Market announcement

Title

2011 6 months and II quarter consolidated unaudited interim report

Message

Tallinn, Estonia, 2011-08-17 15:30 CEST (GLOBE NEWSWIRE) --


MANAGEMENT REPORT

General information

AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction
group offering complete solutions in the construction field. The largest
companies belonging to the group are SIA Merks (100%), UAB Merko Statyba
(100%), Tallinna Teede AS (100%), AS Gustaf (85%), OÜ Gustaf Tallinn (80%), AS
Merko Tartu (66%), AS Merko Infra (100%) and AS Tartu Maja Betoontooted (25%). 


Operating results

In 2011 6 months, the revenue of the construction group was EUR 75.0 million.
Estonia contributed 78.8%, Latvia 18.0% and Lithuania 3.2% to the group's
revenue. As compared to 2010 6 months, the group's revenue increased by 5.9%,
including +26.6% in Estonia, +59.4% in Lithuania and -40.3% in Latvia. 

Group's revenue for Q2 2011 was EUR 48.9 million, which constitutes an annual
increase of EUR 10.0 million (+25.8%). 

As of 30 June 2011, the group's portfolio on unfinished construction contracts
totalled EUR 219 million. The contract portfolio does not include residential
development projects developed by the Company and the works related to
construction of investment properties. 

In 2011 6 months, the group sold 24 apartments for EUR 2.2 million, (exclusive
of VAT). As of 30.06.2011, the inventories included 38 unsold apartments with a
total cost of EUR 2.8 million and 597 apartments in the stage of construction
with a total cost of EUR 26.7 million as of the balance sheet date. Of the
finished buildings 32 apartments are located in Tartu and 6 in Riga. At the
moment the group is building an apartment building with 93 apartments at Tartu
road 50 in Tallinn (completion time Q4 2011), an apartment building with 15
apartments at Kristiina 12, Tallinn (completion time Q4 2011), two apartment
buildings (21 apartments in each) at Hane Street in Tallinn (completion time
summer 2012) and two apartment buildings with 115 and 133 apartments at
Skanstese street in Riga (completion time July 2011 and December 2012
respectively). 

In 2011, the share of infrastructure facilities has grown, which has
significantly increased the impact of seasonality on the group's quarterly
performance (EUR 26.2 million revenue in Q1 2011 compared to EUR 48.9 million
in Q2). The impact of the cyclical nature of development projects on Q2 results
and the results of the first 6 months was insignificant. 

The consolidated revenue of the group's largest entities:

                                                              in thousand euros
--------------------------------------------------------------------------------
                                    6 months 2011  6 months 2010  6 months 2009
Estonian entities                                                              
AS Merko Ehitus (parent)                   41 658         34 352         50 954
Tallinna Teede AS (100% ownership)          6 895          8 327          8 173
AS Merko Infra (100% ownership)             4 034              5              -
AS Gustaf (85% ownership)                   1 285            697          1 828
OÜ Gustaf Tallinn (80% ownership)           3 161          1 688          2 308
AS Merko Tartu (66% ownership)              1 551          1 155          3 238
Latvian entity                                                                 
SIA Merks (100% ownership)                 13 508         22 630         21 263
Lithuanian entity                                                              
UAB Merko Statyba (100% ownership)          2 144          1 478          3 145

Marketing and general administrative expenditures of the group decreased by
2.1% with the first six months of 2011. Work on cutting the marketing and
general administrative expenditures continues and the management has set the
goal to take the proportion of the respective costs under 5.5% of revenue by
the end of 2011. 

The group ended the first half of 2011 at a loss. The group's EBIT loss for the
first six months was EUR 7.5 million, and net loss was EUR 7.6 million - by
comparison, for the first six months of 2010, the group reported an EBIT profit
of EUR 3.9 million and net profit of EUR 3.3 million. The loss was caused by
the rapid increase in construction prices in 2009/2010, which exceeded
considerably the estimated input prices that were used to calculate the cost of
the tenders submitted in 2009/2010. As of 30.06.2011, the group had drawn
appropriations to cover the costs necessary for terminating non-profitable
projects in the total amount of EUR 4.3 million. The management believes that
the second half of 2011 will be better than the first, but the group will still
not make a profit for the year in total. 

