Market announcement

Title

Interim financial results for 2008 and Q4

Message

MANAGEMENT REPORT

General information

AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction
group providing integrated construction solutions. 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%).

The presented report provides an overview of the economic activities and
financial indicators of AS Merko Ehitus in the first 9 months of 2008,
including the economic activities and financial indicators of the company's
legal predecessor AS Järvevana (previous name AS Merko Ehitus) in the first
7 months of 2008.

On 17 December 2008, the Estonian Security Police Board announced that the
company AS Merko Ehitus is under suspicion of offering a gratuity.
According to the suspicions, a member of the management board of AS Merko
Ehitus gave a book and a travel agency gift certificate worth 25 000 EEK
to a city administration official as a gift, considered as a bribe for
taking care of the detailed plans of seven registered immovables in the
city of Tallinn. AS Merko Ehitus rejects the suspicions against the company.
(http://www.nasdaqomxbaltic.com/market/?pg=details&instrument=EE3100098328
&list=2&tab=news&news_id=229083).

On 7 October 2008, AS Merko Ehitus transferred its 100-percent holding in
the company OÜ Põrguvälja Soojus (registry code 10711682) as a business
area not necessary for the fulfilment of the group's strategic objectives.
(http://www.baltic.omxnordicexchange.com/market/?pg=news&news_id=227308).

On 1 August 2008, the registration department of Harju County Court made an
entry in the Commercial Register registering the division of AS Merko Ehitus
(registry code 10068022, with the new business name ‘Aktsiaselts Järvevana')
into the limited companies Merko Ehitus (registry code 11520257) and Järvevana
(registry code 10068022).

Pursuant to the division plan (http://www.merko.ee/upload/File/Restrukturee
rimise%20dokumendid/AS%20Merko%20Ehitus%20jagunemiskava%20ENG.pdf), upon the
division, AS Järvevana transferred to AS Merko Ehitus the entire set of assets
related to the economic activities of the building company, including all
concluded building, subcontracting and supply contracts; the equipment,
machinery and employees; all professional know-how and cash-flows without
interrupting the continuing economic activities.

On 3 June 2008 the Annual General Meeting (http://www.baltic.omxnordic
exchange.com/market/?pg=news&news_id=226094) approved the division of the
company to into the limited companies new Merko Ehitus (registry code
11520257) and Järvevana (registry code 10068022).

On May 21 2008 AS Merko Ehitus transferred the 50-percent holding in the
company OÜ Tornimäe Apartments (registry code 11016607) to the co-partner
AS EKE Invest. The sale price of the company was 58 million kroons
(http://www.baltic.omxnordicexchange.com/market/?pg=news&news_id=223709).

On May 2 2008 AS Merko Ehitus transferred the 100-percent holding in the
company OÜ Karulaugu Kinnisvara (registry code 11034491) to AS E.L.L.
Kinnisvara. The sale price of the company was 42 million kroons; from this
amount, 4.12 million kroons, the balance of company's financial obligations
and current assets, were deducted (http://www.baltic.omxnordicexchange.com/
market/?pg=details&instrument=EE3100003559&list=2&tab=news&news_id=223284).

On 15 April 2008, the management of AS Merko Ehitus presented the Company's
restructuring plan (http://www.baltic.omxgroup.com/market/?pg=details&
instrument=EE3100003559&list=2&tab=news&news_id=222602), according to which
AS Merko Ehitus was split up/demerged so that AS Merko Ehitus, e.g. assets
(other than liquid assets in the amount of 250 million kroons), liabilities
and contracts as well as the business name was separated and transferred to
the new company being set up. The exact description of assets and the
division plan were published in the materials announcing the general meeting
of shareholders http://www.merko.ee/eng/investor/generalmeeting/2008.

At a joint meeting held at 14 March 2008, the Management Board and the
Supervisory Board of AS Merko Ehitus adopted a resolution to restructure
the Company and separate operating activities from the criminal proceedings
related to the land swap. The Company's management estimates that the
restructuring of the Company is the best way to ensure its sustainable
development and protect the interests of shareholders and employees in the
long-lasting criminal proceedings related to the land swap.

Business operations

Group's revenue for the year 2008 was 4653.9 million kroons, which
constitutes an annual decrease of 15.5%. 62.2% of the sales originated from
Estonia, 19.4% from Latvia and 18.4% from Lithuania. As compared with the
year 2007, company's sales in Lithuania increased by 15.8%, and decreased
in Latvia by 34.7% and in Estonia by 14.5%.

Group's revenue in the fourth quarter of 2008 was 1101.6 million kroons.
Due to the crisis in global economics, the revenue decreased by 545.6
million kroons compared to the year 2007. 

As at 31 December 2008, the group's backlog of construction contracts
in progress amounted to 2986 million kroons (4136 million kroons as at
31 December 2007).

