Market announcement

Title

Interim financial results for 2007 and Q4

Message

MANAGEMENT REPORT

General information

Merko Ehitus is a leading building corporation offering integrated solutions
since 1990, with branches currently in Estonia, Latvia and Lithuania. Largest
companies of the Group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna
Teede AS (100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%),
OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%).

On April 5 2007 AS Merko Ehitus acquired 75% holding of OÜ Fort Ehitus
(Registry Code 10722444). Principal activities of OÜ Fort Ehitus are hydraulic
engineering and pile works. The holding was acquired in order to strengthen
competence of the group in the field of pile works and hydraulic engineering
construction (http://www.baltic.omxgroup.com/market/?pg=news&news_id=213583).

On October 15th, 2007, the Prosecutor's Office brought up a suspicion against
AS Merko Ehitus and Chairman of the company's Supervisory Board, Mr. Toomas
Annus, for bribing and abuse of confidence. The contents of the suspicions
filed were incomprehensible for the management of AS Merko Ehitus as the
activities of both the company and its management bodies has been and is
correct in all aspects and in compliance with the law of the Republic of
Estonia. The suspicions and comments by Merko Ehitus were disclosed in the
company's stock exchange release of 23.10.2007
(http://www.baltic.omxgroup.com/market/?pg=news&news_id=218499).

The impact of the suspicions on the company's economic outcomes in 2007 is
insignificant. Nevertheless, the management considers it important to mention
that filing of suspicions may, in mid-term perspective, influence the company's
competitiveness and competition situation in Estonian building market,
as a whole.

Business operations

Group's revenue for the 12 months in 2007 were 5520.0 million kroons, which
constitutes an annual increase of 25.0%. 61.4% of the sales originated from
Estonia, 25.2% from Latvia and 13.4% from Lithuania. As compared with the
respective period in 2006, company's sales in Latvia increased by 31.6%, in
Lithuania by 30,9% and in Estonia by 21.4%.

Group's revenue in the fourth quarter of 2007 were 1656.4 million having
increased by 313.0 million kroons or by 23.3% as compared to the same period
in 2006. The seasonality of road construction works and sales of housing
projects in fourth quarter had a positive effect on the revenue.

Companies of the Group 12M 2007 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):

                                             12M 2007             12M 2006
                                            EEK      EUR        EEK       EUR
Estonian companies
   AS Merko Ehitus (parent company)      2 256 611  144 224   1 864 882  119 188
   AS Gustaf (75% partnership)             153 123    9 786      97 049    6 203
   OÜ Gustaf Tallinn (80% partnership)     148 108    9 466     124 068    7 929
   AS Merko Tartu (66% partnership)        309 282   19 767     255 769   16 347
   Tallinna Teede AS (100% partnership)    363 272   23 217     317 591   20 298
   OÜ Woody (100% partnership)             218 641   13 974     306 354   19 580
Latvian company
   SIA Merks (100% partnership)          1 229 043   78 550     973 636   62 227
Lithuanian company
   UAB Merko Statyba (100% partnership)    696 010   44 483     507 309   32 423

Compared to 12M 2006 the cost of goods sold increased by 27.4% and the marketing
and general administration costs 37.0% forming respectively 86.0% and 4.3% of
the sales. Increase in expenses exceeding the growth in income led to a lower
gross margin of 14.0% as compared to 15.6% in 2006.  Also, the operating profit
margin fell from 14.3% to 9.5%.

The net profit of the Group for 12M 2007 was 544.5 million kroons. Extraordinary
profit from sale of land plots contributed 48.7 million kroons. In a year, the
Group's net profit from core business increased from 456.6 million to 495.9
millon kroons with a yearly growth of 6.8%. Due to the decrease of the gross
and operating profit margin, the net profit margin decreased during the
reference period from 13.2% to 9.9%.

Group's net cash flow of the 12 months of the year was -473.3 million kroons,
including cash flow from operating activities -489.3 million kroons, from
investing activities -75.4 million kroons and financing activities +91.4
million kroons. The cash flow from operating activities were mostly influenced
by the change in inventories arising from development activities (-665.7
million kroons) and change in trade payables related to operating activities
(-129.9 million kroons). The negative cash flow of the period was covered with
additional loans (net cash flow of the period from borrowings +220.4 million
kroons) and liquid assets of the Group.

