COMMENTARY FROM MANAGEMENT
The decrease in revenue that continued in Q2 2019 for Merko Ehitus was an
expected development due to the completion of major projects that had been under
construction at the group's subsidiaries, the general market situation and the
decline in the secured order book. Revenue for the second quarter was EUR 77
million and for the first half-year, EUR 154 million, representing a decrease of
16% compared to the year before. Sales revenue for six months decreased year-
over-year in Estonia and Latvia, but increased in Lithuania and Norway.
The group's profit before taxes in Q2 was EUR 4.5 million and for the first
half-year EUR 7.5 million - an increase of 6.7% from the year before. Net profit
in Q2 was impacted by income tax expenses on dividends paid in the amount of EUR
2.7 million. Profitability in Q2 was also influenced by the fact that due to
timing of project completion, the subsidiaries of the group sold significantly
fewer apartments compared to Q2 last year. At the same time, preliminary sales
of apartments are going according to plan and the number of apartments to be
handed over to buyers in the second half-year on the basis of preliminary sale
contracts is growing. Net profit attributable to equity holders of the parent in
Q2 was EUR 1.7 million and for the first half-year EUR 4.5 million.
With construction orders generally declining, very strong competition and
pressure on prices persist on the main contractors' market. In this type of
market situation, the group's subsidiaries are focusing first and foremost on
projects where it is possible to create value added for the customer in terms of
quality of project management, where pricing is fair and contractual risks are
distributed in a reasonable manner. Considering the rapid growth of input prices
that has taken place in recent years, especially in terms of the cost of
workforce, it is extremely important for the normal development of the
construction market that there is a good cooperation between the parties of the
construction process, and that liability and risk are balanced appropriately.
The group's secured order book balance decreased by the end of June 2019 to EUR
172 million, decreasing 30% compared to the level in the same period last year
(EUR 247 million). At the same time, EUR 86 million in new contracts were signed
in the first half-year, this being 27% more than in the same period last year
(EUR 68 million). The largest contracts signed were for the renovation of the
Aaspere-Haljala road section as well as construction of Türi Basic School and
Laima chocolate factory. In addition to the abovementioned, the largest projects
in progress were construction works of water supply and sewerage piping in
Metsanurme, Kasemetsa and Üksnurme area, the commercial building at Pärnu mnt
186, construction of undersea electric power cables of Suur Väin and Väike Väin
straits, the student home for Rakvere Vocational School and the reconstruction
and dredging of the Port of Hundipea; in Latvia, Lidl's logistics centre and
Alfa shopping centre; in Lithuania, Neringa hotel, Quadrum office building, and
a private school; and in Norway, the Tesla service centre and the renovation of
the office building at Møllergata 23-25.
Strategically, Merko Ehitus is increasingly focused on the apartment development
business area. Investments into apartment development have grown significantly
and in the first half-year, the group invested close to EUR 40 million into
projects in progress. In addition, in Q2 the group purchased a large development
area in Vilnius for EUR 13 million. The planned total investment volume for this
year in apartment developments is on the order of EUR 100 million. In Estonia,
Latvia and Lithuania, the group currently has a total of more than 1,000
apartments in development. The biggest projects in Tallinn are the Uus-Veerenni
and Pikaliiva residential projects, in Riga, the Gai?ezers and Viesturd?rzs
development projects, and, in Vilnius, the Vilneles slenis and Rinktin?s Urban
developments.
In Q2, the group sold 37 apartments compared to 117 in Q2 last year. The reason
for the lower number is the fact that previous larger development projects have
been completed and the apartments largely sold. At the end of the first half-
year, there were about one hundred apartments in the three Baltic states in
total that were ready to be sold and not covered by preliminary contracts. New
projects are in the construction phase and Merko will start selling some of them
as they are finished at the end of this year and most of them next year, in
2020.
The apartment markets in Tallinn and Vilnius continue to favour well-prepared
projects with high-quality execution, which offer integral living environments.
Riga's apartment market continues to be less active with the sales potential
being higher for projects that are more precisely targeted to market
expectations. For the real estate market as a whole, the question remains about
the current and future developments in the Baltic banking sector. This pertains
to both the sufficiency of competition between banks, regulations and the
rigidity of their interpretations in selecting customers, as well as the general
risk appetite of banks when it comes to financing both the developers and home
buyers. In case of unfavourable developments, banking activities may start
curtailing the general economic activity of the Baltic states, including the
normal functioning of the real estate market.
