Tallinn, Estonia, 2015-11-05 07:00 CET (GLOBE NEWSWIRE) --
COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD
The sales revenue of Merko Ehitus in Q3 stood at 68.4 million euros and for the first 9 months at 184.6 million euros and has stayed at the level of the previous year. The net profit of the group for Q3 stood at 3.1 million euros and for the first 9 months at 5.6 million euros, and it includes the additional income tax expenses arising from the payment of dividends. The decrease in the sales revenue from construction services in Estonia has been compensated by the growth of the sales revenue in Latvia and Lithuania, and also by active real estate development, where the sales revenue has grown by 73% in the first 9 months and accounts for a quarter of the group’s sales revenue.
In this challenging year, the group has managed to maintain the sales revenue at a level comparable to the previous year, which has not been easy, given the situation in the Baltic construction market and the relatively weak position of the group’s secured order book at the beginning of the year. As expected, the volume of construction service in Estonia has decreased, because the number of orders by the government has decreased in civil engineering and the company has sought to avoid excess risks in price competitions within the general construction segment. Group-wide, the growth of sales revenue in Latvia and Lithuania and more active real estate development throughout the Baltic states has helped to balance the sales revenue.
Even though the group’s portfolio of new contracts has increased in comparison with the corresponding 9 months of the previous year, its volume cannot be deemed satisfying. As the public sector has recently placed only a few orders and only a few procurements have been large, the price war at these tenders is very fierce. The private customers have nevertheless had the courage to invest and several private customers have had trust in Merko – to date, the majority of new contracts in the portfolio have been entered into with private customers. Within the first 9 months of the year, the group has entered into new contracts to the value of 152.2 million euros. As of 30 September 2015, the group had a secured an order book balance of 193.6 million euros (30 September 2014: 166.4 million euros).
The management estimates that 2016 will definitely be challenging, particularly due to the fact that the launch of the projects co-funded by the EU has been postponed longer than expected and the growth in the Baltic states remains at only a few percentage points. In Latvia, the group has completed the construction of several large-scale projects, but this year has not succeeded in entering into new contracts in the same volume, which may affect the volume of construction work in Latvia next year. The results of the group are also substantially affected by the trends in the Baltic apartment market, where developments have so far been positive for us, although the rapid growth in the last three years has begun to stabilise. We believe that the long-term outlooks of the construction market will remain good in our home markets despite the current challenges as investments in infrastructure and housing construction are still essential, and the yield on commercial property remains at a competitive level for investors.
The sales revenue of Merko Ehitus in Q3 of 2015 stood at 68.4 million euros and for the first 9 months at 184.6 million euros (Q3 in 2014: 68.5 million euros and the first 9 months in 2014: 182.2 million euros). The Q3 gross margin of the group was 9.3% and the profit before taxes was 3.5 million euros; the performance for the first 9 months was 8.3% and 7.0 million euros, respectively. The net profit of the company in Q3 stood at 3.1 million euros and for the first 9 months at 5.6 million euros. The net profit for the first 9 months was influenced by additional income tax expenses in Estonia in the amount of 0.9 million euros, which resulted from the payment of dividends to the shareholders in Q2.
The real estate development projects launched by the group in this year have progressed as planned and although the apartment markets in Tallinn and Vilnius have begun to stabilise, potential customers are still interested in purchasing apartments developed by Merko. In order to maintain and strengthen our longstanding market position, the group has also acquired new land plots, the largest of these is the approximately 1.3-hectare Rinktines development area in the city centre of Vilnius, where more than 300 new apartments can be built. It is relevant to note that the group has purchased the new land plots for the company’s own resources without drawing on external funding this year. Over the first 9 months, the group has invested 30.1 million euros into the construction of apartments and 11.7 million euros into the acquisition of different land plots. During the first 9 months, the share of the sales revenue from real estate development has increased to about 25% of the total revenues of the group (the first 9 months in 2014: 14.5%).