Construction market

Problems in the US housing market and related negative background for the real
estate and financial sector and negative outlooks, attributable to the economies
of the Baltic States, have had little impact on the main building market indices
of the region. According to the information of the Statistical Office, the
building market grew in all the Baltic States during the first 9 months of the
year 2007: building works conducted with own forces grew, compared to the
current prices of 2006, during the 9 month in Latvia, Lithuania, and Estonia,
respectively, by 43.8%, 43.5% and 25.3%. At the same time, different development
stages can be distinguished in the building market by states: rapid market
growth is notable in Latvia and Lithuania while in Estonia activity level is
lower and the growth in volume is slowing down.

The growth of building prices slowed down in the UV quarter; the price of the
services, compared to the IV quarter of the year 2006, in Latvia, Lithuania
and Estonia grew, respectively, by 22.3%, 15.6% and 8.6%, including the growth
of labour costs in Latvia and Estonia, respectively, by 43.3% and 14.4%. We do
believe that rapid growth of building prices, experienced over the last years,
is now a problem of the past and stabilisation of prices will characterise the
building market in 2008.

The housing market of Latvia and Estonia was characterised by low demand and
considerable decline in volume of transactions; the supply of new apartments
went up and differentiation of sales price of different projects took place.
Certain improvement of the situation can, due to seasonal nature of housing
market, only expected in spring and summer when the housing market usually
becomes more active.

As the result of passive market, developers have frozen majority of their new
projects for an undetermined period. This may cause disproportion in demand
and supply in the end of 2008/beginning of 2009. Until then, the biggest
challenge of the sector is to cope in the condition of restricted financing
alternatives and skilful management of solvency risks that arise from
extended sales period of apartments.

The ratios and calculation methods characterizing the operating activities
of the Group
                                           2007 12 months      2006 12 months

Net profit margin                                   9,0 %*            10,3 %*
Operating profit margin                             9,5 %             14,3 %
Return on equity per annum                         30,2 %             43,2 %
Return on assets per annum                         15,3 %             21,4 %
Current ratio                                       2,4                2,0
Equity ratio                                       51,4 %             49,6 %
General expenses to sales                           4,3 %              3,9 %
Staff costs to sales                                9,2 %              8,0 %
Average number of full-time employees              1025                850

* less extraordinary profit

Net profit margin: Net profit* / Sales
Operating profit margin: Operating profit / Sales
Return on equity: Net profit* / Average equity during the period*
Return on assets: Net profit* / Average assets during the period
Current ratio: Current assets / Current liabilities
Equity ratio: Owners equity* / Total assets
General expenses to sales: General expenses / Sales
Staff costs to sales: Staff costs / Sales

* calculated from the share of the parent company's shareholders

In 31.12.2007, the number of employees in the Group's service was 1115,
including 1079 full-time employees. The number of the Group's employees
increased by 24.3% (218 new employees were recruited). The gross remuneration
paid to full-time personnel in 12 months 2007 amounted to 406.6 million kroons
an increase of 46.3% compared to previous year.

Shares and shareholders

The shares of Merko Ehitus are listed in the main list of Tallinn Stock
Exchange. In 2007 12 months the number of transactions with Merko Ehitus'
shares was 4899, during which 5.5 million shares changed ownership and the
turnover of the transactions was 1830.7 million kroons. The cheapest bargain
with a share was 191.67 kroons and highest 402.12 kroons per share. The
closing share price with a state of 28.12.2007 was 203.41 kroons.


INCOME STATEMENT IV quarter 2007
consolidated, unaudited in thousand EEK and EUR

                                           EEK                   EUR
                                  IVq 2007    IVq 2006   IVq 2007   IVq 2006

Revenue                          1 656 362   1 343 319    105 861     85 854
Cost of goods sold              (1 361 259) (1 131 204)   (87 000)   (72 297)

GROSS PROFIT                       295 103     212 115     18 861     13 557

Marketing expenses                 (11 611)     (7 921)      (742)      (506)
Administrative and general expenses(79 897)    (51 961)    (5 106)    (3 321)
Other operating income                 456     133 572         29      8 537
Other operating expenses           (13 894)    (14 485)      (888)      (926)

OPERATING PROFIT                   190 157     271 320     12 154     17 341

Financial income and expenses from stocks of
associate comp. and joint ventures  14 106       5 346        902        342
Interest expense                    (2 593)     (4 023)      (166)      (257)
Foreign exchange gain                2 371      (2 298)       152       (147)
Other financial income and expenses  1 786       3 051        114        195
Total financial income and expenses 15 670       2 074      1 002        133

