Market announcement

Title

2012 9 months and III quarter consolidated unaudited interim report

Message

Estonia, Tallinn, 2012-11-08 15:30 CET (GLOBE NEWSWIRE) --



MANAGEMENT REPORT


Overview of the results for the first 9 months

Profitability: net profit for the first 9 months of 2012 amounted to EUR 3.2    
 million (first 9 months of 2011: a net loss of EUR 7.3 million). The EUR 2.6   
 million net profit for the third quarter of 2012 (Q2 2012: EUR 0.4 million)    
 shows a positive trend towards an improvement in profitability.                
Revenue meets expectations: EUR 177.7 million was generated in revenue in the   
 first 9 months of 2012. This constitutes a 15.9% increase from the same period 
 last year (first 9 months of 2011: EUR 153.4 million). The revenue for the     
 third quarter of 2012 amounted to EUR 70.9 million (Q3 2011: EUR 78.3 million).
Financial position has improved: the group’s financial resources totalled EUR   
 15.5 million at the end of the reporting period (EUR 5.5 million in the same   
 period in 2011). As at 30 September 2012, the total net debt of the group was  
 negative in the amount of EUR 25.9 million (30 September 2011: negative in the 
 amount of EUR 27.4 million).                                                   
Secured order book has remained stable: in the first 9 months of the year, group
 companies entered into new contracts in the total amount of EUR 211 million    
 (first 9 months of 2011: EUR 148 million), with the secured order book         
 amounting to EUR 200 million as at 30 September 2012 (as at 30 September 2011: 
 EUR 195 million).                                                              


Background information and major changes introduced in the corporate structure

AS Merko Ehitus is a holding company incorporating construction and real estate
development companies offering integrated construction solutions in Estonia,
Latvia and Lithuania. Major construction companies incorporated under the
holding company include AS Merko Ehitus Eesti (100%), SIA Merks (100%), UAB
Merko Statyba (100%), as well as the AS Merko Ehitus Eesti group companies
Tallinna Teede AS (100%) and AS Merko Infra (100%). 

As a result of the changes introduced in the company’s management structure at
the beginning of 2012, the Supervisory Board of AS Merko Ehitus resolved, at
its meeting of 3 September 2012, to recall management board member Alar Lagus
from the Management Board of AS Merko Ehitus. Mr Lagus will continue serving as
a member of the Management Board of AS Merko Ehitus Eesti, a 100% subsidiary of
AS Merko Ehitus. 

The Management Board of the holding company AS Merko Ehitus will continue with
two members: Andres Trink and Viktor Mõisja. 

The profiles of the members of the Management Board and Supervisory Board have
been presented in Note 15 to the financial statements, and published, together
with the track record and photographs, on the company’s website at
www.merko.ee. 

The changes introduced in the management of SIA Merks, the Latvian-based
subsidiary of AS Merko Ehitus, took effect in September 2012, with the former
Chairman of the Management Board Ivars Geid?ns being appointed a member of the
Supervisory Board of SIA Merks, and the former CFO Oskars Ozoli?š the Chairman
of the Management Board of SIA Merks. The Management Board of SIA Merks will
continue with two members: Oskars Ozoli?š as the chairman and construction
director J?nis Šperbergs as member of the Management Board. The company’s
Supervisory Board will continue with Andres Trink serving as the chairman, and
Tõnu Toomik, Jaan Mäe and Ivars Geid?ns as members. 

In connection with the revising of the Ukrainian market prospects, the
Supervisory Board of AS Merko Ehitus approved, on 4 September 2012, the
management’s proposal for the initiation of the liquidation of the 100%
subsidiary Merko Ukraine LLC. As at 30 September 2012, the company had no
work-in-progress, contracts that needed to be served, or employees in Ukraine. 

On 6 July 2012, AS Merko Ehitus transferred 25% of its stake in the reinforced
concrete element manufacturer AS TMB to the Management Board of the company. 

In 2012, the business strategy of AS Merko Ehitus subsidiary companies focused
on improving profitability, enhancing the efficiency of the cost base and
strengthening the long-term liquidity position, concentrating on general
contracting and real estate development at the domestic markets of Estonia,
Latvia and Lithuania. 