In the first 9 months, the group sold 248 apartments at the total cost of 42.6 million euros, and in Q3 it sold 80 apartments at the total cost of 10.9 million euros (figures exclusive of VAT), (the first 9 months in 2014: 235 apartments, sales revenue 23.5 million euros). The sales revenue from real estate development has increases by 72.7% over the first 9 months. This year, the company has launched the construction of a total of 386 apartments in the Baltic states (the first 9 months in 2014: 310 apartments), including apartment buildings in the city centre of Tallinn at 52 Tartu mnt (I stage), at 33 Sõpruse pst in Kristiine district, at 1a Jahu Street in Kalamaja district, in Paepargi Perepark, Kaupmehe Street in Tartu rural municipality and at 73 Krokuvos Street in the city centre of Vilnius.
OVERVIEW OF THE 9 MONTHS AND III QUARTER RESULTS
PROFITABILITY
Profit before tax in 9M 2015 was EUR 7.0 million (9M 2014: EUR 8.0 million), which is equivalent to a profit before tax margin of 3.8% (9M 2014: 4.4%). Gross margin in 9M was 8.3% (9M 2014: 8.9%), which has decreased by 7.3% compared to the same period last year. Q3 2015 profit before tax was EUR 3.5 million (Q3 2014: EUR 3.3 million). Net margin in 9M 2015 decreased to 3.0% (9M 2014: 4.2%) and net profit was EUR 5.6 million (9M 2014: EUR 7.6 million), having decreased by 27.1% compared to the same period last year. Q3 net profit was EUR 3.1 million (Q3 2014: EUR 3.3 million).
REVENUE
Revenue in 9M 2015 was EUR 184.6 million (9M 2014: EUR 182.2 million), which has increased by 1.3% compared to the same period last year. Q3 revenue was EUR 68.4 million (Q3 2014: EUR 68.5 million). The share of construction service revenue earned outside of Estonia has increased in 9M 2015 to 31.9% (9M 2014: 25.7%). The number of apartments sold in 9 months of 2015 (248 pcs, revenues of EUR 42.6 million) has increased by 5.5% and the revenue from apartment sales has increased by 81.5%(9 months of 2014: 235 apartments, revenues of EUR 23.5 million).
CASH POSITION
At the end of the reporting period, the group had EUR 19.9 million in cash and cash equivalents and equity EUR 121.3 million (53.4% of total assets). Comparable figures as at 30 September 2014 were accordingly EUR 40.3 million and EUR 122.2 million (47.5% of total assets). As at 30 September 2015 the group had net debt of positive EUR 10.0 million (30 September 2014: positive EUR 0.1 million).
SECURED ORDER BOOK
In Q3 2015, group companies signed new contracts in the amount of EUR 30.9 million (Q3 2014: EUR 37.2 million). 9M 2015 new contracts signed in amount of EUR 152.2 million (9M 2014: EUR 107.5 million). As at 30 September 2015, the group’s secured order book stood at EUR 193.6 million (30 September 2014: EUR 166.4 million).
