MANAGEMENT REPORT
General information and structure of the group
AS Merko Ehitus is operating as a construction and real estate development group providing integrated solutions in the field of construction in Estonia, Latvia and Lithuania. The largest construction companies of the group are AS Merko Ehitus Eesti (100%), SIA Merks (100%), UAB Merko Statyba (100%) and companies belonging to the AS Merko Ehitus Eesti group Tallinna Teede AS (100%), AS Merko Infra (100%), AS Gustaf (85%), OÜ Gustaf Tallinn (80%) and AS Merko Tartu (66%).
In accordance with the strategic directions approved in 2010 and pursuant to the decision of the Supervisory Board of AS Merko Ehitus dated 30 December 2011, all of the construction activities of the group were transferred to AS Merko Ehitus Eesti as of 1 January 2012. The aim of the changes was to separate the management of the group and Estonian production activities and more efficient distribution of resources between the business areas of the group. After the changes are completed AS Merko Ehitus will operate as a holding company that is independently not involved in production activities and which holds 100% holdings in the construction companies AS Merko Ehitus Eesti, SIA Merks and UAB Merko Statyba as well as the real estate business unit of the group together with the companies owning real estate. The main activity of the holding company is to develop and realise the strategies of the different business areas of the Merko Ehitus group, first and foremost through the long-term planning of resources.
In the first quarter of the year 2012 a 100% subsidiary Merko Finland OY was registered in Finland with the aim of establishing technical preconditions for starting potential construction projects in longer perspective in Russia and as a result of an intra-group transaction Lithuanian subsidiaries UAB Balsiu Mokyklos SPV and UAB Merko Bustas were transferred, respectively, to OÜ Merko Property and AS Merko Ehitus.
Operating results
In 2012 3 months, the revenue of the group was EUR 47.8 million. Estonia contributed 87.8%, Latvia 8.1% and Lithuania 4.1% to the group’s revenue. As compared to 2011 3 months, the group’s revenue increased by +82.6%, including +110.9% in Estonia, +74.7% in Lithuania and -24.7% in Latvia.
The consolidated revenue of the group’s largest entities:
|
3 months 2012 |
3 months 2011** | 3 months 2010** | |
| Estonian entities | |||
| AS Merko Ehitus* | 2 897 | 100 | 15 |
| AS Merko Ehitus Eesti group (100% ownership) | 39 329 | 19 837 | 16 624 |
| AS Merko Ehitus Eesti (100% ownership) | 22 738 | 13 567 | 13 365 |
| Tallinna Teede AS (100% ownership) | 3 688 | 1 940 | 1 818 |
| AS Merko Infra (100% ownership) | 9 038 | 1 437 | 5 |
| Other subsidiaries | 3 865 | 2 893 | 1 436 |
| Latvian entity | |||
| SIA Merks (100% ownership) | 3 880 | 5 116 | 15 068 |
| Lithuanian entity | |||
| UAB Merko Statyba (100% ownership) | 1 685 | 1 120 | 289 |
| Total Merko Ehitus group | 47 791 | 26 173 | 31 996 |
* includes the revenues of the smaller subsidiaries of AS Merko Ehitus
** approximate comparative indicators of the new structure of AS Merko Ehitus
As of 31 March 2012, the group’s portfolio on unfinished construction contracts totalled EUR 189 million. The contract portfolio does not include residential projects developed by the group and the works related to construction of investment properties (incl. the contract for the construction and leasing of Jõgeva police and court building).
During the first 3 months of the year 2012, 14 apartments were sold at the total cost of EUR 2.0 million (VAT not included), which does not include transactions covered with preliminary contracts under the law of obligations. As of 31.03.2012 inventories included 114 unsold completed apartments (81 apartments in Tallinn, 29 in Tartu and 4 in Riga) with the total cost of EUR 11.5 million and 507 apartment in the stage of construction, the cost of which, as on the balance sheet date was EUR 20.9 million. Due to the continuing low transaction activity on the housing market, the construction of 311 apartments (in the amount of EUR 8.4 million) has currently been halted and the construction of 196 apartments is underway, including two 21-apartment buildings in Tallinn, on Hane street (time of completion: summer of 2012), three 13-apartment buildings in Tallinn, on Pallasti street (time of completion: summer of 2012) and a 115-apartment building in Riga, on Skanstese street (time of completion: autumn of 2012). In order to minimise risks, new projects are generally small-scaled or directed at a specific target group and regionally dispersed. The impact of the cyclical nature of the development activity was insignificant for the results of the first quarter.