Companies of the Group 12M 2008 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):

                                             12M 2008            12M 2007
                                            EEK      EUR        EEK       EUR
Estonian companies
   AS Merko Ehitus (parent company)   1 861 545  118 974  2 221 823   142 000
   AS Gustaf (75% partnership)          142 558    9 111    153 123     9 786
   OÜ Gustaf Tallinn (80% partnership)  140 930    9 007    146 568     9 367
   AS Merko Tartu (66% partnership)     308 732   19 732    309 282    19 767
   Tallinna Teede AS (100% partnership) 432 273   27 627    363 272    23 217
   OÜ Woody (100% partnership)           79 803    5 100    218 642    13 974
Latvian company 				
   SIA Merks (100% partnership)         878 295   56 133  1 225 816    78 344
Lithuanian company				
   UAB Merko Statyba (100% partnership) 797 902   50 995    696 010    44 483


In one year, the Group's cost of goods sold decreased by 17.6%, whereas the
marketing and general administrative expenses increased by 8.7%, constituting
83.8% and 5.7% of the revenue respectively. Various extraordinary expenses
contributed to the increase of marketing and general administrative costs in
the period: expenses incurred in the division of AS Merko Ehitus and
AS Järvevana, legal aid costs related to the legal succession and experience
of Merko Ehitus, redundancy payments and administrative personnel expenses
included in general expenses.

As a result of a decrease in demand for residential space and a consequent
price drop, the group decreased the sales prices of residential space in the
fourth quarter. As a consequence of the this correction, the sales price of
flats fell below the costs of their acquisition and construction, and as
a result, the group discounted the value of registered immovables, residential
development projects, as well as work-in-progress and finished goods below
their realisation (market) price in the fourth quarter, and hence resulted
in an extraordinary loss of 141.8 million kroons. In the year 2008, the
Group sold 529 flats and as of the year-end owned 412 finished but unsold
flats and 449 half-finished flats, of which the construction process was
suspended for 438 flats.

The group's profit before taxes for the year 2008 amounted to 328.4 million
kroons, having decreased by 262.4 million kroons during the course of the
year, and the net profit amounted to 296.6 million kroons, having decreased
by 248.5 million kroons correspondingly. The decrease of profit was mostly
affected by a discount of inventories in the amount of 150.1 million kroons
and a discount of receivables in the amount of 21.0 million kroons, whereas
both discounts were caused by deterioration of the economic environment.
The net profit of the group before the extraordinary discounts was 467.7
million kroons, having decreased by 13.3% compared to the year 2007.

Group's net cash flow of the twelve months of the year was +577.4 million
kroons, including cash flow from operating activities +675.3 million kroons,
from investing activities +37.2 million kroons, financing activities -110.1
million kroons and net assets separated in division -25,0 million kroons.
The cash flow from operating activities were mostly influenced by the change
in trade and other receivables related to operating activities (+357.0
million kroons), operating profit +323.7 million kroons, change in trade
and other payables (-252.1 million kroons), change in inventories +177.8
million kroons and adjustments of revenue from construction contracts under
stage of completion method +146.7 million kroons.
As at 31 December 2008, the group has 780.2 million kroons of funds on the
group's bank accounts.

The ratios and calculation methods characterizing the operating activities
of the Group
                                           2008 12 months     2007 12 months
Net profit margin                                   6,4 %              9,9 %
Earnings before taxes margin                        7,1 %              10,7%
Operating profit margin                             7,0 %              9,5 %
Return on equity per annum                         14,5 %             30,2 %
Return on assets per annum                          7,6 %             15,3 %
Current ratio                                       2,2                2,4
Equity ratio                                       53,6 %             51,5 %
General expense ratio                               5,7 %              4,5 %
Gross remuneration ratio                            8,8 %              7,4 %

Net profit margin: Net profit* / Revenue
Earnings before taxes margin: Profit before tax / Revenue
Operating profit margin: Operating profit / Revenue
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 expense ratio: General expenses / Revenue
Gross remuneration ratio: Gross remuneration / Revenue

* calculated as attributable to the equity holders of the parent company

In 31.12.2008, the number of employees in the Group's service was 964,
including 928 full-time employees. The group reduced the number of its
personnel by 151 employees, or 13.5% in a year. The gross remuneration
paid to employees in 2008 amounted to 408.4 million kroons an increase
of 0.5% compared to previous year. Since most lay-offs were done in the
3rd and 4th quarter, their influence on the labour costs of the period
remained insignificant.