| 9M ‘15 | 9M ‘14 | Variance | Q3 ‘15 | Q3 ‘14 | Variance | 12M ‘14 | ||
| Revenue | million EUR | 184.6 | 182.2 | +1.3% | 68.4 | 68.5 | -0.3% | 252.3 |
| Gross profit | million EUR | 15.3 | 16.3 | -6.1% | 6.3 | 6.2 | +2.4% | 24.7 |
| Gross profit margin | % | 8.3 | 8.9 | -7.3% | 9.3 | 9.0 | +2.7% | 9.8 |
| EBITDA | million EUR | 9.9 | 10.2 | -2.5% | 4.4 | 4.1 | +7.8% | 16.4 |
| EBITDA margin | % | 5.4 | 5.6 | -3.7% | 6.4 | 5.9 | +8.1% | 6.5 |
| Profit before tax | million EUR | 7.0 | 8.0 | -12.0% | 3.5 | 3.3 | +4.9% | 13.3 |
| PBT margin | % | 3.8 | 4.4 | -13.1% | 5.1 | 4.8 | +5.1% | 5.3 |
| Net profit (parent) | million EUR | 5.6 | 7.6 | -27.1% | 3.1 | 3.3 | -3.8% | 12.4 |
| Net profit margin | % | 3.0 | 4.2 | -28.0% | 4.6 | 4.8 | -3.5% | 4.9 |
| EPS | EUR | 0.31 | 0.43 | -27.1% | 0.18 | 0.18 | -3.8% | 0.70 |
| 30.09.2015 | 30.09.2014 | Variance | 31.12.2014 | ||
| ROE (on yearly basis) | % | 8.3 | 8.3 | +0.2% | 10.1 |
| Equity ratio | % | 53.4 | 47.5 | +12.5% | 51.0 |
| Secured order book | million EUR | 193.6 | 166.4 | +16.3% | 179.1 |
| Total assets | million EUR | 227.0 | 257.3 | -11.8% | 249.3 |
| Number of employees | people | 798 | 804 | -0.7% | 765 |
OPERATING RESULTS
Revenue and gross profit
Merko Ehitus group generated a total of EUR 184.6 million in revenue in 9 months of 2015 (9 months of 2014: EUR 182.2 million). 43.4% of the revenue was generated in Estonian construction service, 31.9% in Latvian and Lithuanian construction service and 24.7% in and real estate development segment (9 months of 2014: 59.8% in Estonian construction service, 25.7% in Latvian and Lithuanian construction service and 14.5% in real estate development segment). Compared to the 9 months of 2014 the group revenue has increased by 1.3%. Compared to the 9 months of the previous year in the 9 months of 2015 the share of Latvian and Lithuanian construction service revenue in the group’s revenue has increased from 25.7% to 31.9%. Revenue in Q3 2015 was EUR 68.4 million, which has decreased by 0.3% compared to the previous year (Q3 2014: EUR 68.5 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 9 months of 2015 the group’s gross profit from development and construction activities totalled EUR 15.3 million (9 months of 2014: EUR 16.3 million) and in Q3 2015 EUR 6.3 million (Q3 2014: EUR 6.2 million). The 9 months gross profit margin (8.3%) has decreased by 0.6 pp compared to the same period last year (9 months of 2014: 8.9%). Maintaining the stability of profit margins during the 9 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 9 months of 2015, the group’s profit before tax totalled EUR 7.0 million and net profit attributable to equity holders of the parent was EUR 5.6 million as compared to the pre-tax profit or EUR 8.0 million and net profit attributable to equity holders of the parent of EUR 7.6 million in 9 months of 2014. The 9 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 9 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 3.8% (9 months of 2014: 4.4%) and the net profit margin was 3.0% (9 months of 2014: 4.2%). Both the group’s profit before tax (EUR 7.0 million) and the profit before tax margin (3.8%) have decreased compared to the same period last year (9 months of 2014: EUR 8.0 million and 4.2%, respectively).
In Q3 of 2015, the group’s pre-tax profit totalled EUR 3.5 million and net profit was EUR 3.1 million as compared to the pre-tax profit of EUR 3.3 million and net profit of EUR 3.3 million in Q3 of 2014. Contrary to the 9 months of 2015, both the group’s quarterly profit before tax (EUR 3.5 million) and the quarterly profit before tax margin (5.1%) have increased compared to the same period last year (Q3 2014: EUR 3.3 million and 4.8%, 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. The group’s segment structure is alined with group’s management structure.
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
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.
In the 9 months of 2015, the revenue of the Estonian construction service segment was EUR 80.0 million (9 months of 2014: EUR 109.0 million), having decreased by 26.5% from the same period last year. The 9 months revenue also includes revenue from the Finnish pile works project in the amount of EUR 2.5 million. The decrease of revenues is largely due to the fact that in the first 9 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). Also, part of the general construction projects have proceeded somewhat more slowly than originally planned; however, this will not result in changes in the final project deadlines. In this segment, the group earned a gross profit of EUR 7.7 million for 9 months (9 months of 2014: EUR 9.9 million). The Estonian construction service segment revenues for 9 months 2015 were 43.4% of the group’s revenue, forming the largest proportion in the group’s revenue, but still having decreased by 27.5%.
