Market announcement

Title

2015 3 months consolidated unaudited interim report

Message

Tallinn, Estonia, 2015-05-07 07:00 CEST (GLOBE NEWSWIRE) --




COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

The results posted by the Merko Ehitus group in the first quarter of 2015 are
in line with expectations and reflect developments on the Baltic construction
market in 2014 – a lower volume of orders and pressure on margins from price
competition – which will continue to have an effect in 2015 and likely in 2016
as well. The management of the group sees 2015 as challenging for construction
companies as regards securing new orders, as growth is not forecasted in the
near future on the construction market, preparation of new procurements takes a
long time and companies are taking major risks in bidding for construction
contracts. Growth prospects on the construction market may start improving from
2016, and thus flexibility and efficiency are very important for construction
companies in the near future. 

In the first quarter of 2015, Merko Ehitus had sales revenue of EUR 45.6
million (first 3 months of 2014: EUR 48.9 million), of which 41.8% was earned
outside Estonia. We are satisfied with the growth of sales revenue from
construction services in Latvia; in the 3 months of 2015 the share of Latvian
revenue in the group’s revenue has increased to almost 37%. Lithuanian revenue
from construction services stayed on par with the figure for the first quarter
last year. The volume of new construction contracts cannot be considered
satisfactory – in the first quarter, Merko Ehitus signed EUR 22.4 million in
new construction contracts compared to EUR 48.6 million in the same period in
2014. Above all due to the interim period in announcement of public
procurements funded by the EU and the uncertainty among private customers with
regard to launching new developments, it is a great challenge for the group to
maintain and grow its secured order book. The group continues to be focused on
good cooperation and experience in the field of design services as well as
comprehensive supply of design-build services to private customers. 

The low number of new orders has led to a bidding war on the market, which is
putting pressure on margins and due to which greater risks are being taken in
construction contracts by both builders and customers. Merko Ehitus’s gross
margin for the first quarter was 7.8% (3 months of 2014: 8.1%) and profit
before taxes was EUR 0.8 million (3 months of 2014: EUR 1.1 million). Net
profit margin grew to 1.8% (3 months of 2014: 1.5%) and net profit for the
first quarter of 2015 was EUR 0.8 million (3 months of 2014: EUR 0.7 million). 

The share of the real estate development segment increased in the first quarter
of 2015 to make up 24.3% of the group’s total revenue (3 months of 2014:
21.1%). In the first quarter of this year, the group has invested EUR 10.7
million into new and ongoing development projects, and the total investment
planned for 2015 into apartment development projects in the Baltic states
amounts to EUR 45-50 million, depending on the performance of the Baltic
apartment market, currently supported by low interest rates. In 2015, the group
is prepared to launch the construction of 450-500 new apartments in the Baltic
states. 

In the first quarter, the group sold 62 apartments compared to 99 in the same
period last year. Apartments are recognised in the quarterly sales revenue in
relation to the project completion deadline and the date on which possession is
transferred to home buyers. As we delivered a greater number of apartments to
buyers in Latvia back in the first quarter of 2014, the comparison base is
high. We can be content with the level of the pre-sale agreements signed by the
end of the last quarter – demand for Merko-developed and Merko-built apartments
remains strong. 



OVERVIEW OF THE 3 MONTHS RESULTS

PROFITABILITY

Gross margin in 3M was 7.8% (3M 2014: 8.1%), which has decreased by 3.0%
compared to the same period last year. Profit before tax in 3M 2015 was EUR 0.8
million (3M 2014: EUR 1.1 million), which is equivalent to a profit before tax
margin of 1.8% (3M 2014: 2.3%). Net margin increased to 1.8% (3M 2014: 1.5%)
and net profit in 3M was EUR 0.8 million (3M 2014: EUR 0.7 million), having
increased by 13.9% compared to the same period last year. 

REVENUE

Revenue in 3M 2015 was EUR 45.6 million (3M 2014: EUR 48.9 million), which has
decreased by 6.7% compared to the same period last year. The share of revenue
earned outside of Estonia has incresed in 3M 2015 to 41.8% (3M 2014: 33.4%) and
the number of apartments sold in 3 months of 2015 (62 pcs, revenues of EUR 10.8
million) has decreased by 61.3% (3 months of 2014: 99 apartments, revenues of
EUR 9.0 million). 