INCOME STATEMENT 12M 2008
consolidated, in thousand EEK and EUR
                                           EEK                   EUR
                                  12M 2008    12M 2007   12M 2008   12M 2007

Revenue                          4 653 925   5 510 760    297 440    352 202
Cost of goods sold              (3 899 531) (4 731 752)  (249 225)  (302 415)

GROSS PROFIT                       754 394     779 008     48 215     49 787

Marketing expenses                 (43 921)    (32 472)    (2 807)    (2 075)
Administrative and gen. expenses  (223 673)   (213 806)   (14 295)   (13 665)
Other operating income               9 504       6 424        607        411
Other operating expenses          (172 560)    (18 109)   (11 029)    (1 157)

OPERATING PROFIT                   323 744     521 045     20 691     33 301

Financial income and expenses
from stocks of subsidiaries          1 418           0         91          0
Financial income and expenses
from stocks of associate
companies and joint ventures        (4 565)     76 440       (292)     4 885
Interest expense                   (18 392)    (16 948)    (1 175)    (1 083)
Foreign exchange gain               (6 942)       (809)      (444)       (52)
Other financial income              34 405      11 016      2 199        704
Other financial expenses            (1 297)         (5)       (83)        (0)
Total financial income and expenses  4 627      69 694        296      4 454

PROFIT BEFORE TAX                  328 371     590 739     20 987     37 755

Corporate income tax expense       (26 286)    (30 830)    (1 680)    (1 970)

NET PROFIT FOR FINANCIAL YEAR      302 085     559 909     19 307     35 785
  incl. net profit attributable
        to equity holders of
        the parent company         296 554     545 049     18 953     34 835
        minority interest            5 531      14 860        354        950

Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR)  16,75       30,79       1,07       1,97


INCOME STATEMENT IV quarter 2008
consolidated, unaudited in thousand EEK and EUR

                                           EEK                   EUR
                                  IVq 2008    IVq 2007   IVq 2008   IVq 2007

Revenue                          1 101 559   1 647 155     70 402    105 272
Cost of goods sold                (934 650) (1 343 339)   (59 735)   (85 855)

GROSS PROFIT                       166 909     303 816     10 667     19 417

Marketing expenses                 (17 801)    (12 228)    (1 138)      (782)
Administrative and general expenses(66 458)    (89 626)    (4 247)    (5 728)
Other operating income                 872       1 263         56         81
Other operating expenses          (160 092)    (13 956)   (10 232)      (892)

OPERATING PROFIT                   (76 570)    189 269     (4 894)    12 096

Financial income and expenses
from stocks of subsidiaries          1 418           0         91          0
Financial income and expenses
from stocks of associate
companies and joint ventures        (5 750)     14 953       (367)       956
Interest expense                    (5 951)     (2 593)      (380)      (166)
Foreign exchange gain                  417       2 371         27        152
Other financial income              16 536       1 722      1 057        110
Other financial expenses               (10)        (64)        (1)        (4)
Total financial income and expenses  6 680      16 517        429      1 056

PROFIT BEFORE TAX                  (69 890)    205 786     (4 465)     13 152

Corporate income tax expense        21 293     (12 484)     1 361       (798)

NET PROFIT FOR FINANCIAL YEAR      (48 597)    193 302     (3 104)    12 354
  incl. net profit attributable
        to equity holders of
        the parent company         (47 321)    187 025     (3 024)    11 953
        minority interest           (1 276)      6 277        (81)       401

Earnings per share for profit attributable
to the equity holders of the parent company
(basic and diluted, in EEK and EUR)  (2,67)      10,57      (0,17)      0,68


BALANCE SHEET AS OF 31.12.2008
consolidated, in thousand EEK and EUR
                                       EEK                      EUR
                             31.12.2008   31.12.2007  31.12.2008  31.12.2007
ASSETS
Current assets
Cash and cash equivalents       780 210      205 564      49 865      13 138
Trade and other receivables     785 020    1 201 942      50 172      76 818
Inventories                   1 809 350    2 025 426     115 638     129 448
Assets held for sale                173            0          11           0
Total current assets          3 374 753    3 432 932     215 686     219 404

Non-current assets
Long-term financial investments 257 829      290 852      16 478      18 589
Investment property              17 545        7 361       1 122         470
Property, plant and equipment   201 096      172 912      12 854      11 051
Intangible assets                11 807       12 574         755         804
Total non-current assets        488 277      483 699      31 206      30 914

TOTAL ASSETS                  3 863 030    3 916 631     246 892     250 318

LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings                      535 748      304 879      34 241      19 485
Trade and other payables        972 569    1 032 210      62 158      65 970
Government grants                     0        1 498           0          96
Short-term provisions            38 307       73 212       2 448       4 680
Total current liabilities     1 546 624    1 411 799      98 847      90 231

Non-current liabilities
Long-term borrowings            202 304      397 713      12 930      25 418
Long-term payables to suppliers   8 824       11 091         564         709
Long-term suppliers advance payments  0       46 332           0       2 961
Total non-current liabilities   211 128      455 136      13 494      29 088

Total liabilities             1 757 752    1 866 935     112 341     119 319

Equity
Minority interest                32 933       33 939       2 257       2 169
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 (12 550)      (5 085)       (802)       (325)
Retained earnings             1 890 195    1 826 142     120 805     116 712
Total equity attributable
to equity holders of
the parent company            2 072 345    2 015 757     132 446    128 830
Total equity                  2 105 278    2 049 696     134 551    130 999

TOTAL LIABILITIES AND EQUITY  3 863 030    3 916 631     246 892     250 318


Alar Lagus
Member of Board
+372 6 805 109
alar.lagus@merko.ee