In 9 months of 2015, the gross margin of the Estonian construction service segment was 9.6%, which increased by 5.8% compared to the 9 months of 2014 (9.1%). 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.
Our major projects in the third quarter in Tallinn included the construction works of Hilton Tallinn Park hotel, the reconstruction work at the North-Estonia Medical Centre in Mustamäe, the design and construction works of logistics centre in Maardu, the design and renovation of the infrastructure of tram line No. 4, the design and construction works of Öpik Office Building and pile works in Tripla development are in Helsinki. Also the reconstruction works of Läsna-Kodasoo sections of Tallinn-Narva main road, the repair works of Kohtlase bridge, the reconstruction works of national highway No 12 Kose-Jägala and the road maintenance works done under the service agreement with Tallinn were in progress.
Latvian and Lithuanian construction service
The Latvian and Lithuanian construction service segment consists of general construction work in both of these countries and provision of civil engineering services in Latvia.
The revenue of the Latvian and Lithuanian construction service segment amounted to EUR 58.9 million in the 9 months of 2015 (9 months of 2014: EUR 46.8 million), which is 25.7% more than in the 9 months of 2014. If the Latvian and Lithuanian construction service segment revenues of 9 months of 2014 formed 25.7% of the group’s revenue, then during 9 months of the current year the segments revenues have increased to 31.9%. This increase was expected considering the completion of large contracts signed in late 2013 in Latvia, such as the Liepaja Concert Hall and the Dzintaru 28 apartment building. The group’s continued focus is on increasing the revenues outside Estonia. The 9 month gross profit of the Latvian and Lithuanian construction service segment amounted to EUR 2.5 million (9 months of 2014: EUR 2.1 million) and the gross profit margin was 4.3% (9 months of 2014: 4.4%), which decreased by 1.1% compared to the same period previous year.
In the third quarter of 2015, the main ongoing projects included were the construction of multifunctional concert hall in Liepaja, the construction of Dzintaru 28 apartment building in Jurmala, the construction of professional schools in Riga and Valmiera, the construction works of apartment building Magdalēnas nami in Riga, the re-cultivation and construction works of waste recycling site at A. Deglava Street in Riga, the engineering preparation works for Mežaparks development area in Riga, the construction of concrete foundations for wind turbine generators in Šilute wind farm, the construction works of Kauno/Algirdo residential complex with office premises in Vilnius and the general construction works of the ABB HVDC transformer substation in Klaipeda.
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 248 apartments in 9 months of 2015 at the total value of EUR 42.6 million (excl. VAT), compared to 235 apartments and EUR 23.5 million in 9 months of 2014. In Q3 of 2015 a total of 80 apartments were sold at the total value of EUR 10.9 million (excl. VAT), (Q3 2014: 37 apartments and EUR 4.9 million). In 9 months of 2015, the group has earned EUR 2.1 million of revenue from the sale of immovable properties (9 months of 2014: EUR 1.4 million). In 9 months of 2015 real estate development segment revenues have increased 72.7% 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 9 months to 24.7% of the group’s total revenue (9 months of 2014: 14.5%). 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 9 month gross profit of the segment amounted to EUR 5.1 million (9 months of 2014: EUR 4.3 million) and the gross profit margin was 11.1% (9 months of 2014: 16.4%), which decreased by 32.6% 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.
At the end of the period, Merko Ehitus group’s inventory comprised 241 apartments where a preliminary agreement had been signed: 22 completed apartments (3 in Estonia and 19 in Latvia) and 219 apartments under construction (175 in Estonia and 44 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 September 2015, Merko Ehitus group had a total of 412 apartments for active sale (as at 30 September 2014: 366 apartments), for which there are no pre-sale agreements and of which 72 have been completed (17 in Estonia, 54 in Latvia and 1 in Lithuania) and 340 are under construction (210 in Estonia, 120 in Lithuania and 10 in Finland).