OVERVIEW OF THE II QUARTER AND 6 MONTHS RESULTS
PROFITABILITY
2019 6 months profit before tax was EUR 7.5 million and Q2 2019 was EUR 4.5
million (6M 2018: EUR 7.1 million and Q2 2018: EUR 5.8 million), which brought
the profit before tax margin to 4.9% (6M 2018: 3.8%).
Net profit attributable to equity holders of the parent in 6 months 2019 was EUR
4.5 million (6M 2018: EUR 6.7 million) and Q2 2019 net profit attributable to
equity holders of the parent was EUR 1.7 million (Q2 2018: EUR 5.6 million). 6
months net profit margin was 2.9% (6M 2018: 3.6%). Net profitability was
influenced by, among other things, a significantly increased income tax expense:
in Q2, the group's income tax expense on paid dividends was EUR 2.7 million
greater than the year before. There was no income tax expense on the dividends
paid in 2018 - the dividends were distributed from dividends paid by foreign
subsidiaries to the parent.
REVENUE
Q2 2019 revenue was EUR 77.4 million (Q2 2018: EUR 103.3 million) and 6 months
revenue was EUR 154.2 million (6M 2018: EUR 183.7 million). 6 months revenue has
decreased by 16.0% compared to same period last year. The share of revenue
earned outside Estonia in 6 months 2019 was 57.0% (6M 2018: 52.6%).
SECURED ORDER BOOK
As at 30 June 2019, the group's secured order book was EUR 172.1 million (30
June 2018: EUR 247.0 million). In 6 months 2019, group companies signed new
contracts in the amount of EUR 86.0 million (6M 2018: EUR 67.5 million). In Q2
2019, new contracts were signed in the amount of EUR 53.8 million (Q2 2018: EUR
45.3 million).
REAL ESTATE DEVELOPMENT
In 6 months 2019, the group sold a total of 100 apartments (incl. 33 apartments
in a joint venture); in 6 months 2018, the group sold 168 apartments (incl. 34
apartments in a joint venture). The group earned a revenue of EUR 9.2 million
from sale of own developed apartments in 6 months 2019 and EUR 16.3 million in
6 months 2018. In Q2 of 2019 a total of 37 apartments (incl. 4 apartment in a
joint venture) were sold. compared to 117 apartments (incl. 9 apartment in a
joint venture) in Q2 2018, and earned a revenue of EUR 4.7 million from sale of
own developed apartments (Q2 2018: EUR 12.0 million).
CASH POSITION
At the end of the reporting period, the group had EUR 14.0 million in cash and
cash equivalents, and equity of EUR 118.5 million (41.2% of total assets).
Comparable figures as at 30 June 2018 were EUR 27.2 million and EUR 119.1
million (42.8% of total assets), respectively. As at 30 June 2019, the group had
net debt of EUR 48.7 million (30 June 2018: EUR 26.9 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros
2019 2018 2019 2018 2018
6 months 6 months II quarter II quarter 12 months
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Revenue 154,202 183,650 77,357 103,340 418,011
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Cost of goods sold (139,532) (170,621) (68,893) (94,394) (384,962)
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Gross profit 14,670 13,029 8,464 8,946 33,049
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Marketing expenses (1,784) (1,729) (933) (923) (3,285)
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General and
administrative expenses (6,241) (5,664) (3,117) (2,845) (12,304)
-------------------------------------------------------------------------------
Other operating income 1,230 1,695 529 843 3,527
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Other operating expenses (253) (105) (218) (73) (1,115)
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Operating profit 7,622 7,226 4,725 5,948 19,872
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Finance income/costs (97) (171) (180) (145) (97)
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incl. finance
income/costs from sale
of subsidiary and
liquidation - (59) - (59) (62)
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finance income/costs
from joint venture 203 226 (19) 90 653
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interest expense (286) (309) (151) (156) (652)
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foreign exchange gain
(loss) (4) (1) (4) - 5
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other financial income
(expenses) (10) (28) (6) (20) (41)
-------------------------------------------------------------------------------
Profit before tax 7,525 7,055 4,545 5,803 19,775
-------------------------------------------------------------------------------
Corporate income tax
expense (2,888) (201) (2,813) (111) (375)
-------------------------------------------------------------------------------
Net profit for financial
year 4,637 6,854 1,732 5,692 19,400
-------------------------------------------------------------------------------
incl. net profit
attributable to equity
holders of the parent 4,453 6,669 1,675 5,565 19,343
-------------------------------------------------------------------------------
net profit attributable
to non-controlling
interest 184 185 57 127 57
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Other comprehensive
income, which can
subsequently be
classified in the income
statement
-------------------------------------------------------------------------------
Currency translation
differences of foreign
entities 29 28 (3) 15 (6)
-------------------------------------------------------------------------------
Comprehensive income for
the period 4,666 6,882 1,729 5,707 19,394
-------------------------------------------------------------------------------
incl. net profit
attributable to equity
