The following table lists the apartment projects in progress:

Two previously frozen development projects were re-launched in the second quarter of 2013. In Tallinn, the company launched construction of the Kentmanni 6 residential and commercial building (number of apartments in the new design: 92), a project frozen in 2008. The first two floors of the building have been designed as commercial space, with the remaining 12 floors allocated for apartments. Two underground parking lots had been constructed for the building by the end of 2008. The building is scheduled to be completed at the end of 2014.

In the second quarter of 2013, we partially re-launched the Pärna Avenue development project (42 apartments) in Raadi, Tartu. As at 30 June 2013, the company thus has a single frozen project in Tartu – the 158-apartment project shelved in 2007.

In addition, we launched new development projects in both Riga and Vilnius in the second quarter of 2013. The development project launched in Riga constitutes a continuation of the apartment building which is nearing completion at Grostonas 17 in the Skanstese district – we will build an 82-apartment residential building just next to it. In Vilnius, we will proceed with the second stage of the Mokslininku project (54 apartments).

One of our objectives is to keep a moderate portfolio of land plots to ensure stable implementation of property development projects considering the market conditions. At the same time the real estate market has become more selective – key aspects considered in the evaluation of risks prior to the launch of each project are the location, scale of development, design solutions and the target group. In view of the low mortgage interest rates and the limited supply on the market of new apartments over the last three years, demand and transaction activity in the apartment market has grown moderately.

Secured Order Book

As at 30 June 2013, the group’s secured order book amounted to EUR 184 million as compared to EUR 233 million as at 30 June 2012. The group does not include residential building projects developed by the group and development of the investment property in the order book.

In second quarter of 2013, EUR 51 million worth of new contracts were signed (without own developments) as compared to EUR 97 million in same period previous year. Public procurement remained the greatest contributor to the volume of contracts concluded in the second quarter of 2012. Major contracts included the design and construction of the Narva City water treatment plant (EUR 21 million), reconstruction of the North-Estonia Medical Centre in Mustamäe (EUR 24 million) and reconstruction of the Ülemiste traffic interchange (EUR 8 million). The table below shows the largest construction contracts that were signed in the second quarter of 2013:

After the balance sheet date, a contract was concluded on 18 July 2013 between the AS Merko Ehitus group company AS Merko Ehitus Eesti and the AS Olympic Entertainment Group company Kesklinna Hotelli OÜ for the construction of a hotel and entertainment complex in Tallinn. The hotel will be operated by the international hotel chain Hilton Worldwide. The contract value is nearly EUR 31 million. Demolition work on the present-day Park Hotel & Casino will commence in October 2013, with the construction of the new building to be launched in February 2014. The work is scheduled to be delivered in December 2015.

Furthermore, on 1 August 2013, SIA Merks – a Latvian-based subsidiary of AS Merko Ehitus – concluded a contract with Liep?ja City Government for the construction of the multi-functional Lielais Dzintars centre in Liep?ja. The contract value is EUR 28.3 million, with the work scheduled to be delivered in July 2015.

Although public procurements make up a bulk of the construction orders for 2013, the private sector has shown signs of recovery in all Baltic States in the first half of 2013. Considering the expiry of the current EU budget period in the second half of 2013, we are expecting a decrease in the volume of public procurements. Consequently, it will prove quite a challenge to keep the volume of new contracts at its current level (the level for 2012).

Cash flows

The cash position of the group is stable. As at the end of the reporting period, the cash and cash equivalents of Merko Ehitus group amounted to EUR 31.3 million (as at 30 June 2012: EUR 11.7 million). The group also has EUR 2.5 million in short-term deposits with a maturity term of more than 3 months. The strategic cash position and investment capability of the holding company AS Merko Ehitus has improved during the year.

The 6-month cash flow from operating activity was positive at EUR 3.2 million (6 months of 2012: negative EUR 4.4 million), cash flow from investing activity was negative at EUR 3.2 million (6 months of 2012: negative EUR 1.5 million) and the cash flow from financing activity was negative at EUR 3.9 million (6 months of 2012: negative EUR 0.9 million). The cash flow from operating activity was mostly influenced by the negative change in trade and other receivables related to operating activities EUR 16.2 million, by the positive change in trade and other payables related to operating activities EUR 13.1 million, by the operating profit EUR 5.1 million and positive change in construction contracts recognised under the stage of completion method EUR 4.1 million.

The share of public orders remains high in the consolidated cash flows, with long terms of payment (an average of 56 days after registered delivery of the work) and a persistent burden on current assets, including cash flow management. 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 (13.9% as at 6 months of 2013).

Cash flows from investing activities include the acquisition of short-term deposit with a maturity term of more than 3 months in the amount of EUR -2.5 million, while the balance of other investments and acquisition of PPE was EUR -0.7 million.

The net of loans received and loans repaid in connection with development projects amounted to EUR -2.9 million, factoring to EUR -0.4 million and financial lease repayments to EUR -0.6 million in the cash flow from financing activities.

The Q2 2013 cash flow from operating activity was negative at EUR 1.9 million (Q2 2012: positive EUR 1.5 million), cash flow from investing activity was negative at EUR 0.5 million (Q2 2012: negative EUR 1.1 million) and the cash flow from financing activity was positive at EUR 0.3 million (Q2 2012: positive EUR 2.6 million). The negative quarterly cash flow from operating activities was mainly conditioned by the current asset outflow related to the launch of large-scale projects in the last quarter of the year.

Cash flow from financing activities amounted to EUR 2.6 million in the second quarter of 2012 – EUR 2.3 million higher than the EUR 0.3 million in the second quarter of 2013. This difference can mainly be attributed to the low level of debt financing used for the residential development projects.

Financial ratios (per share attributable to equity holders of the parent company)

Employees and remuneration

The number of the group’s employees decreased by 14 in the last 12 months (-1.5%) and as at 30 June 2013, the group had a total of 943 employees (including fixed-term and part-time employees).

The group’s objective is to pay its employees competitive salary. The interests of employees and the company are balanced by performance-based remuneration. Gross wages and salaries paid to employees in 6 months of 2013 totalled EUR 10.9 million, of which base wages and salaries accounted for 72.0% and bonuses accounted for 28.0% (6 months of 2012: EUR 8.8 million, of which base wages and salaries were 83.5% and bonuses were 16.5%). In a year, gross wages and salaries increased by 24.7%, including a 7.4% increase in base wages and salaries and a 112.5% increase in bonuses.

Share and shareholders

The shares of Merko Ehitus have been listed in the main list of NASDAQ OMX Tallinn. A total of 1051 transactions were conducted with the shares of Merko Ehitus in 6 months of 2013, with 0.36 million shares traded, generating a turnover of EUR 2.45 million. The lowest share price amounted to EUR 5.71 and the highest to EUR 7.70 per share. The closing price of the share was EUR 6.44 on 30 June 2013. As at 30 June 2013, the market value of AS Merko Ehitus amounted to EUR 114 million.

Main shareholders of AS Merko Ehitus as of 30 June 2013 and the change compared to the previous quarter:

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.

A dividend payable of EUR 5.3 million (EUR 0.3 per share) has been recognised in the consolidated balance sheet as at 30 June 2013. The dividends were paid out to shareholders on 3 July 2013.

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.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME in thousand euros, unaudited

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME in thousand euros, unaudited

CONSOLIDATED STATEMENT OF FINANCIAL POSITION in thousand euros, unaudited

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