AS Merko Ehitus received two awards in September 2012:

The Entrepreneurship Award 2012

AS Merko Ehitus was granted the most competitive enterprise award in the field
of construction at the Entrepreneurship Award competition organised by
Enterprise Estonia, the Estonian Chamber of Commerce and the Estonian
Employers’ Confederation. 

Euromoney – Real Estate Survey 2012

In its real estate market survey for 2012, Euromoney – the international
financial journal with a history of more than 40 years – declared AS Merko
Ehitus Estonia’s best developer. The Real Estate Survey 2012 is the eighth
survey conducted by Euromoney with the aim of ranking the best in real estate
on the basis of the market data, as well as the assessments of developers,
counsellors, business customers, investors and banks. 


Business activities

Key financial indicators (in millions of euros):

                                            9 months      9 months      9 months
                                                2012          2011          2010
Revenue                                                                         
Estonia                                        152.8         107.0          91.1
Latvia                                          18.9          31.9          32.1
Lithuania                                        6.0          14.5           3.1
Revenue total                                  177.7         153.4         126.3
                                                                                
Operating profit (EBIT)                          3.0         (6.7)           6.1
                                                                                
attributable to equity holders of the            3.2         (7.3)           5.2
 parent                                                                         
attributable to non-controlling                (0.1)         (0.1)         (0.1)
 interest                                                                       
Net profit                                       3.1         (7.4)           5.1
                                                                                
Earnings per share (EPS), in euros              0.18        (0.41)          0.29
                                                                                
Cash and cash equivalents at the end            15.5           5.5          21.2
 of period                                                                      
                                                                                

Merko Ehitus generated a total of EUR 177.7 million in revenue in the first 9
months of 2012, including the EUR 70.9 million generated in the third quarter.
86.0% of the revenue was generated in Estonia, 10.6% in Latvia and 3.4% in
Lithuania. The consolidated revenue grew by 15.9%, compared to the first 9
months of 2011. This can mainly be attributed to the increase in the revenue
generated from engineering projects in Estonia. A bulk of the revenue generated
from the construction sector can be attributed to projects co-financed by the
European Structural Funds. 

A total of 119 apartments were sold in the first 9 months of 2012 at the total
cost of EUR 12.8 million (w/o VAT) (113 apartments and EUR 12.3 million in the
first 9 months of 2011). Work-in-progress covers 292 apartments, including the
apartment building in Räägu Street in Tallinn (a total of 20 apartments;
scheduled to be completed in the summer of 2013), and the apartment building in
Eha Street (a total of 27 apartments, scheduled to be completed in the summer
of 2013). In Riga, a 115-apartment building is nearing completion in Skanstes
Street (scheduled to be completed in the fourth quarter of 2012) and a
62-apartment building is under construction in Grostonas Street (scheduled to
be completed in the autumn of 2013). In Vilnius, A 68-apartment building in
Mokslinink? Street is scheduled to be completed at the end of 2012. The real
estate market has become more selective – key aspects considered in the
evaluation of risks prior to the launch of each project is the location, scale
of development, design solutions and the target group. 

The group posted a gross profit of EUR 10.7 million from development and
construction activities in the first 9 months of 2012 (EUR 0.4 million in the
first 9 months of 2011). The seasonal nature of construction activities had
minor impact on the results for the first 9 months of 2012, compared to
previous periods – the third quarter has traditionally been the most active
construction period of the calendar year. New profitable projects have
positively contributed to the gross period, compared to last year. In addition,
the previous recognition of losses from problematic projects has had a further
positive impact. Consequently, the gross profit margin has advanced by 5.8%
(first 9 months of 2012: 6.0%), compared to the 9 months of 2011 (0.2%). 

The consolidated earnings before taxes (EBT) for the first 9 months of 2012
amounted to EUR 3.5 million and net profit to EUR 7.1 million, compared to the
negative EBT of EUR 7.1 million and net loss of EUR 7.3 million for the first 9
months of 2011. 

The group posted a net profit of EUR 2.6 million in the third quarter of 2012,
compared to the EUR 0.3 million net profit for the third quarter of 2011. 

As at 30 September 2012, secured order book amounted to EUR 200 million,
compared to the EUR 195 million as at 30 September 2011. The group does not
include residential building projects developed by the group and development of
investment property in the contracts portfolio. 