CASH POSITION

At the end of the reporting period, the group had EUR 40.9 million in cash and
cash equivalents and equity EUR 127.8 million (53.1% of total assets).
Comparable figures as at 31 March 2014 were accordingly EUR 51.9 million and
EUR 122.6 million (51.0% of total assets). As at 31 March 2015 the group had
net debt of negative EUR 5.8 million (31 March 2014: negative EUR 19.8
million). 

SECURED ORDER BOOK

In Q1 2015, group companies signed new contracts in the amount of EUR 22.4
million (Q1 2014: EUR 48.6 million). As at 31 March 2015, the group’s secured
order book stood at EUR 167.2 million (31 March 2014: EUR 224.0 million). 

DISTRIBUTION OF PROFITS AND REDUCTION OF SHARE CAPITAL

The general meeting of shareholders held on 29 April 2015 resolved to approve
the profit allocation proposal for 2014 and distribute EUR 7.3 million (EUR
0.41 per share) in dividends from retained earnings. This is equivalent to a
58% dividend rate for 2014. Additionally the general meeting of shareholders
decided to approve to reduce the share capital by total of EUR 4.1 million (EUR
0,23 per share) by way of reducing the book value of shares. 



                                  3M 2015  3M 2014  Variance  12M 2014
----------------------------------------------------------------------
Revenue              million EUR     45.6     48.9     -6.7%     252.3
----------------------------------------------------------------------
Gross profit         million EUR      3.6      3.9     -9.5%      24.7
----------------------------------------------------------------------
Gross profit margin  %                7.8      8.1     -3.0%       9.8
----------------------------------------------------------------------
EBITDA               million EUR      1.9      1.9     +0.7%      16.4
----------------------------------------------------------------------
EBITDA margin        %                4.1      3.8     +8.0%       6.5
----------------------------------------------------------------------
Profit before tax    million EUR      0.8      1.1    -26.5%      13.3
----------------------------------------------------------------------
PBT margin           %                1.8      2.3    -21.2%       5.3
----------------------------------------------------------------------
Net profit (parent)  million EUR      0.8      0.7    +13.9%      12.4
----------------------------------------------------------------------
Net profit margin    %                1.8      1.5    +22.0%       4.9
----------------------------------------------------------------------
EPS                  EUR             0.05     0.04    +13.9%      0.70
----------------------------------------------------------------------



                                    31.03.2015  31.03.2014  Variance  31.12.2014
--------------------------------------------------------------------------------
ROE (on yearly basis)  %                  10.1         7.8    +29.4%        10.1
--------------------------------------------------------------------------------
Equity ratio           %                  53.1        51.0     +4.2%        51.0
--------------------------------------------------------------------------------
Secured order book     million EUR       167.2       224.0    -25.4%       179.1
--------------------------------------------------------------------------------
Total assets           million EUR       240.8       240.5     +0.1%       249.3
--------------------------------------------------------------------------------
Number of employees    people              776         824     -5.8%         765
--------------------------------------------------------------------------------



OPERATING RESULTS

Revenue and gross profit

Merko Ehitus group generated a total of EUR 45.6 million in revenue in 3 months
of 2015 (3 months of 2014: EUR 48.9 million). 58.2% of the revenue was
generated in Estonia, 36.8% in Latvia and 5.0% in Lithuania (3 months of 2014:
66.6% in Estonia, 28.6% in Latvia and 4.8% in Lithuania). Compared to the 3
months of 2014 the group revenue has decreased by 6.7%. Compared to the 3
months of the previous year in the 3 months of 2015 the share of Latvian
revenue in the group’s revenue has increased from 28.6% to 36.8%. The main
changes in the revenue structure compared to the same period last year, can be
mainly attributed to increase in revenue of projects pursued in the Latvian and
Lithuanian construction service and real estate development segments. At the
same time there has been a reduction in sales revenue from Estonian
construction service segment, which is primarily due to the end of major
projects financed from EU structural funds and the reduced project volumes.
This trend has been similar since the beginning of 2014. 