With the first three months of the year 2012, the group earned a gross profit of EUR 2.5 million (within 3 months of 2011 EUR -1.4 million) from development and construction activities. The impact of seasonality of construction activities on the results of the quarter as compared to the previous years has been insignificant. As compared to the first quarter of the year 2011, the marketing and general administration costs of the group decreased by 2.3% and the share of these costs in the revenue formed 5.2% (9.7% in the first quarter of 2011).
During the first 3 months of the year 2012, the profit before taxes of the group was EUR 0.4 million and the net profit EUR 0.2 million as compared to the EUR 4.1 million of loss before taxes and net loss of the same sum during the first three months of the year 2011.
In 2012 3 months, the change in short-term investments, and cash and cash equivalents of Merko Ehitus group was EUR -9.7 million and as of 31 March 2012, the cash and cash equivalents in the bank accounts and term deposits of the group were in the amount of EUR 8.7 million. The cash flows from operating activities totalled EUR -6.7 million, cash flows from investing activities totalled EUR +0.1 million and cash flows from financing activities totalled EUR -3.1 million. The cash flows from operating activities in the reporting period were mostly affected by the change in receivables and prepayments of EUR -5.4 million, change in liabilities and prepayments related to operating activities of EUR +3.4 million and the change in inventories EUR -2.9 million. Of the cash flows from financing activities, the balance of loans received and repaid totalled EUR -2.9 million and finance lease payments totalled EUR -0.2 million.
The financial ratios and methodology for calculating the ratios describing the group’s main operations
| 3 months 2012 | 3 months 2011 | 3 months 2010 | |
| Net profit margin | 0,3 % | -15,7 % | 3,3 % |
| EBT margin | 0,9 % | -15,7 % | 4,8 % |
| Operating profit margin | 0,5 % | -14,6 % | 5,2 % |
| Gross margin | 5,2 % | -5,5 % | 11,7 % |
| EBITDA margin | 1,7 % | -12,4 % | 7,0 % |
| Return on equity per annum | 0,6 % | -13,4 % | 3,1 % |
| Return on assets per annum | 0,3 % | -8,4 % | 1,9 % |
| Equity ratio | 51,7 % | 62,1 % | 63,2 % |
| Current ratio | 2,0 | 2,6 | 2,5 |
| Quick ratio | 0,9 | 0,9 | 1,2 |
| General expense ratio | 5,2 % | 9,7 % | 8,3 % |
| Gross remuneration ratio | 7,2 % | 14,5 % | 12,3 % |
| Debt to assets | 17,4 % | 12,8 % | 13,9 % |
| Accounts receivable turnover (in days) | 60 | 75 | 45 |
| Accounts payable turnover (in days) | 55 | 48 | 39 |
| Revenue per employee (in thousand euros) | 55 | 29 | 43 |
| Average number of full-time employees at the group | 863 | 901 | 748 |
Net profit margin: Net profit* / Revenue
EBT margin: Profit before taxes / Revenue
Operating profit margin: Operating profit / Revenue
Gross margin: Gross profit / Revenue
EBITDA margin: (Operating profit + Depreciation and impairment charge) / Revenue
Return on equity: Net profit x 4* / Average equity during the period*
Return on assets: Net profit x 4* / Average assets during the period
Equity ratio: Owners equity* / Total assets
Current ratio: Current assets / Current liabilities
Quick ratio: (Current assets – Inventories) / Current liabilities
General expense ratio: General expenses / Revenue
Gross remuneration ratio: Gross remuneration / Revenue
Debt to assets: Interest-bearing liabilities / Total assets
Accounts receivable turnover: Trade receivables x 365 / Revenue x 4
Accounts payable turnover: Payables to supplies x 365 / Cost of goods sold x 4
Revenue per employee: Revenue / Average number of full-time employees
* attributable to equity holders of the parent
Employees and remuneration
The number of group’s employees decreased by 65 (-6.9%) employees in a year and as of 31.03.2012, the group had 883 employees. Within the framework of the efficiency program implemented from the first quarter changes were carried out in the management of Merko Statyba, furthermore, the number of administrative employees was decreased in the Lithuanian and Latvian subsidiaries. The gross remuneration paid to employees in 2012 3 months amounted to EUR 4.1 million an increase of 7.3% compared to previous year. Salaries accounted for 85.5% of the gross remuneration, and performance-related pay accounted for 14.5%.