A total of EUR 211 million worth of new contracts were concluded in the first 9
months of 2012, compared to the EUR 148 million in the same period last year.
The largest construction agreements concluded in the last 9 months have been
brought out below: 

Contracts                                                        Cost           
                                                         in million of euros    
AS Eesti Energia Narva Power Plants: general constr. on the           17.3      
 300 MW oil-shale based energy block                                            
North Estonia Medical Centre                                     23.9           
Water treatment facility of the City of Narva                    21.1           
Water supply, sewerage system and wastewater pumping stations of           7.7  
 Vääna-Jõesuu and Viti villages                                                 
Kiisa emergency power plant                                      7.2            
                                                                                

The group has improved on its financial resources. As at the end of the
reporting period the Merko Ehitus group’s financial resources amounted to EUR
15.5 million, compared to the EUR 5.5 million in the same period last year. 

Cash flow from operating activities was a negative EUR 15.8 million (9 months
of 2011: negative EUR 22.2 million), cash flow from investing activities a
positive EUR 8.1 million (9 months of 2011: EUR 5.8 million) and cash flow from
financing activities EUR 4.7 million (9 months of 2011: EUR 11.8 million). Cash
flow from operating activities was affected the most by the negative change in
receivables and prepayments related to operating activities (EUR 20.5 million)
as well as the positive change in the liabilities and prepayments related to
operating activities (EUR 5.3 million). The share of public procurement with
long terms of payment (a contractual average of 56 days after approval of the
work) has increased in the consolidated cash flow from operating activities,
exerting pressure on current assets, including optimal management of cash
flows. To buttress the cash flow from operating activities, the group has,
after a careful analysis, engaged additional debt capital, including factoring.
The debt ratio has still remained modest (17.6% for the 9 months of 2012). 

The EUR 8.1 million cash flow from investing activities is made up of the
positive EUR 6.1 million of repayment of loans related to the financing of
development activities as well as the EUR 2.8 million generated from the
disposal of the share in AS TMB. Negative cash flows consist of the EUR 1.4
million spent on the acquisition of investment property (mainly the
construction of the court and police department building in Jõgeva). 

The balance of loans received and loans repaid contributed EUR 5.4 million and
the repayment of the finance lease principal EUR 0.7 million to the cash flow
from financing activities. 

The financial ratios of Merko Ehitus for the first 9 months of 2012, and the
methods for calculating the financial ratios (per share attributable to equity
holders of the parent company) 

                                              9 months     9 months     9 months
                                                  2012         2011         2010
Net profit margin                  %               1.8         -4.8          4.1
EBT margin                         %               1.9         -4.7          4.7
Operating margin                   %               1.7         -4.4          4.9
Gross profit margin                %               6.0          0.2         10.3
EBITDA margin                      %               2.8         -3.3          6.3
ROE                                %              -3.2         -9.5          3.8
ROA                                %              -1.6         -5.5          2.3
Equity ratio                       %              47.9         52.7         61.2
Current ratio                  multiplier          1.9          2.1          2.6
Quick ratio                    multiplier          1.0          1.0          1.2
General expense ratio              %               4.5          4.9          6.2
Gross remuneration ratio           %               7.6          8.1          9.2
Debt ratio                         %              17.6         15.0         12.9
Accounts receivable turnover     days               60           55           46
Accounts payable turnover        days               51           42           38
Revenue per employee           thousand            197          162          156
                                 euros                                          
Average number of employees      people            902          944          809
 (in group)                                                                     

Net profit margin = net profit / revenue
EBT margin = EBT / revenue
Operating profit margin = operating profit / revenue
Gross margin = gross profit / revenue
EBITDA margin = (operating profit + depreciation, amortisation and impairment)
/ revenue 
ROE = net profit / equity
ROA = net profit / total assets
Equity ratio = 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 ratio: interest-bearing liabilities / total assets
Accounts receivable turnover = accounts receivable / revenue x 365
Accounts payable turnover = accounts payable / cost of goods sold x 365
Revenue per employee = revenue / average number of employees


Employees and remuneration

The number of the group’s employees has dropped by 41 in the last 12 months
(-4.3%). As at 30 September 2012, the group had a total of 920 employees
(including fixed-term and part-time employees). Changes were introduced in the
management of UAB Merko Statyba and SIA Merks on the basis of the efficiency
programme implemented at the beginning of 2012, with the number of
administrative staff members reduced from 67 to 35 in the subsidiaries. 