In 2011 6 months, the change in short-term investments, and cash and cash
equivalents of Merko Ehitus group was EUR -7.2 million and as of 30 June 2011,
the cash and cash equivalents in the bank accounts and term deposits of the
group were in the amount of EUR 4.5 million. The cash flows from operating
activities totalled EUR -16.2 million, cash flows from investing activities
totalled EUR -1.3 million and cash flows from financing activities totalled EUR
+9.5 million. The cash flows from operating activities in the reporting period
were mostly affected by the change in trade and other receivables related to
operating activities of EUR -18.6 million, change in trade and other payables
related to operating activities of EUR +13.0 million and operating loss EUR
-7.2 million. Of the cash flows from investing activities, purchase of
investment property totalled EUR -5.1 million, the balance of issued and repaid
loans totalled EUR +3.0 million and investments in property, plant and
equipment totalled EUR -0.7 million. Of the cash flows from financing
activities the balance of gained and repaid loans totalled EUR +10.0 million
and EUR -0.6 million was spent on finance lease principal payments. 

The ratios and methodology for calculating the financial ratios describing the
group's main operations 

                                            6 months      6 months      6 months
                                                2011          2010          2009
---------------------------------------                                         
Net profit margin                            -10,1 %         4,7 %         5,1 %
Profit before taxes margin                   -10,0 %         5,5 %         5,4 %
Operating profit margin                       -9,6 %         5,8 %         5,2 %
Gross profit margin                           -3,2 %        11,9 %        11,6 %
EBITDA margin                                 -8,3 %         7,7 %         6,1 %
Return on equity per annum                   -12,6 %         5,0 %         7,0 %
Return on assets per annum                    -7,4 %         3,0 %         3,9 %
Equity ratio                                  53,7 %        60,1 %        56,8 %
Current ratio                                    2,0           2,3           2,9
Quick ratio                                      0,9           1,0           1,4
General expense ratio                          6,7 %         7,3 %         6,7 %
Gross remuneration ratio                      10,7 %        10,9 %        10,1 %
Debt to assets                                16,6 %        13,9 %        16,8 %
Accounts receivable turnover (days)               85            56            79
Accounts payable turnover (days)                  66            55            42
Revenue per employee (thousand euros)             81            92           110
Average number of full-time employees            923           766           844
 (group)                                                                        

Net profit margin: Net profit* / Revenue
Profit before taxes margin: Profit before taxes / Revenue
Operating profit margin: Operating profit / Revenue
Gross profit margin: Gross profit / Revenue
EBITDA margin: (Operating profit + Depreciation and impairment charge) / Revenue
Return on equity: Net profit x 2* / Avg equity during the period*
Return on assets: Net profit x 2* / Avg 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 / Revenue x 365/2
Accounts payable turnover: Payables to supplies / Cost of goods sold x 365/2
Revenue per employee: Revenue / Average number of full-time employees

* attributable to equity owners of the parent


Employees and remuneration

Due to the growth of the contract portfolio and the increase in the share of
facilities in the structure of contracts, the number of group's employees
increased by 170 (+20,1%) employees and as of 30.06.2011, the group had 1017
employees. The gross remuneration paid to employees in 2011 6 months amounted
to EUR 8.06 million an increase of 4.0% compared to previous year. The group's
labour costs have increased due to the employment of new personnel. Salaries
accounted for 83.9% of the gross remuneration, and performance-related pay
accounted for 16.1%. 