Construction market
Tendencies influencing the construction market in the coming quarters:
In the year 2012, the majority of the new large-scale construction contracts in the Baltic states still come from the public sector and are funded from the European Union structural funds. Considering the continuously high requirements of the clients on guarantees and long payment terms, the burden on the circulating capital of the construction companies continues to be intense and in order to remain in competition, it is important that the company has the capacity to manage cash flows. Some companies may be in difficulty in obtaining sufficient guarantees due to the lack of security. Furthermore, there are many examples on clients cancelling the procurements due to the fact that the bids are not within the previously prepared budget and the funds allocated for funding the projects are insufficient.
Intense competition in major public procurements continues. Considering the extremely low profitability of the construction sector and the negative financial results of earlier years, the construction companies cannot afford new objects that yield loss. Assessing and managing risks in making construction offers has become more and more important and construction companies are paying a lot of attention to it. Construction companies with a stronger equity base and lower debt burden are more likely to strengthen their market position in the segment of larger construction orders.
As a positive trend, increase of activeness of private clients in the preparation of development projects of commercial real estate can be observed, although the activeness of concluding actual construction contracts will presumably remain low in 2012.
The activeness of the apartment market in all three Baltic states continues to be low as compared to the years before the crisis. At the same time, the realisation of various apartment development projects that were frozen before, has been activated. This will increase the offer of new apartments. The apartment buyers are increasingly focused on the construction quality and in making their purchase decisions, they are relying on the availability of infrastructure in the region (parking, services, logistics). The availability of bank loans in financing apartment transactions may be considered rather good in all three Baltic states, although in Latvia, the internal demand and activeness of private clients continues to be very low.
Share and shareholders
Share information
ISIN EE3100098328
Short name of the security MRK1T
Stock Exchange List Baltic Main List
Nominal value no par value
Total no of securities issued 17 700 000
No of listed securities 17 700 000
Listing date 11.08.2008
The shares of Merko Ehitus are listed in the main list of NASDAQ OMX Tallinn Stock Exchange. In 2012 3 months 547 transactions with the shares of Merko Ehitus were performed in the course of which 0.3 million shares were traded and the total monetary value of transactions was EUR 1.7 million. The lowest share price was EUR 5.37 and the highest price was EUR 6.80 per share. The closing share price as of 31.03.2012 was EUR 6.00. AS Merko Ehitus market value as of 31.03.2012 was EUR 106 million.