A total of EUR 13.4 million was paid in gross remuneration to employees in the
first 9 months of 2012. This constitutes an 8.6% increase from last year. Basic
wages made up 82.8% of the gross wages, with performance pay contributing
17.2%. 


Share and shareholders

Information on security

ISIN                                      EE3100098328
Short name                            MRK1T
List                                        Baltic Main List
Nominal value                         no par value
Securities issued                     17 700 000
Securities listed                      17 700 000
Date of listing                         11 August 2008

The shares of Merko Ehitus have been listed in the main list of NASDAQ OMX
Tallinn. A total of 1,352 transactions were conducted with the shares of Merko
Ehitus in the first 9 months of 2012, with 0.67 million shares traded,
generating a turnover of EUR 4.0 million. The lowest share price amounted to
EUR 5.37 and the highest to EUR 7.30 per share. The closing price of the share
was EUR 6.02 on 30 September 2012. As at 30 September 2012, the market value of
AS Merko Ehitus amounted to EUR 107 million. 

                                    30.09.2012  30.09.2011  30.09.2010
No. of shares, pcs                  17 700 000  17 700 000  17 700 000
Earnings per share (EPS), in euros        0.18       -0.41        0.29
Equity per share, in euros                6.36        6.53        7.27
P/B (price to book ratio)                 0.95        0.81        1.12

Structure of shareholders as at 30.09.2012

    No. of shares             No. of             % of        No. of  % of shares
                        shareholders     shareholders        shares             
    1 000 001 - …                  1            0.07%    12 742 686       71.99%
  100 001 – 1 000                 11            0.77%     3 072 772       17.36%
              000                                                               
 10 001 – 100 000                 28            1.96%       845 017        4.77%
      1001-10 000                246           17.20%       714 942        4.04%
         101-1000                737           51.54%       302 137        1.71%
            1-100                407           28.46%        22 446        0.13%
            Total               1430             100%    17 700 000         100%

Main shareholders of AS Merko Ehitus as at 30.09.2012 and change compared to
previous quarter: 

                                                       No. of       % of  Change
                                                       shares      total        
AS Riverito                                        12 742 686     71.99%       -
ING Luxembourg S.A., clients                          974 126      5.50%       -
Skandinaviska Enskilda Banken Ab, clients             736 864      4.16%  -2 000
Firebird Republics Fund Ltd                           302 395      1.71%     +32
                                                                             741
Ergo Pensionifond 2P2                                 165 759      0.94%  -5 920
Gamma Holding OÜ                                      162 566      0.92%     +11
                                                                             301
State Street Bank and Trust Omnibus Account a         153 018      0.86%       -
 Fund No OM01                                                                   
SEB Elu- ja Pensionikindlustus AS                     125 520      0.71%       -
Skandinaviska Enskilda Banken Finnish clients         125 191      0.71%       -
AS Midas Invest                                       112 555      0.64%       -
Andersson Investeeringud OÜ                           111 841      0.63%       -
Clearstream Banking Luxembourg S.A. clients           102 937      0.58%       -


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

                                                                 2012       2011
                                                             9 months   9 months
                                                                                
Revenue                                                       177 729    153 391
Cost of goods sold                                          (167 077)  (153 036)
Gross profit (loss)                                            10 652        355
                                                                                
Marketing expenses                                            (1 385)    (1 574)
Administrative and general expenses                           (6 688)    (5 974)
Other operating income                                            604        587
Other operating expenses                                        (180)      (101)
Operating profit (loss)                                         3 003    (6 707)
                                                                                
Finance income/costs                                              461      (425)
incl. finance income/costs from investments in                      -         14
 subsidiaries                                                                   
finance income/costs from investments in associates and           189        157
 joint ventures                                                                 
finance income/costs from other long-term investments           1 016          -
interest expense                                                (921)      (756)
foreign exchange gain                                              37        104
other financial income (expenses)                                 140         56
Profit (loss) before tax                                        3 464    (7 132)
Corporate income tax expense                                    (340)      (238)
Net profit (loss) for current period                            3 124    (7 370)
incl. net profit (loss) attributable to equity holders of       3 202    (7 329)
 the parent                                                                     
net profit (loss) attributable to non-controlling interest       (78)       (41)
                                                                                