Members of the Supervisory and Management Board of AS Merko Ehitus

Supervisory Board

The general meeting of shareholders elects the Company's Supervisory Board. The
Supervisory Board plans the Company's activities and arranges its management as
well as performs supervision over the Management Board. The general meeting of
shareholders, held on 28 June 2011, elected an additional member (Mr Toomas
Annus) to the current Supervisory Board of AS Merko Ehitus. Thus, the
Supervisory Board of AS Merko Ehitus now has 5 members. 

Toomas Annus - Born at 5 October 1960. Finished Tallinn Technical School of
Building and Mechanics and graduated from Tallinn University of Technology,
majoring in industrial and civil engineering. Since 1987 the chairman of the
Management Board of EKE MRK, the predecessor of Merko Ehitus, since 1991 the
chairman of the Management Board of AS Merko Ehitus. In the years 1997-2008 and
again from June 2011 the chairman of the Supervisory Board of AS Merko Ehitus. 

Tõnu Toomik - Born at 8 March 1961. Finished Raatuse Gymnasium in Tartu (former
Tartu Secondary School no. 3) and graduated from Tallinn University of
Technology, majoring in industrial and civil engineering. From 1993, started to
work as a project manager at AS Merko Ehitus. Between 1997-2008, was a member
of the Management Board of AS Merko Ehitus, being responsible for the
management and development of the Company. From August 2008, is the member of
the Supervisory Board of AS Merko Ehitus. 

Teet Roopalu - Born at 30 August 1949. Finished Tallinn Secondary School no. 10
(current Nõmme Gymnasium) and graduated from the Faculty of Economics of
Tallinn University of Technology, majoring in construction economics and
organisation. Has worked at construction companies, including as a director of
finance, managed the economic activities in EKE (Estonian Collective Farm
Construction) system as a chief economist, as a bank director and has also been
involved in design work. Since November 2002, works at AS Merko Ehitus and is
responsible for the Company's financial and legal areas. Is a member of the
Supervisory Board of AS Riverito and those of several subsidiaries and
associates of AS Merko Ehitus. 

Indrek Neivelt - Born at 17 March 1967. Finished a mathematics and physics -
biased class at Tallinna Secondary School no. 1 (current Gustav Adolf
Gymnasium), graduated from Tallinn University of technology, majoring in civil
engineering economics and management, and received his MBA in banking and
finance from Stockholm University. Between 1991-2005, worked in various
positions at Hansapank, over the last six years as the general director of the
group and chairman of the Management Board. From 2005, is a Chairman of the
Supervisory Board of Bank Saint Petersburg and is a member of supervisory
boards of several entities. From October 2008, is member of the Supervisory
Board of AS Merko Ehitus. 

Olari Taal - Born at 7 August 1953. In 1971, finished Varstu Secondary School
and in 1976, graduated as a civil engineer from Tallinn University of
Technology. Has managed Tartu Elamuehituskombinaat (Tartu Housing Plant; Tartu
Maja) and Eesti Hoiupank (Estonian Savings Bank). Has served the Republic of
Estonia as the Minister of Construction, Minister of Economic Affairs, Minister
of Internal Affairs and as a member of the 10th Riigikogu (Parliament of
Estonia). From October 2008, Olari Taal is a member of the Supervisory Board of
AS Merko Ehitus. 

Management Board

The Management Board is the Company's governing body, which represents and
manages the Company. The Management Board shall adhere to the lawful
regulations of the Supervisory Board. The Management Board is under the
obligation to act in most economically purposeful manner. As of 21.12.2010, the
Management Board of AS Merko Ehitus has 6 members. 

Tiit Roben - Born at 5 January 1966. Finished Mustamäe Gymnasium (former name:
Tallinn Secondary School no. 44) in Tallinn and graduated from Tallinn
University of Technology, majoring in industrial and civil engineering. Worked
as a project manager at AS Merko Ehitus between 1998-2002. Between 2002-2008,
worked at AS Riverito's entity E.L.L.Kinnisvara AS, from 2005, is a member of
the Company's Management Board. From August 2008, is the Chairman of the
Management Board of AS Merko Ehitus, being responsible for the management and
development of the Company. 

