COMMENTARY FROM MANAGEMENT
Merko Ehitus posted revenue of EUR 73 million in Q3 and EUR 228 million for the
first nine months of 2019. Sales revenue for nine months decreased year-over-
year in Estonia and Latvia, increased significantly in Norway and stayed more or
less the same in Lithuania. The profit before taxes in Q3 was EUR 2.8 million
and for the first nine months EUR 10.3 million. The group's net profit
attributable to equity holders of the parent in Q3 was EUR 2.5 million, and the
nine-month net profit was EUR 7 million.
Due to the completion of major construction projects in progress over the last
two years, the cooling off of the construction market and the fact that the
group is placing its strategic focus more firmly on apartment development,
revenue decreased by 24% compared to last year; while pre-tax earnings decreased
by 18%. Considering the declining trend in the portfolio of construction
contracts in the last 1.5 years, a drop in volumes was to be expected this year.
Yet the civil engineering services area has fallen short of management
expectations this year. The group has taken a clearer direction toward apartment
development and providing main contracting services for construction on projects
where the group's subsidiaries have competitive advantages, such as in the form
of engineering and technical knowhow, construction and financial capability and
long-term cooperative relations. Ensuring higher construction volumes is not a
goal in its own right if it should come at the expense of larger contractual
risks (unrealistic deadlines, contractual penalties, lack of clarity regarding
the scope of contracting) or customer insolvency. Public-private partnership
(PPP) projects also continue to be in the group's focus, and the greatest market
activity in this area has thus far been seen in Lithuania.
Based on developments in the economy and the real estate market, the volume of
construction orders in the Baltics is seeing an overall declining trend. The
greater caution exercised by banks as to selection of customers and projects for
financing and the growth in loan margins are also having an increasing impact on
the construction market. The orders from the public sector have not managed to
compensate for the decrease in the activity of private sector customers. This
places main contractors in an increasingly difficult competitive situation and
increases pressure on them to reduce costs. The decreasing level of construction
activity may at some point also mean concessions in terms of input prices,
though this has not yet occurred. Thus, general contractors are working in an
environment where on the one hand they face pressure from customers (contract
conditions) and on the other hand from subcontractors (expenses).
The group has continued investments in residential real estate development as
planned. During 2019, Merko Ehitus has invested EUR 83 million into the real
estate development business segment, of which close to EUR 65 million into
building apartments and nearly EUR 19 million into acquiring new land for
development in Lithuania and Estonia to ensure development capability in years
to come. In Estonia, Latvia and Lithuania, the group currently has a total of
more than 1,100 apartments in development. Considering the cycle for completion
of apartment development projects, investments will start yielding results to a
greater extent in the form of apartment sales starting in Q4 of this year and
even more so next year. Sales and pre-sales of apartments are going according to
plan. We see the new apartment markets remaining active at current levels in
Tallinn and Vilnius, while in Riga, general activity continues to be lower. The
group will continue focusing on the real estate development business segment on
all three markets.
The biggest projects in Tallinn are the Uus-Veerenni, Lahekalda and Pikaliiva
residential projects; in Riga, the Gai?ezers and Viesturd?rzs developments; and,
in Vilnius, the Vilneles slenis and Rinktin?s Urban developments. In Q3, the
group sold 106 apartments compared to 87 in the third quarter last year. At the
end of September, there were a total of 123 apartments in the three Baltic
states ready to be sold and not covered by pre-sale agreements.
The group's secured order book decreased by end of September 2019 to EUR 152
million, decreasing 36% compared to the level at the same time last year (EUR
239 million). EUR 128 million in new contracts were signed in the first nine
months, this being 19% less than in the same period last year (EUR 157 million).
The largest contracts in Q3 were signed, in Latvia, for the reconstruction of
the Riga Technical University Civil Engineering Faculty building and the
construction of college building and dormitory in Babites county in Pinki, and,
in Tallinn, the construction of Terminal D parking house at the Tallinn
passenger port. In addition to the abovementioned ones, the largest projects in
progress were, in Estonia, reconstruction of the Aaspere-Haljala road section,
construction of Türi Basic School, establishing water supply and sewerage piping
for the 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, student home for Rakvere Vocational School, as well as
reconstruction and dredging of the Port of Hundipea; in Latvia, construction of
Lidl's logistics centre, Alfa shopping centre and Laima chocolate factory; and
in Lithuania, Neringa Hotel, Quadrum office building, and a private school in
Vilnius.
OVERVIEW OF THE III QUARTER AND 9 MONTHS RESULTS
PROFITABILITY
2019 9 months profit before tax was EUR 10.3 million and Q3 2019 was EUR 2.8
million (9M 2018: EUR 12.6 million and Q3 2018: EUR 5.6 million), which brought
the profit before tax margin to 4.5% (9M 2018: 4.2%).
Net profit attributable to equity holders of the parent in 9 months 2019 was EUR
7.0 million (9M 2018: EUR 12.3 million) and Q3 2019 net profit attributable to
equity holders of the parent was EUR 2.5 million (Q3 2018: EUR 5.6 million). 9
months net profit margin was 3.1% (9M 2018: 4.1%). 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
Q3 2019 revenue was EUR 73.4 million (Q3 2018: EUR 115.1 million) and 9 months
revenue was EUR 227.6 million (9M 2018: EUR 298.8 million). 9 months revenue has
decreased by 23.8% compared to same period last year. The share of revenue
earned outside Estonia in 9 months 2019 was 53.2% (9M 2018: 51.5%).