PROFIT BEFORE TAX                  205 827     273 394     13 156     17 474

Corporate income tax expense       (12 729)    (24 267)      (814)    (1 551)

NET PROFIT FOR CURRENT PERIOD      193 098     249 127     12 342     15 923
   incl. net profit attributable
         to equity holders of
         the parent company        186 513     246 463     11 920     15 752
         minority interest           6 585       2 664        422        171

Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR)  10,54       13,92       0,67       0,89


INCOME STATEMENT 12M 2007
consolidated, in thousand EEK and EUR
                                           EEK                   EUR
                                  12M 2007    12M 2006   12M 2007   12M 2006

Revenue                          5 519 967   4 414 361    352 790    282 129
Cost of goods sold              (4 749 671) (3 727 561)  (303 559)  (238 234)

GROSS PROFIT                       770 296     686 800     49 231     43 895

Marketing expenses                 (31 856)    (23 390)    (2 036)    (1 495)
Administrative and general exp.   (204 077)   (148 792)   (13 043)    (9 510)
Other operating income               5 704     148 205        365      9 472
Other operating expenses           (18 134)    (29 952)    (1 159)    (1 914)

OPERATING PROFIT                   521 933     632 871     33 358     40 448

Financial income and expenses
from stocks of subsidiaries              0       2 326          0        149
Financial income and expenses from stocks of
associate comp. and joint ventures  75 592      17 461      4 831      1 116
Financial income and expenses from
other long-term financial investments    0           7          0          0
Interest expense                   (16 948)    (14 288)    (1 083)      (913)
Foreign exchange gain                 (747)     (6 064)       (48)      (388)
Other financial income and expenses 10 950       8 295        700        530
Total financial income and expenses 68 847       7 737      4 400        494

PROFIT BEFORE TAX                  590 780     640 608     37 758     40 942

Corporate income tax expense       (31 075)    (49 917)    (1 986)    (3 190)

NET PROFIT FOR CURRENT PERIOD      559 705     590 691     35 772     37 752
   incl. net profit attributable
         to equity holders of
         the parent company        544 537     581 738     34 802     37 180
         minority interest          15 168       8 953        970        572

Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR)  30,76       32,87       1,97       2,10


BALANCE SHEET AS OF 31.12.2007
consolidated, in thousand EEK and EUR
                                       EEK                      EUR
                             31.12.2007   31.12.2006  31.12.2007  31.12.2006
ASSETS
Current assets
Cash and cash equivalents       201 032      676 143      12 848      43 213
Financial assets at fair
value through profit or loss      4 532            0         290           0
Trade and other receivables   1 204 688      860 531      76 993      54 998
Inventories                   2 025 949    1 356 734     129 482      86 712
Assets held for sale                  0          733           0          47
Total current assets          3 436 201    2 894 141     219 613     184 970

Non-current assets
Long-term financial investments 290 004      215 866      18 534      13 796
Investment property               7 361        3 900         471         249
Property, plant and equipment   172 912       90 445      11 051       5 781
Intangible assets                12 540       10 177         802         650
Total non-current assets        482 817      320 388      30 858      20 476

TOTAL ASSETS                  3 919 018    3 214 529     250 471     205 446

LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings                      304 879      283 792      19 485      18 138
Trade and other payables      1 014 587    1 100 264      64 845      70 320
Government grants                 1 498        1 498          96          96
Short-term provisions            93 426       33 517       5 971       2 142
Total current liabilities     1 414 390    1 419 071      90 397      90 696

Non-current liabilities
Loans, bonds and
finance lease liabilities       397 713      159 336      25 418      10 183
Other long-term payables         11 091       10 351         709         662
Long-term customer prepayments   46 332       12 925       2 961         826
Total non-current liabilities   455 136      182 612      29 088      11 671

Total liabilities             1 869 526    1 601 683     119 485     102 367

Equity
Minority interest                34 247       18 904       2 189       1 208
Equity attributable to equity holders of the parent company
  Share capital                 177 000      177 000      11 312      11 312
  Statutory reserve capital      17 700       17 700       1 131       1 131
  Currency translation adjustment(5 085)      (5 751)       (325)       (368)
  Retained earnings           1 825 630    1 404 993     116 679      89 796
Total equity attributable to equity
holders of the parent company 2 015 245    1 593 942     128 797     101 871
Total equity                  2 049 492    1 612 846     130 986     103 079

TOTAL LIABILITIES AND EQUITY  3 919 018    3 214 529     250 471     205 446


Alar Lagus
Member of Board
+372 6 805 109
[email protected]