In 9 months of 2015, we launched the construction of a total of 386 new apartments in the Baltic States (9 months of 2014: 310 apartments) – including the first stage of Tartu mnt 52 development project, the preparation works of which took place in 2014. After the balance sheet date, the group has launched an additional apartment developments with 55 apartments at Grostonas 12 in Riga, Latvia. In the 9 months of this year, the group has invested a total of EUR 30.1 million (9 months of 2014: EUR 32.3 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 will 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 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 30 September 2015, the group's inventories included land plots with the development potential of EUR 61.5 million (30.09.2014: EUR 55.6 million; 31.12.2014: EUR 55.2 million).
In the 9 months of 2015, the group has purchased new land plots in Estonia at an acquisition cost of EUR 6.6 million and in Lithuania EUR 5.1 million (9 months of 2014: in Lithuania at an acquisition cost of EUR 3.2 million). In Lithuania, in Q3 2015, the group bought an approximately 1.3-hectare Rinktines development area in the city centre of Vilnius, where up to 350 apartments can be constructed. 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 to build approximately 200 apartments.
Secured order book
As at 30 September 2015, the group’s secured order book (without own developments) amounted to EUR 193.6 million as compared to EUR 166.4 million as at 30 September 2014. The secured order book excludes the group's own residential development projects and construction work related to developing real estate investments.
In third quarter of 2015, EUR 30.9 million worth of new contracts were signed (without own developments) as compared to EUR 37.2 million in same period last year. The value of new contracts signed (without own developments) in the 9 months of 2015 amounted to EUR 152.2 million (9 months of 2014: EUR 107.5 million).
After the balance sheet date, the group concluded three large construction contracts:
- On 9 October 2015, SIA Merks – a subsidiary of AS Merko Ehitus – signed a contract with SIA LMH to perform the construction works of kindergarten and school buildings complex near Riga in Pinki, in Latvia. The value of the contract is approximately EUR 6.0 million. The works are scheduled for completion in October 2016.
- On 16 October 2015, AS Merko Ehitus Eesti, 100% owned subsidiary part of AS Merko Ehitus group, and EKEREPOL OÜ, part of EKE Invest AS group, signed a contract to perform the construction works of an 14-storey office building, located at Mustamäe tee 3 ja 3A, Tallinn, Estonia. The contract value is approximately EUR 10.6 million. The works are scheduled to complete by the end of 2016.
- On 3 November 2015, AS Merko Ehitus group company AS Merko Ehitus Eesti and KMG Insenerehituse AS, and Tallinn's city’s transport operator Tallinna Linnatranspordi AS entered into a contract to perform the design and construction work on the infrastructure of Tallinn airport tram line. The contract value is approximately EUR 11.5 million. The works will be performed during 2016 and 2017.
Of the contracts signed in the 9 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 4/5 (as at 31.12.2014 approximately 1/2). 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 first 9 months of 2015 has been modest. 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 in 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
As at 30 September 2015 the group had cash equivalents in the amount of EUR 19.9 million (30.09.2014: EUR 40.3 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 utilized its credit lines of existing overdrafts and loan agreements and has not concluded loan agreements for financing all of the projects in development.
The 9-month cash flow from operating activity was negative at EUR 16.1 million (9 months of 2014: negative EUR 0.2 million), cash flow from investing activity was negative at EUR 0.1 million (9 months of 2014: negative EUR 1.6 million) and the cash flow from financing activity was negative at EUR 15.5 million (9 months of 2014: negative EUR 4.4 million).