SECURED ORDER BOOK
As at 30 September 2019, the group's secured order book was EUR 152.2 million
(30 September 2018: EUR 239.4 million). In 9 months 2019, group companies signed
new contracts in the amount of EUR 127.6 million (9M 2018: EUR 157.0 million).
In Q3 2019, new contracts were signed in the amount of EUR 41.6 million (Q3
2018: EUR 89.4 million).
REAL ESTATE DEVELOPMENT
In 9 months 2019, the group sold a total of 206 apartments (incl. 36 apartments
in a joint venture); in 9 months 2018, the group sold 255 apartments (incl. 47
apartments in a joint venture). The group earned a revenue of EUR 20.2 million
from sale of own developed apartments in 9 months 2019 and EUR 24.3 million in
9 months 2018. In Q3 of 2019 a total of 106 apartments (incl. 3 apartments in a
joint venture) were sold compared to 87 apartments (incl. 13 apartments in a
joint venture) in Q3 2018, and earned a revenue of EUR 10.9 million from sale of
own developed apartments (Q3 2018: EUR 8.0 million).
CASH POSITION
At the end of the reporting period, the group had EUR 13.4 million in cash and
cash equivalents, and equity of EUR 121.1 million (39.4% of total assets).
Comparable figures as at 30 September 2018 were EUR 23.9 million and EUR 124.8
million (43.1% of total assets), respectively. As at 30 September 2019, the
group had net debt of EUR 71.0 million (30 September 2018: EUR 29.8 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros
2019 2018 2019 2018 2018
9 months 9 months III quarter III quarter 12 months
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Revenue 227,620 298,768 73,418 115,118 418,011
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Cost of goods sold (206,723) (276,984) (67,191) (106,363) (384,962)
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Gross profit 20,897 21,784 6,227 8,755 33,049
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Marketing expenses (2,626) (2,482) (842) (753) (3,285)
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General and
administrative
expenses (8,841) (8,583) (2,600) (2,919) (12,304)
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Other operating income 1,740 2,477 510 782 3,527
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Other operating
expenses (1,222) (277) (969) (172) (1,115)
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Operating profit 9,948 12,919 2,326 5,693 19,872
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Finance income/costs 363 (273) 460 (102) (97)
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incl. finance
income/costs from sale
of subsidiary and
liquidation - (59) - - (62)
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finance income/costs
from joint venture 845 274 642 48 653
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interest expense (471) (452) (185) (143) (652)
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foreign exchange gain
(loss) - (1) 4 - 5
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other financial income
(expenses) (11) (35) (1) (7) (41)
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Profit before tax 10,311 12,646 2,786 5,591 19,775
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Corporate income tax
expense (2,983) (169) (95) 32 (375)
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Net profit for
financial year 7,328 12,477 2,691 5,623 19,400
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incl. net profit
attributable to equity
holders of the parent 7,003 12,312 2,550 5,643 19,343
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net profit
attributable to non-
controlling interest 325 165 141 (20) 57
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Other comprehensive
income, which can
subsequently be
classified in the
income statement
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Currency translation
differences of foreign
entities (10) 31 (39) 3 (6)
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Comprehensive income
for the period 7,318 12,508 2,652 5,626 19,394
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incl. net profit
attributable to equity
holders of the parent 7,002 12,343 2,552 5,647 19,324
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net profit
attributable to non-
controlling interest 316 165 130 (21) 70
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Earnings per share for
profit attributable to
equity holders of the
parent (basic and
diluted, in EUR) 0.40 0.70 0.14 0.32 1.09
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CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros
30.09.2019 30.09.2018 31.12.2018
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ASSETS
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Current assets
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Cash and cash equivalents 13,355 23,868 39,978
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Trade and other receivables 72,280 114,150 76,183
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Prepaid corporate income tax 94 163 224
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Inventories 183,056 116,601 117,992
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268,785 254,782 234,377
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Non-current assets
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Investments in joint venture 1,577 353 732
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Other long-term loans and receivables 10,590 10,707 10,391
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Deferred income tax assets - 5 -
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Investment property 14,077 13,785 13,771
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Property, plant and equipment 11,336 9,443 9,715
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Intangible assets 777 593 671
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38,357 34,886 35,280
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TOTAL ASSETS 307,142 289,668 269,657
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LIABILITIES
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Current liabilities
-------------------------------------------------------------------------------
Borrowings 41,750 17,758 19,900
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Payables and prepayments 84,643 95,410 77,016
-------------------------------------------------------------------------------
Income tax liability 309 306 381
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Short-term provisions 7,675 7,755 8,100
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134,377 121,229 105,397
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Non-current liabilities
-------------------------------------------------------------------------------
Long-term borrowings 42,571 35,878 24,266
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Deferred income tax liability 1,589 1,370 1,481
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Other long-term payables 2,653 1,647 2,179
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46,813 38,895 27,926
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TOTAL LIABILITIES 181,190 160,124 133,323
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EQUITY
-------------------------------------------------------------------------------
Non-controlling interests 4,893 4,768 4,577
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Equity attributable to equity holders of the
parent
-------------------------------------------------------------------------------
Share capital 7,929 7,929 7,929
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Statutory reserve capital 793 793 793
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Currency translation differences (722) (671) (721)
-------------------------------------------------------------------------------
Retained earnings 113,059 116,725 123,756
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121,059 124,776 131,757
-------------------------------------------------------------------------------
TOTAL EQUITY 125,952 129,544 136,334
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY 307,142 289,668 269,657
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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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