| 31.03.2012 | 31.03.2011 | 31.03.2010 | |
| No. of shares, thousand pcs | 17 700 | 17 700 | 17 700 |
| Earnings per share (EPS), in euros | 0,01 | -0,23 | 0,06 |
| Equity per share, in euros | 6,18 | 6,82 | 7,74 |
| P/B (price to book ratio) | 0,97 | 1,36 | 0,99 |
Main shareholders of AS Merko Ehitus as of 31.03.2012
| Number of shares | Percentage of total | |
| AS Riverito | 12 742 686 | 71,99% |
| ING Luxembourg S.A., clients | 974 126 | 5,50% |
| Skandinaviska Enskilda Banken Ab, clients | 757 289 | 4,28% |
| Firebird Republics Fund Ltd | 182 754 | 1,03% |
| Ergo Pensionifond 2P2 | 171 679 | 0,97% |
| State Street Bank and Trust Omnibus Account a Fund No OM01 | 156 718 | 0,89% |
| Gamma Holding OÜ | 143 847 | 0,81% |
| SEB Elu- ja Pensionikindlustus AS | 125 520 | 0,71% |
| Andersson Investeeringud OÜ | 103 570 | 0,59% |
| Clearstream Banking Luxembourg S.A. clients | 102 937 | 0,58% |
| AS Midas Invest | 102 805 | 0,58% |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros
|
2012 3 months |
2011 3 months |
|
| Revenue | 47 791 | 26 173 |
| Cost of goods sold | (45 288) | (27 608) |
| Gross profit (-loss) | 2 503 | (1 435) |
| Marketing expenses | (428) | (562) |
| Administrative and general expenses | (2 048) | (1 972) |
| Other operating income | 237 | 184 |
| Other operating expenses | (23) | (37) |
| Operating profit (-loss) | 241 | (3 822) |
| Finance income/costs | 175 | (276) |
|
incl. finance income/costs from investments in associates and joint ventures |
105 | (76) |
| finance income/costs from other long-term investments | 335 | - |
| interest expense | (313) | (210) |
| foreign exchange gain | (63) | (9) |
| other financial income (expenses) | 111 | 19 |
| Profit (loss) before tax | 416 | (4 098) |
| Corporate income tax expense | (269) | - |
| Net profit (-loss) for current period | 147 | (4 098) |
| incl. net profit (-loss) attributable to equity holders of the parent | 155 | (4 107) |
| net profit (-loss) attributable to non-controlling interest | (8) | 9 |
| Other comprehensive income (-loss) | ||
| Currency translation differences of foreign entities | (23) | 18 |
| Comprehensive income (-loss) for the period | 124 | (4 080) |
| incl. net profit (-loss) attributable to equity holders of the parent | 132 | (4 089) |
| net profit (-loss) attributable to non-controlling interest | (8) | 9 |
|
Earnings per share for profit (loss) attributable to equity holders of the parent (basic and diluted, in euros) |
0,01 | (0,23) |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited, in thousand euros
| 31.03.2012 | 31.12.2011 | |
| ASSETS | ||
| Current assets | ||
| Cash and cash equivalents | 8 732 | 18 510 |
| Short-term deposits | - | 140 |
| Trade and other receivables | 64 154 | 64 449 |
| Prepaid corporate income tax | 711 | 686 |
| Inventories | 90 290 | 87 834 |
| Total current assets | 163 887 | 171 619 |
| Non-current assets | ||
| Long-term financial assets | 26 256 | 27 051 |
| Deferred income tax assets | 1 635 | 1 870 |
| Investment property | 2 702 | 2 313 |
| Property, plant and equipment | 15 650 | 16 057 |
| Intangible assets | 1 408 | 1 427 |
| Total non-current assets | 47 651 | 48 718 |
| TOTAL ASSETS | 211 538 | 220 337 |
| LIABILITIES AND EQUITY | ||
| Current liabilities | ||
| Borrowings | 17 545 | 16 574 |
| Payables and prepayments | 56 581 | 61 635 |
| Short-term provisions | 6 437 | 6 781 |
| Total current liabilities | 80 563 | 84 990 |
| Non-current liabilities | ||
| Long-term borrowings | 19 333 | 23 764 |
| Long-term trade payables | 737 | 790 |
| Deferred corporate income tax liability | 131 | 131 |
| Long-term provisions | 54 | 66 |
| Total non-current liabilities | 20 255 | 24 751 |
| Total liabilities | 100 818 | 109 741 |
| Equity | ||
| Non-controlling interest | 1 348 | 1 356 |
| Equity attributable to equity holders of the parent | ||
| Share capital | 12 000 | 12 000 |
| Statutory reserve capital | 1 131 | 1 131 |
| Currency translation differences | (593) | (570) |
| Retained earnings | 96 834 | 96 679 |
| Total equity attributable to equity holders of parent | 109 372 | 109 240 |
| Total equity | 110 720 | 110 596 |
| TOTAL LIABILITIES AND EQUITY | 211 538 | 220 337 |
Andres Trink
Chairman of Management Board
+372 680 5400
andres.trink@merko.ee