Jaan Mäe - Born at 26 September 1964. Finished Viljandi Secondary School no. 5.
and graduated from Tallinn University of Technology, majoring in industrial and
civil engineering. From December 1997, works at AS Merko Ehitus, has been
project manager, division manager and member of the Management Board. Between
2006-2010, was a member of the Supervisory Board of AS Merko Ehitus and several
group entities. From June 2010, is a member of the Management Board of AS Merko
Ehitus, being responsible for attainment of goals in the area of development
and is the Chairman of the Supervisory Board of Latvian and Lithuanian
subsidiaries. 

Alar Lagus - Born at 15 February 1969. Finished Rapla Secondary School and
graduated from the Faculty of Chemistry of Tallinn University of Technology,
majoring in organisation and technology of public catering. After graduation,
worked in various positions at Hansapank. From 2004, works as a manager in the
finance area and is responsible for the Company's financial and managerial
accounting and investor relations. 

Veljo Viitmann - Born at 13 March 1962. Finished Türi Secondary School and
graduated from Tallinn University of Technology, majoring in road engineering
and bridges. From 1994, works at AS Merko Ehitus and is responsible for
preparation of tenders for new projects. 

Andres Agukas - Born at 15 July 1965. Finished Pärnu-Jaagupi Secondary School
and graduated from Tallinn University of Technology, majoring in road
engineering. At 2 February 1998, started to work at AS Merko Ehitus as the
first employee in the area of civil engineering. From October 2005, as a member
of the Management Board is responsible for the whole area of the construction
service. 

Viktor Mõisja - Born at 6 January 1951. Graduated as a civil engineer from
Tallinn University of Technology. Viktor Mõisja has worked at AS Merko Ehitus
since the foundation of the Company and most of the time as a manager of the
department of concrete works. From 21 December 2010, is a member of the
Company's Management Board and his area of responsibility are quality
management and supervision. 


Construction market

Economic growth, at constant prices  Construction price index, at constant      
                                      prices                                    
Q2 2011 vs. Q2 2010                  Q2 2011 vs. Q2 2010                        
Estonia  +8,4%                       Estonia +3,2% incl. labour force +7,0%     
Latvia  +5,3%                        Latvia  +1,3% incl. labour force -5,6%     
Lithuania +6,1%                      Lithuania +4,3%  incl. labour force +6,9%  

Improvement of the overall economic climate has given the Baltic construction
market a positive boost. In Lithuania and Estonia, construction volumes with
own forces have increased in the last year: in Lithuania, along with a +6.1%
GDP growth*, there has been a 21.8% growth in construction volumes**, compared
to Q2 2010 (+17.7% respectively in Q1 2011); and in Estonia the construction
market** grew 31.4% in Q1 2011 compared to the same period last year
(construction market results for Q2 2011 will be published on 29 August 2011).
The situation is most difficult in Latvia where, despite a +5.3% GDP* growth,
construction volumes** are still down from last year by 
-2.7% (-23.0% respectively in Q1 2011). However, it is hoped that the Latvian
construction market bottomed out in 2010, and that construction volumes will
increase by the end of 2011. 
* in constant prices
** in current prices

High global demand has brought about the rise in the construction sector input
prices. There has been an especially marked increase in the prices of materials
containing petroleum products and metals. High demand in the construction
sectors of Central Europe and Scandinavia offers a considerable alternative for
the local labour to sell their labour force to foreign countries; this keeps
the labour force prices high. More expensive inputs and orientation of several
sub-contracting companies towards external markets has resulted in remarkable
increase in construction service prices. Compared towards the bottom of the
construction market in 2009, the construction prices as of today have increased
by 30-40%. High volatility of prices makes budgeting of new projects and
execution of projects according to planned expenditures complicated and brings
about an additional risk upon executing contracts with fixed prices. 