The cash flow from operating activity was mostly influenced by the operating profit EUR 7.6 million (9 months of 2014: EUR 8.5 million), by the positive change in receivables and liabilities related to construction contracts recognised under the stage of completion method EUR 7.0 million (9 months of 2014: positive change of EUR 2.3 million), by the negative change in the provisions EUR 3.7 million (9 months of 2014: negative change of EUR 0.3 million), by the negative change in trade and other receivables related to operating activities EUR 12.6 million, incl. a negative change in financing co-financed projects of EUR 3.6 million (9 months of 2014: negative change of EUR 5.6 million, incl. a negative change in financing co-financed projects of EUR 0.4 million), by the positive change in inventory EUR 1.9 million, incl. negative cash flow from purchase of new land plots in the amount of EUR 11.7 million (9 months of 2014: negative change of EUR 16.0 million, incl. negative cash flow from purchase of new land plots in the amount of EUR 3.2 million), by the negative change in trade and other payables related to operating activities EUR 16.1 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 (9 months of 2014: positive change of EUR 10.1 million) and by the corporate income tax paid EUR 1.6 million (9 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 and Lithuanian 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 (13.2% as at 30.09.2015; 15.7% as at 30.09.2014).
Cash flows from investment activities include negative cash flow from the acquisition of non-current asset in the amount of EUR 0.4 million (9 months of 2014: EUR 1.1 million) and the positive cash flow from the sale of non-current assets in the amount of EUR 0.3 million (9 months of 2014: EUR 0.1 million). Cash flows from investment activities in 9 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, but also negative cash flow from the acquisition of minority shareholding in subsidiary AS Gustaf in the amount of EUR 0.1 million and the acquisition of subsidiary UAB Timana (related to the purchase of a new land plot in Lithuania) in the amount of 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.
The largest single negative item in cash flows from financing activities was the dividend payment of EUR 7.3 million (9 months of 2014: EUR 7.3 million). Project specific loans obtained using investment property as collateral were repaid mainly in Estonia in the amount of EUR 1.6 million (9 months of 2014: negative cash flow in net amount of EUR 0.4 million), net of loans received and loans repaid in connection with development projects mainly in Latvia amounted to negative cash flow of EUR 4.9 million (9 months of 2014: positive cash flow of EUR 7.5 million) and finance lease principal repayments of EUR 1.6 million (9 months of 2014: EUR 0.7 million). All of the new land plots acquired by the group both in the first 9 months of 2015 and 2014 were financed in full from the group’s resources without drawing on external funding. 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 9 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 Q3 2015 cash flow from operating activity was positive at EUR 0.8 million (Q3 2014: negative EUR 6.9 million), cash flow from investing activity was negative at EUR 0.1 million (Q3 2014: negative EUR 0.8 million) and the cash flow from financing activity was negative at EUR 5.2 million (Q3 2014: positive EUR 4.6 million).
The quarterly cash flows from operating activities were positive primarily as a result of the decrease receivables and increase of liabilities calculated using the percentage of completion method. On the negatice side cash flow from operating activities was impacted by the acquisition cost of land plots for development activity in Lithuania for the total amount of EUR 5.1 million.
Cash flows from investment activities was negative primarily due to the purchase of non-current asset in the amount of EUR 0.1 million, which is mainly related to the renewal of equipment in the road construction segment.