holders of the parent 4,480 6,696 1,672 5,579 19,324
-------------------------------------------------------------------------------
net profit attributable
to non-controlling
interest 186 186 57 128 70
-------------------------------------------------------------------------------
Earnings per share for
profit attributable to
equity holders of the
parent (basic and
diluted, in EUR) 0.25 0.38 0.09 0.31 1.09
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros
30.06.2019 30.06.2018 31.12.2018
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ASSETS
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Current assets
-------------------------------------------------------------------------------
Cash and cash equivalents 13,980 27,230 39,978
-------------------------------------------------------------------------------
Trade and other receivables 72,561 91,541 76,183
-------------------------------------------------------------------------------
Prepaid corporate income tax 94 163 224
-------------------------------------------------------------------------------
Inventories 162,829 120,467 117,992
-------------------------------------------------------------------------------
249,464 239,401 234,377
-------------------------------------------------------------------------------
Non-current assets
-------------------------------------------------------------------------------
Investments in joint venture 935 306 732
-------------------------------------------------------------------------------
Other long-term loans and receivables 11,418 14,861 10,391
-------------------------------------------------------------------------------
Deferred income tax assets - 5 -
-------------------------------------------------------------------------------
Investment property 14,115 13,748 13,771
-------------------------------------------------------------------------------
Property, plant and equipment 11,255 9,454 9,715
-------------------------------------------------------------------------------
Intangible assets 727 574 671
-------------------------------------------------------------------------------
38,450 38,948 35,280
-------------------------------------------------------------------------------
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TOTAL ASSETS 287,914 278,349 269,657
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------------
Current liabilities
-------------------------------------------------------------------------------
Borrowings 31,786 16,202 19,900
-------------------------------------------------------------------------------
Payables and prepayments 88,748 92,638 77,016
-------------------------------------------------------------------------------
Income tax liability 2,854 375 381
-------------------------------------------------------------------------------
Short-term provisions 6,276 4,487 8,100
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129,664 113,702 105,397
-------------------------------------------------------------------------------
Non-current liabilities
-------------------------------------------------------------------------------
Long-term borrowings 30,921 37,894 24,266
-------------------------------------------------------------------------------
Deferred income tax liability 1,556 1,335 1,481
-------------------------------------------------------------------------------
Other long-term payables 2,473 1,500 2,179
-------------------------------------------------------------------------------
34,950 40,729 27,926
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
TOTAL LIABILITIES 164,614 154,431 133,323
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
EQUITY
-------------------------------------------------------------------------------
Non-controlling interests 4,763 4,789 4,577
-------------------------------------------------------------------------------
Equity attributable to equity holders of the
parent
-------------------------------------------------------------------------------
Share capital 7,929 7,929 7,929
-------------------------------------------------------------------------------
Statutory reserve capital 793 793 793
-------------------------------------------------------------------------------
Currency translation differences (694) (675) (721)
-------------------------------------------------------------------------------
Retained earnings 110,509 111,082 123,756
-------------------------------------------------------------------------------
118,537 119,129 131,757
-------------------------------------------------------------------------------
TOTAL EQUITY 123,300 123,918 136,334
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 287,914 278,349 269,657
-------------------------------------------------------------------------------
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
(http://group.merko.ee/en/)).
Priit Roosimägi
Head of Group Finance Unit
AS Merko Ehitus
+372 650 1250
priit.roosimagi@merko.ee (mailto:priit.roosimagi@merko.ee)
AS Merko Ehitus (group.merko.ee (http://group.merko.ee/en/)) group consists of
Estonia's leading construction company AS Merko Ehitus Eesti, the Latvian-
market-oriented SIA Merks, UAB Merko Statyba operating on the Lithuanian market,
and the Norwegian construction company Peritus Entreprenør AS. Besides provision
of construction service as a main contractor, the group's other major area of
activity is apartment development. As at the end of 2018, the group employed
764 people, and the group's revenue for 2018 was EUR 418 million.
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