In 3 months of 2015 the group’s gross profit from development and construction
activities totalled EUR 3.6 million (3 months of 2014: EUR 3.9 million). The 3
months gross profit margin (7.8%) has decreased marginally compared to the same
period last year (3 months of 2014: 8.1%). Maintaining the stability of profit
margins during the 3 months of 2015 in the Estonian construction service
segment has been important, despite the decline in sales volumes, that has been
supported by the slight decrease in input prices, which may not necessarily
continue over the whole of 2015. The scarcity of projects and the
ever-tightening competition in the construction sector poses a great challenge
in the maintaining of the current gross profit margin for new procurements in
all segments. The number of companies participating in tenders and the risk of
low pricing bids is high in all three Baltic states. 

Profit before tax and net profit

In 3 months of 2015, the group’s profit before tax totalled EUR 0.8 million and
net profit attributable to equity holders of the parent was EUR 0.8 million as
compared to the pre-tax profit or EUR 1.1 million and net profit attributable
to equity holders of the parent of EUR 0.7 million in 3 months of 2014. The 3
months of 2014 higher tax expense was affected besides the ordinary Latvian and
Lithuanian income tax by the income tax expenses on the dividends received from
OÜ Gutsaf Tallinn in the amount of EUR 0.3 million, which increased the
comparison base as an extraordinary one-off item. Group’s profit before tax
margin was 1.8% (3 months of 2014: 2.3%) and the net profit margin was 1.8% (3
months of 2014: 1.5%). Both the group’s net profit (EUR 0.8 million) and the
net profit margin (1.8%) have increased compared to the same period last year
(3 months of 2014: EUR 0.7 million and 1.5%, respectively). 



Business segments

The group operates mainly in Estonian, Latvian and Lithuanian market through
its subsidiaries and depending on the country provide construction services and
real estate development services across the following business segments:
Estonian construction service, Latvian and Lithuanian construction service and
Real estate development. The group’s segment structure is alined with group’s
management structure. 

As of 21 April 2015, the management board of AS Merko Ehitus decided to change
the segment reporting structure in the group’s financial reports and harmonise
it with the group’s new internal reporting structure, which corresponds to the
group’s country-based management structure and takes into account the changes
in the operational volumes of business segments. 

As a result of the change, instead of the previous five segments presented
(general construction, civil engineering, road construction, real estate
development and other segments), the group will start submitting segment
reporting from the current period in the following three segments: Estonian
construction service, Latvian and Lithuanian construction service and Real
estate development. 

As a result of the change the operating segments presented in the group’s
external financial reporting structure are grouped together according to the
requirements applicable to disclosure of operating segments pursuant to the
conditions specified in the International Financial Reporting Standards (IFRS
8). 

Estonian construction service and Latvian and Lithuanian construction service
segments include all projects of the respective countries pertaining to
construction services: 

  -- General construction consists of the construction of different buildings,
     from commercial and office buildings, retail and entertainment centres to
     public sector and residential and specialised industrial buildings. Group
     companies provide strategic consulting and quality complete solutions as
     part of the general contracting service of construction according to the
     customer's requirements: preparation, design, construction, interior and
     warranty service. In the field of general construction the group operates
     in all three Baltic countries.
  -- The civil engineering pürojects the group constructs include port, waste
     management and road structures (bridges, tunnels, overpasses, roads),
     electrical construction of up to 330 kV, various environmental protection
     structures, water treatment plants, both open-cut and trenchless
     construction of water and sewerage pipelines and other various engineering
     projects. Complex and unique engineering projects require specialised
     knowledge and a good partnership with the customer and local authorities.
     In this area the group operates in Estonia and Latvia.
  -- In the road construction division, the group carries out road construction
     and builds the associated infrastructure, road maintenance and maintenance
     repair. In the area or road construction the group operates only in
     Estonia.

Real estate development is based on the development of real estate in the
ownership of the group, encompassing development of apartment projects,
long-term investments into real estate and real estate projects executed for
business purposes, and to a minor extent also real estate maintenance and
lease. In this segment, similarly to before, the group recognises projects
being developed in all of the different countries. 

Estonian construction service

In the 3 months of 2015, the revenue of the Estonian construction service
segment was EUR 17.1 million (3 months of 2014: EUR 26.2 million), having
decreased by 34.7% from the same period last year. The decrease is largely due
to the fact that in the first three months of 2015, the group did not have
large-scale projects in progress as it did in the same period of the previous
year (such as the Tondiraba Ice Arena and the Vääna-Jõesuu and Narva-Jõesuu
water supply and sewerage system renovation projects). In this segment, the
group earned a gross profit of EUR 1.4 million for 3 months (3 months of 2014:
EUR 1.3 million). If the revenue of the Estonian construction service segment
have formed the largest proportion in the group’s revenue in the previous
periods, then in the 3 months of 2015 the Estonian construction service segment
revenues formed a 37.5% share. 