The rapid rise in input prices, the additional requirements set by clients and
the postponement of works have all caused many contractors to have difficulties
with the performance of the contracts. Contracting entities cancel tender
invitations more and more often since the offers made do not comply with the
budgets drawn in 2009/2010 and financial means for executing the project are
insufficient. 

Confidence of private contractors towards the future is still low, so there is
no interest in constructing new buildings/facilities. Estonia's transition to
Euro has not remarkably enlivened the activity of external investments in the
area nor influenced the construction market positively as hoped. Still most of
the new contracts originate from the public sector and are funded with the help
of EU Structural Funds. 

For the construction companies, the year of 2011 shall be the most challenging
since. Guarantees and payment terms dictated by the contracting entities turn
constantly more and more unfavourable for the construction companies, load over
the circulating capital of companies increases and cash-flow management as well
as liquidity becomes more and more determining. 


Share and shareholders

The shares of Merko Ehitus are listed in the main list of NASDAQ OMX Tallinn
Stock Exchange. In 2011 6 months 1990 transactions with the shares of Merko
Ehitus were performed in the course of which 0.5 million shares were traded and
the total monetary value of transactions was EUR 4.23 million. The lowest share
price was EUR 7.05 and the highest price was EUR 10.65 per share. The closing
share price as of 30.06.2011 was EUR 7.85. AS Merko Ehitus market value as of
30.06.2011 was EUR 139 million. 

                                       30.06.2011  30.06.2010  30.06.2009
--------------------------------------                                   
No. of shares, thousand pcs                17 700      17 700      17 700
Earnings per share (EPS), in euros          -0,43        0,19        0,26
Equity per share, in euros                   6,52        7,17        7,55
P/B (share price to equity per share)        1,20        1,03        0,45

The main shareholders of AS Merko Ehitus as of 30.06.2011

                                                     Number of     Percentage of
                                                        shares             total
-----------------------------------------------                                 
AS Riverito                                         12 742 686            71,99%
ING Luxembourg S.A., clients                           963 376             5,44%
Skandinaviska Enskilda Banken Ab, clients              903 581             5,11%
State Street Bank and Trust Omnibus Account a          156 718             0,89%
 Fund No OM01                                                                   
Gamma Holding OÜ                                       132 468             0,75%
SEB Elu- ja Pensionikindlustus AS                      125 520             0,71%
Clearstream Banking Luxembourg S.A. clients            106 239             0,60%
AS Midas Invest                                        104 240             0,59%



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

                                                                2011        2010
                                                                   6    6 months
                                                              months            
                                                                                
Revenue                                                       75 047      70 854
Cost of goods sold                                               (77    (62 406)
                                                                480)            
Gross profit                                                 (2 433)       8 448
                                                                                
Marketing expenses                                           (1 162)       (998)
Administrative and general expenses                          (3 893)     (4 165)
Other operating income                                           320       1 014
Other operating expenses                                        (49)       (193)
Operating profit (loss)                                      (7 217)       4 106
                                                                                
Financial income and expenses                                  (321)       (200)
incl. financial income (expenses) from investments into                25  (284)
associates and joint ventures                                                   
interest expense                                               (414)       (410)
foreign exchange gain                                             27          95
other financial income (expenses)                                 41         399
Profit (loss) before tax                                     (7 538)       3 906
                                                                                
Corporate income tax expense                                       -       (608)
                                                                                
                                                            --------------------
Net profit (loss) for current period                         (7 538)       3 298
                                                            --------------------
incl. equity holders of the parent                           (7 592)       3 318
non-controlling interest                                          54        (20)
                                                                                
Other comprehensive income (loss)                                               
Currency translation differences of foreign entities              26          64
                                                                                
                                                            --------------------
Comprehensive income (loss) for the period                   (7 512)       3 362
                                                            --------------------
                                                            --------------------
incl. equity holders of the parent                           (7 566)       3 382
non-controlling interest                                          54        (20)
                                                                                