The quarterly cash flow from financing activities was negative primarily due the net negative cash flow of EUR 4.4 million of loans received and loans repaid to finance the construction costs of both investment property and development projects mainly in Latvia but also in Estonia, which was supplemented by the finance lease principal repayments of EUR 0.7 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 reduction of share capital in the Commercial Register was made on 14 August 2015 and the monetary payments to the shareholders in the amount of EUR 4,071,000 (EUR 0.23 per share), related to the reduction of share capital will be made on 16 November 2015. 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 4.1 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)
| 9M ‘15 | 9M ‘14 | 9M ‘13 | Q3 ‘15 | Q3 ‘14 | Q3 ‘13 | 12M ‘14 | ||
| Income statement summary | ||||||||
| Revenue | million EUR | 184.6 | 182.2 | 197.8 | 68.4 | 68.5 | 84.1 | 252.3 |
| Gross profit | million EUR | 15.3 | 16.3 | 17.4 | 6.3 | 6.2 | 7.5 | 24.7 |
| Gross profit margin | % | 8.3 | 8.9 | 8.8 | 9.3 | 9.0 | 9.0 | 9.8 |
| Operating profit | million EUR | 7.6 | 8.5 | 9.5 | 3.7 | 3.5 | 4.4 | 14.0 |
| Operating profit margin | % | 4.1 | 4.7 | 4.8 | 5.4 | 5.1 | 5.3 | 5.5 |
| Profit before tax | million EUR | 7.0 | 8.0 | 8.7 | 3.5 | 3.3 | 4.2 | 13.3 |
| PBT margin | % | 3.8 | 4.4 | 4.4 | 5.1 | 4.8 | 5.0 | 5.3 |
| Net profit | million EUR | 5.6 | 7.4 | 7.9 | 3.2 | 3.2 | 3.9 | 12.3 |
| attributable to equity holders of the parent | million EUR | 5.6 | 7.6 | 7.9 | 3.1 | 3.3 | 3.9 | 12.4 |
| attributable to non-controlling interest | million EUR | 0.0 | (0.2) | 0.0 | 0.1 | (0.1) | 0.0 | (0.1) |
| Net profit margin | % | 3.0 | 4.2 | 4.0 | 4.6 | 4.8 | 4.6 | 4.9 |
| Other income statement indicators | ||||||||
| EBITDA | million EUR | 9.9 | 10.2 | 11.6 | 4.4 | 4.1 | 5.3 | 16.4 |
| EBITDA margin | % | 5.4 | 5.6 | 5.9 | 6.4 | 5.9 | 6.3 | 6.5 |
| General expense ratio | % | 4.8 | 4.9 | 4.7 | 4.4 | 4.5 | 4.2 | 4.9 |
| Labour cost ratio | % | 12.1 | 12.1 | 12.1 | 12.4 | 11.3 | 11.2 | 11.9 |
| Revenue per employee | thousand EUR | 239 | 230 | 226 | 89 | 87 | 96 | 319 |
| Other significant indicators | 30.09.2015 | 30.09.2014 | 30.09.2013 | 31.12.2014 | |
| Return on equity | % | 8.3 | 8.3 | 10.5 | 10.1 |
| Return on assets | % | 4.4 | 4.1 | 5.3 | 5.0 |
| Return on invested capital | % | 8.3 | 7.1 | 9.4 | 8.8 |
| Equity ratio | % | 53.4 | 47.5 | 48.1 | 51.0 |
| Debt ratio | % | 13.2 | 15.7 | 13.9 | 15.1 |
| Current ratio | times | 2.4 | 2.2 | 2.0 | 2.3 |
| Quick ratio | times | 0.9 | 1.0 | 1.1 | 1.1 |
| Accounts receivable turnover | days | 43 | 61 | 55 | 56 |
| Accounts payable turnover | days | 40 | 38 | 43 | 39 |
| Average number of employees | people | 771 | 792 | 877 | 790 |
| Secured order book | million EUR | 193.6 | 166.4 | 218.1 | 179.1 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros
|
2015 9 months |
2014 9 months |
2015 III quarter |
2014 III quarter |
2014 12 months |
|
| Revenue | 184,564 | 182,237 | 68,360 | 68,536 | 252,323 |
| Cost of goods sold | (169,295) | (165,979) | (62,030) | (62,357) | (227,591) |
| Gross profit | 15,269 | 16,258 | 6,330 | 6,179 | 24,732 |
| Marketing expenses | (2,347) | (2,290) | (826) | (781) | (3,190) |
| General and administrative expenses | (6,429) | (6,577) | (2,184) | (2,285) | (9,128) |