In 3 months of 2015, the gross margin of the Estonian construction service
segment was 8.2%, which increased by 63.8% compared to the 3 months of 2014. In
light of the close competition on the Estonian construction services market and
the drop in volumes of work for nearly all market participants, we consider
this as a very good result. Due to the decrease in public procurement volumes,
above all in civil engineering, we continue to closely monitor the changes in
volumes of all projects in progress, in order to maintain as effective cost
base as possible for the purpose of responding to additional market changes. 

Latvian and Lithuanian construction service

The revenue of the Latvian and Lithuanian construction service segment amounted
to EUR 17.4 million in the 3 months of 2015 (3 months of 2014: EUR 12.4
million), which is 40.7% more than in the 3 months of 2014. If the Latvian and
Lithuanian construction service segment revenues of 3 months of 2014 formed
25.4% of the group’s revenue, then during 3 months of the current year the
segments revenues have increased to 38.2%, forming the the largest proportion
in the group’s revenue having increased by 50.8%. This proportional increase
was expected, especially given the knowledge that group’s continued focus has
been on increasing the revenues outside Estonia. The 3 month gross profit of
the Latvian and Lithuanian construction service segment amounted to EUR 1.0
million (3 months of 2014: EUR 0.4 million) and the gross profit margin was
5.7% (3 months of 2014: 3.1%), which increased by 82.4% compared to the same
period previous year. 

Real estate development

A total of 62 apartments were sold in 3 months of 2015 at the total value of
EUR 10.8 million (excl. VAT), compared to 99 apartments and EUR 9.0 million in
3 months of 2014. In 3 months of 2015, the group has earned EUR 0.0 million of
revenue from the sale of immovable properties (3 months of 2014: EUR 1.0
million). Despite a lower number of apartments sold and the absence of the sale
of immovable properties, 3 months real estate development segment revenues have
increased 7.6% compared to the same period last. The growth is primarily
influenced by sales of apartments in more exclusive developments where the
sales price per apartment is higher than the apartments sold last year during
the same period. The share of revenue from the real estate development segment
also increased in the 3 months to 24.3% of the group’s total revenue (3 months
of 2014: 21.1%). The overall increase in the real estate development segment
volumes has been planned and occasioned by the strategic decisions made already
in 2012 to increase the segment’s investments into various new real estate
development projects. 

The 3 month gross profit of the segment amounted to EUR 1.2 million (3 months
of 2014: EUR 2.2 million) and the gross profit margin was 10.5% (3 months of
2014: 21.8%), which decreased by 48.0% compared to the same period previous
year. The profitability of the apartment development projects varies by project
and depends greatly on the land acquisition price and the size of the project.
In addition, the gross profit obtained from sales of the immovable property
makes up an important part of the 3-month comparison base of 2014. 

At the end of the period, Merko Ehitus group’s inventory comprised 198
apartments where a preliminary agreement had been signed: 64 completed
apartments (57 in Estonia and 7 in Latvia) and 134 apartments under
construction (72 in Estonia, 49 in Latvia and 13 in Lithuania). The sale of
these apartments had not yet been finalised and delivered to customers, because
the development site is still under construction or the site was completed at
the end of the reporting period and the sales transactions have not all been
finalised yet. 

As at 31 March 2015, Merko Ehitus group had a total of 361 apartments for
active sale (as at 31 March 2014: 304 apartments), for which there are no
pre-sale agreements and of which 34 have been completed (7 in Estonia, 23 in
Latvia and 4 in Lithuania) and 327 are under construction (198 in Estonia, 76
in Latvia and 53 in Lithuania). 

In 3 months of 2015, we launched the construction of a total of 103 new
apartments in the Baltic States (3 months of 2014: 108 apartments) – the first
stage of Tartu mnt 52 development project, the preparation works of which took
place in 2014. In the 3 months of this year, the group has invested a total of
EUR 10.7 million in new development projects launched in 2015 as well as
projects already in progress from previous year. 