Earnings per share for profit (loss) attributable to equity   (0,43)        0,19
holders of the parent (basic and diluted, in euros)                             
                                                                                

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

                                                                2011        2010
                                                          II quarter  II quarter
                                                                                
Revenue                                                       48 874      38 858
Cost of goods sold                                          (49 872)    (34 150)
Gross profit                                                   (998)       4 708
                                                                                
Marketing expenses                                             (600)       (539)
Administrative and general expenses                          (1 921)     (1 965)
Other operating income                                           136         250
Other operating expenses                                        (12)         (3)
Operating profit (loss)                                      (3 395)       2 451
                                                                                
Financial income and expenses                                   (45)        (70)
incl. financial income (expenses) from investments into          101       (129)
associates and joint ventures                                                   
interest expense                                               (204)       (202)
foreign exchange gain                                             36           2
other financial income (expenses)                                 22         259
Profit (loss) before tax                                     (3 440)       2 381
                                                                                
Corporate income tax expense                                       -        (89)
                                                                                
                                                         -----------------------
Net profit (loss) for current period                         (3 440)       2 292
                                                         -----------------------
                                                         -----------------------
incl. equity holders of the parent                           (3 485)       2 259
non-controlling interest                                          45          33
                                                                                
Other comprehensive income (loss)                                               
Currency translation differences of foreign entities               8          10
                                                                                
Comprehensive income (loss) for the period                   (3 432)       2 302
                                                         -----------------------
                                                         -----------------------
incl. equity holders of the parent                           (3 477)       2 269
non-controlling interest                                          45          33
                                                                                
                                                                                
Earnings per share for profit (loss) attributable to          (0,20)        0,13
 equity                                                                         
holders of the parent (basic and diluted, in euros)                             


CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited, in thousand euros

                                                       30.06.2011  31.12.2010
ASSETS                                                                       
                                                                             
Current assets                                                               
Cash and cash equivalents                                   4 389       9 856
Short-term deposits                                           146       2 651
Trade and other receivables                                65 925      44 938
Prepaid corporate income tax                                  682       1 366
Inventories                                                98 084      93 048
Non-current assets held for sale                              180           -
Total current assets                                      169 406     151 859
                                                                             
Non-current assets                                                           
Long-term financial assets                                 17 442      19 311
Deferred income tax assets                                  1 572       1 571
Investment property                                         8 458       3 585
Property, plant and equipment                              16 726      17 747
Intangible assets                                           1 467       1 508
Total non-current assets                                   45 665      43 722
                                                                             
TOTAL ASSETS                                              215 071     195 581
                                                      -----------------------
                                                      -----------------------
                                                                             
LIABILITIES AND EQUITY                                                       
                                                                             
Current liabilities                                                          
Borrowings                                                 21 479      12 554
Trade and other payables                                   55 820      39 154
Provisions                                                  5 817       3 674
Total current liabilities                                  83 116      55 382
                                                                             
Non-current liabilities                                                      
Long-term borrowings                                       14 263      13 185
Long-term trade payables                                      806         845
Long-term customer prepayments                                  0           1
Total non-current liabilities                              15 069      14 031
                                                                             
Total liabilities                                          98 185      69 413
                                                      -----------------------
                                                      -----------------------
                                                                             
Equity                                                                       
                                                                             
Non-controlling interest                                    1 482       1 428
Equity attributable to equity holders of the parent                          
Share capital                                              11 312      11 312
Unregistered share capital                                    688           -
Statutory reserve capital                                   1 131       1 131
Currency translation adjustment                             (898)       (924)
Retained earnings                                         103 171     113 221
Total equity attributable to equity holders of parent     115 404     124 740
                                                                             
Total equity                                              116 886     126 168
                                                      -----------------------
                                                      -----------------------
                                                                             
TOTAL LIABILITIES AND EQUITY                              215 071     195 581
                                                      -----------------------



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