| Other operating income | 1,348 | 1,265 | 345 | 428 | 1,901 |
| Other operating expenses | (201) | (156) | 12 | (73) | (340) |
| Operating profit | 7,640 | 8,500 | 3,677 | 3,468 | 13,975 |
| Finance income/costs | (605) | (502) | (213) | (165) | (667) |
| incl. finance income/costs from joint ventures | (106) | (103) | (30) | (33) | (130) |
| finance income/costs from other long-term investments | 1 | 1 | - | - | 2 |
| interest expense | (575) | (482) | (209) | (149) | (662) |
| foreign exchange gain (loss) | (1) | (5) | (3) | (4) | (12) |
| other financial income (expenses) | 76 | 87 | 29 | 21 | 135 |
| Profit before tax | 7,035 | 7,998 | 3,464 | 3,303 | 13,308 |
| Corporate income tax expense | (1,471) | (558) | (265) | (76) | (1,055) |
| Net profit for financial year | 5,564 | 7,440 | 3,199 | 3,227 | 12,253 |
| incl. net profit attributable to equity holders of the parent | 5,555 | 7,621 | 3,138 | 3,261 | 12,417 |
| net profit attributable to non-controlling interest | 9 | (181) | 61 | (34) | (164) |
| Other comprehensive income | |||||
| Currency translation differences of foreign entities | 1 | - | 2 | - | 4 |
| Comprehensive income for the period | 5,565 | 7,440 | 3,201 | 3,227 | 12,257 |
| incl. net profit attributable to equity holders of the parent | 5,556 | 7,621 | 3,140 | 3,261 | 12,421 |
| net profit attributable to non-controlling interest | 9 | (181) | 61 | (34) | (164) |
| Earnings per share for profit attributable to equity holders of the parent (basic and diluted, in EUR) | 0.31 | 0.43 | 0.18 | 0.18 | 0.70 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros
| 30.09.2015 | 30.09.2014 | 31.12.2014 | |
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 19,936 | 40,332 | 51,583 |
| Trade and other receivables | 52,669 | 67,277 | 46,382 |
| Prepaid corporate income tax | 296 | 58 | 3 |
| Inventories | 118,138 | 118,917 | 117,638 |
| 191,039 | 226,584 | 215,606 | |
| Non-current assets | |||
| Long-term financial assets | 15,272 | 9,823 | 11,476 |
| Deferred income tax assets | 1,580 | 1,593 | 1,535 |
| Investment property | 4,433 | 4,498 | 4,619 |
| Property, plant and equipment | 13,818 | 13,774 | 15,003 |
| Intangible assets | 836 | 1,051 | 1,011 |
| 35,939 | 30,739 | 33,644 | |
| TOTAL ASSETS | 226,978 | 257,323 | 249,250 |
| LIABILITIES | |||
| Current liabilities | |||
| Borrowings | 7,856 | 15,655 | 14,287 |
| Payables and prepayments | 66,046 | 83,170 | 71,122 |
| Income tax liability | 533 | 93 | 352 |
| Short-term provisions | 3,840 | 5,770 | 6,239 |
| 78,275 | 104,688 | 92,000 | |
| Non-current liabilities | |||
| Long-term borrowings | 22,072 | 24,740 | 23,359 |
| Deferred income tax liability | 788 | 651 | 738 |
| Other long-term payables | 1,149 | 1,688 | 1,671 |
| 24,009 | 27,079 | 25,768 | |
| TOTAL LIABILITIES | 102,284 | 131,767 | 117,768 |
| EQUITY | |||
| Non-controlling interests | 3,442 | 3,329 | 4,455 |
| Equity attributable to equity holders of the parent | |||
| Share capital | 7,929 | 12,000 | 12,000 |
| Statutory reserve capital | 1,200 | 1,200 | 1,200 |
| Currency translation differences | (664) | (669) | (665) |
| Retained earnings | 112,787 | 109,696 | 114,492 |
| 121,252 | 122,227 | 127,027 | |
| TOTAL EQUITY | 124,694 | 125,556 | 131,482 |
| TOTAL LIABILITIES AND EQUITY | 226,978 | 257,323 | 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.