We will continue to invest in residential real estate projects and depending on
the apartment market developments in 2015, the group plans to launch the
construction of approximately 450-500 new apartments in the Baltic States
(2014: construction of 369 new apartments launched). In 2015, the group’s
planned investments in both development projects initiated in the previous
years and new projects to be launched in 2015 will be in the range of EUR 45-50
million (2014: EUR 46.9 million invested). 

One of our objectives is to keep a moderate portfolio of land plots to ensure
stable inventory of property development projects considering the market
conditions. At 31 March 2015, the group's inventories included land with
development potential of EUR 59.5 million (31.03.2014: EUR 39.1 million;
31.12.2014: EUR 55.2 million). 

In the 3 months of 2015, the group has purchased new land plots in Estonia at
an acquisition cost of EUR 5.1 million (3 months of 2014: EUR 0.0 million).
Also in the first quarter, the group signed a notarised contract of sale of
registered immovables, under which all of the real estate governed by an option
agreement were realised for total of EUR 4,0 million. The group is searching
for new land plots for real estate development purposes primarily in Estonian
and Lithuania. On 23 April 2015, AS Merko Ehitus group 50% joint venture
Kalaranna Arenduse OÜ additionally signed a contract for the acquisition of
approximately 1.7 hectares of land in the Noblessner quarter, an historically
prestigious industrial area with great potential, for development purpose. 



Secured order book

As at 31 March 2015, the group’s secured order book (without own developments)
amounted to EUR 167.2 million as compared to EUR 224.0 million as at 31 March
2014. The secured order book excludes the group's own residential development
projects and construction work related to developing real estate investments. 

In first quarter of 2015, EUR 22.4 million worth of new contracts were signed
(without own developments) as compared to EUR 48.6 million in same period last
year. The volume of contracts signed in 3 months 2014 were impacted
significantly by the large-scale contract entered into in Estonia for the
design and renovation of the infrastructure of Tallinn tram line No. 4. No
contracts of this volume were entered into in Estonia in 3 months of 2015. 

After the balance sheet date, on 2 April 2015, OÜ Fort Ehitus – a subsidiary of
AS Merko Ehitus Eesti, part of AS Merko Ehitus group – signed a contract with
Keski-Soumen Betonirakenne OY to perform the pile works at Tripla development
project in Helsinki, Finland. The value of the contract is approximately EUR
3.0 million. The works are scheduled for completion in autumn 2015. 

Of the contracts signed in the 3 months of 2015, private sector orders
accounted for the majority proportion, which is also represented in the group’s
secured order book as at the end of the reporting period, where private sector
orders from projects in progress constitute approximately 3/5. Nevertheless, in
the beginning of the year the company did not manage to garner as much work
from private sector customers as it had envisaged. In particular, the buildings
construction segment is seeing the stiffest competition, and is where
competitors are making aggressive offers, incurring risks for both customers
and contractors. Considering the end of the previous EU funding period and the
beginning phase of the current EU funding period, one can forecast the volume
of public procurements to stay at the previous years level or even a slight
decline for 2015. We forecast that the volume of public procurements will start
to increase at the end of 2015 or at the beginning of 2016. In this respect, it
continues to be a great challenge to maintain the group’s secured order book at
the level of 2014 or growing it. 

Traditionally the share of Estonian construction activity has been the highest
in the group's revenues. Given the weak growth outlook of the Estonian
construction market, the group's goal is to increase the volume of construction
orders from outside Estonia. Thus, we will continue to identify the groups
competitive advantages and are closely monitoring the development and
opportunities both in the Baltic States and the Nordic countries. Starting from
2014 AS Merko Ehitus Eesti has selectively and on project basis started to
participate in procurements in Finland, Sweden and Norway in order to gain
experience and sufficient knowledge in the qualification conditions,
requirements established and risks associated in these countries. The group has
set the goal of earning real sales revenue from new markets starting in
2015-2016. 



Cash flows

The liquidity of the group is strong and the cash position is stable. As at 31
March 2015 the group had cash equivalents in the amount of EUR 40.9 million
(31.03.2014: EUR 51.9 million). The group's cash level is lower compared to the
same period last year. 

The 3-month cash flow from operating activity was negative at EUR 7.9 million
(3 months of 2014: positive EUR 9.0 million), cash flow from investing activity
was negative at EUR 0.2 million (3 months of 2014: negative EUR 0.5 million)
and the cash flow from financing activity was negative at EUR 2.6 million (3
months of 2014: negative EUR 3.2 million). 