Other comprehensive income (loss)                                               
Currency translation differences of foreign entities              107         23
Comprehensive income (loss) for the period                      3 231    (7 347)
incl. net profit (loss) attributable to equity holders of       3 309    (7 306)
 the parent                                                                     
net profit (loss) attributable to non-controlling interest       (78)       (41)
                                                                                
Earnings per share for profit (loss) attributable to             0.18     (0.41)
equity holders of the parent (basic and diluted, in euros)                      


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

                                                                2012        2011
                                                                 III         III
                                                             quarter     quarter
                                                                                
Revenue                                                       70 874      78 344
Cost of goods sold                                          (65 260)    (75 556)
Gross profit (loss)                                            5 614       2 788
                                                                                
Marketing expenses                                             (483)       (412)
Administrative and general expenses                          (2 632)     (2 081)
Other operating income                                           146         267
Other operating expenses                                        (60)        (52)
Operating profit (loss)                                        2 585         510
                                                                                
Finance income/costs                                              64       (104)
incl. finance income/costs from investments in                     -          14
 subsidiaries                                                                   
finance income/costs from investments in associates and            7         132
 joint ventures                                                                 
finance income/costs from other long-term investments            341           -
interest expense                                               (278)       (342)
foreign exchange gain                                           (19)          77
other financial income (expenses)                                 13          15
Profit (loss) before tax                                       2 649         406
Corporate income tax expense                                    (35)       (238)
Net profit (loss) for current period                           2 614         168
incl. net profit (loss) attributable to equity holders         2 623         263
 of the parent                                                                  
net profit (loss) attributable to non-controlling                (9)        (95)
 interest                                                                       
                                                                                
Other comprehensive income (loss)                                               
Currency translation differences of foreign entities              19         (3)
                                                                                
Comprehensive income (loss) for the period                     2 633         165
incl. net profit (loss) attributable to equity holders         2 642         260
 of the parent                                                                  
net profit (loss) attributable to non-controlling                (9)        (95)
 interest                                                                       
                                                                                
Earnings per share for profit (loss) attributable to            0.15        0.01
 equity                                                                         
holders of the parent (basic and diluted, in euros)                             


CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited, in thousand euros

                                                       30.09.2012  31.12.2011
ASSETS                                                                       
                                                                             
Current assets                                                               
Cash and cash equivalents                                  15 479      18 510
Short-term deposits                                             -         140
Trade and other receivables                                83 307      64 449
Prepaid corporate income tax                                  478         686
Inventories                                                90 105      87 834
Total current assets                                      189 369     171 619
                                                                             
Non-current assets                                                           
Long-term financial assets                                 23 947      27 051
Deferred income tax assets                                  1 642       1 870
Investment property                                         3 586       2 313
Property, plant and equipment                              15 048      16 057
Intangible assets                                           1 375       1 427
Total non-current assets                                   45 598      48 718
                                                                             
TOTAL ASSETS                                              234 967     220 337
                                                                             
LIABILITIES AND EQUITY                                                       
                                                                             
Current liabilities                                                          
Borrowings                                                 20 145      16 574
Payables and prepayments                                   71 934      61 635
Short-term provisions                                       6 828       6 781
Total current liabilities                                  98 907      84 990
                                                                             
Non-current liabilities                                                      
Long-term borrowings                                       21 278      23 764
Long-term interest liabilities                                  1           -
Long-term trade payables                                      792         790
Deferred corporate income tax liability                       131         131
Long-term provisions                                           31          66
Total non-current liabilities                              22 233      24 751
                                                                             
Total liabilities                                         121 140     109 741
                                                                             
Equity                                                                       
                                                                             
Non-controlling interest                                    1 278       1 356
Equity attributable to equity holders of the parent                          
Share capital                                              12 000      12 000
Statutory reserve capital                                   1 200       1 131
Currency translation differences                            (463)       (570)
Retained earnings                                          99 812      96 679
Total equity attributable to equity holders of parent     112 549     109 240
                                                                             
Total equity                                              113 827     110 596
                                                                             
TOTAL LIABILITIES AND EQUITY                              234 967     220 337


Signe Kukin
Group CFO
+372 650 1250
[email protected]