The cash flow from operating activity was mostly influenced by the operating
profit EUR 1.0 million (3 months of 2014: EUR 1.3 million), by the negative
change in receivables and liabilities related to construction contracts
recognised under the stage of completion method EUR 4.6 million (3 months of
2014: positive change of EUR 5.3 million), by the negative change in the
provisions EUR 4.2 million (3 months of 2014: negative change of EUR 2.0
million), by the positive change in trade and other receivables related to
operating activities EUR 5.0 million (3 months of 2014: positive change of EUR
2.7 million), by the negative change in inventory EUR 2.3 million (3 months of
2014: negative change of EUR 1.2 million), and by the negative change in trade
and other payables related to operating activities EUR 3.5 million, incl.
significant negative outflow from the advances for real estate development
projects (3 months of 2014: positive change of EUR 2.6 million). 

The group’s cash flows from operating activities continue to have contracts
(incl. both government and private sector) with long payment terms (by
contract, an average of 56 days after registered delivery of the work) and
there is an persistent burden on working capital, including optimal management
of cash flows. This is especially true, considering the increase in Latvian
construction volumes and the need for additional working capital. To support
cash flows arising from operating activity, the group has been prudent in
raising additional external capital, including factoring. At the same time, the
debt ratio has remained at a moderate level (14.6% as at 31.03.2015; 13.4% as
at 31.03.2014). 

Cash flows from investment activities include negative cash flow from the
acquisition of non-current asset in the amount of EUR 0.3 million (3 months of
2014: EUR 0.1 million) and the positive cash flow from the sale of non-current
assets in the amount of EUR 0.1 million (3 months of 2014: EUR 0.0 million).
Cash flows from investment activities in 3 months of 2014 was negatively
impacted by the cash balance excluded from the group in connection with the
sale of subsidiary Gustaf Tallinn OÜ in the amount of EUR 0.4 millio. The group
mainly invested in non-current assets for the purpose of renewing its fleet of
machinery in the road construction segment. 

Project specific loans obtained using investment property as collateral,
included in cash flows from financing, were repaid in the amount of EUR 0.1
million (3 months of 2014: negative cash flow in net amount of EUR 0.1
million), net of loans received and loans repaid in connection with development
projects amounted to negative cash flow of EUR 2.1 million (3 months of 2014:
positive cash flow of EUR 0.6 million) and finance lease principal repayments
of EUR 0.4 million (3 months of 2014: EUR 0.2 million). The group has not used
bank loans to finance all of the ongoing development projects – and this is the
case particularly in Estonia, where many advance sales were agreed in the early
phase of construction. Cash flows from financing activities in 3 months of 2014
was negatively impacted by the premature repayment of a working capital loan in
the amount of EUR 3.5 million, instead of which the group entered into an
overdraft contract with an overall limit of EUR 3.5 million 



Dividends and dividend policy

The distribution of dividends to the shareholders of the company is recorded as
a liability in the financial statements as of the moment when the payment of
dividends is approved by the company’s shareholders. 

At the meeting held on 8 April 2013, the Management Board and Supervisory Board
of AS Merko Ehitus reviewed the company’s strategic development trends and
approved the long-term financial objectives until 2018, under which a new
objective of paying the shareholders 50-70% of the annual profit as dividends
was established. The achievement of this objective is an important priority for
the group. 

The annual general meeting of shareholders of AS Merko Ehitus held at 29 April
2015 approved the Supervisory Boards proposal to pay the shareholders the total
amount of EUR 7.3 million (EUR 0.41 per share) as dividends from net profit
brought forward, which is equivalent to a 58% dividend rate and a 5.7% dividend
yield for the year 2014 (using the share price as at 31 December 2014),
(comparable figures in 2014 were accordingly: EUR 7.3 million (EUR 0.41 per
share) as dividends, which is equivalent to a 70% dividend rate and a 5.7%
dividend yield (using the share price as at 31 December 2013)). 

According to the Estonian Income Tax Law §50 section 11 AS Merko Ehitus can pay
dividends without any additional income tax expense and liabilities occurring
due to previously received and taxed distribution of profits from subsidiaries.
Taking into account the dividends already paid to the parent company by the
subsidiaries, the group will incur income tax expense in connection with the
disbursement of dividends of approximately EUR 0.9 million (2014: EUR 0.0
million) In Estonia in the second quarter of 2015.The dividend payment to the
shareholders will take place on 26 May 2015. 



Share capital reduction

The general meeting of the shareholders held on 29 April 2015 resolved to
approve the Supervisory Boards proposal to reduce the share capital by EUR 4
071 000 (EUR 0.23 per share). 

Pursuant to subsection §50 section 2 of the Income Tax Act in force in Estonia,
income tax does not have to be paid on the portion of payments made from the
equity upon reduction of the share capital or contributions, upon redemption of
shares or contributions or in other cases, and on the portion of the paid
liquidation distributions made by way of previous monetary contributions. About
EUR 4.0 million in the said monetary contributions have been made in AS Merko
Ehitus. 

Based on the resolution of the general meeting of the shareholders, share
capital will be reduced by EUR 4,071,000 (EUR 0.23 per share), from the amount
EUR 12.0 million to EUR 7.9 million. Share capital is reduced by way of
reducing the book value of the shares and as a result of the reduction the book
value of one share will be reduced from EUR 0.677966 to EUR 0.447966; the
number of shares will remain the same – 17,700,000 shares. 

Pursuant to the articles of association of Merko Ehitus, the minimum share
capital of the company is EUR 6.0 million and the maximum share capital is EUR
24.0 million. The new share capital will amount to EUR 7.9 million, which is in
line with the company’s articles of association. 

Considering the perspectives of the Baltic construction market in the coming
years and the related need for capital by the group, the share capital would be
reduced in order to improve the group’s capital structure and support return on
equity. AS Merko Ehitus lacks the need to possess share capital in the existing
amount and the requirements that legislation imposes on share capital will also
be fulfilled in the case of the reduced share capital. 

The monetary payments to the shareholders in the amount of EUR 4,071,000,
related to the reduction of share capital shall be made within the period
prescribed by law, i.e. latest within 3 (three) months after the registration
of the reduction of share capital in the Commercial Register. 

Considering the resolutions of the general meeting of the shareholders to pay
EUR 7.3 million from retained earnings to shareholders as dividends (EUR 0.41
per share) and to reduce share capital by EUR 4.7 million (EUR 0.23 per share),
and considering the share price as at 31 December 2014, return on the
investment in 2014 was 9.0%. 



Ratios
(attributable to equity holders of the parent)

                                                     3M      3M      3M      12M
                                                   2015    2014    2013     2014
--------------------------------------------------------------------------------
Income statement summary                                                        
--------------------------------------------------------------------------------
Revenue                               million      45.6    48.9    47.9    252.3
                                        EUR                                     
--------------------------------------------------------------------------------
Gross profit                          million       3.6     3.9     4.2     24.7
                                        EUR                                     
--------------------------------------------------------------------------------
Gross profit margin                       %         7.8     8.1     8.8      9.8
--------------------------------------------------------------------------------
Operating profit                      million       1.0     1.3     2.3     14.0
                                        EUR                                     
--------------------------------------------------------------------------------
Operating profit margin                   %         2.2     2.7     4.8      5.5
--------------------------------------------------------------------------------
Profit before tax                     million       0.8     1.1     2.0     13.3
                                        EUR                                     
--------------------------------------------------------------------------------
PBT margin                                %         1.8     2.3     4.1      5.3
--------------------------------------------------------------------------------
Net profit                            million       0.7     0.6     1.8     12.3
                                        EUR                                     
--------------------------------------------------------------------------------
attributable to equity holders of     million       0.8     0.7     1.8     12.4
 the parent                             EUR                                     
--------------------------------------------------------------------------------
attributable to non-controlling       million     (0.1)   (0.1)     0.0    (0.1)
 interest                               EUR                                     
--------------------------------------------------------------------------------
Net profit margin                         %         1.8     1.5     3.7      4.9
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income statement indicators                                               
--------------------------------------------------------------------------------
EBITDA                                million       1.9     1.9     2.9     16.4
                                        EUR                                     
--------------------------------------------------------------------------------
EBITDA margin                             %         4.1     3.8     6.0      6.5
--------------------------------------------------------------------------------
General expense ratio                     %         6.5     6.1     5.5      4.9
--------------------------------------------------------------------------------
Labour cost ratio                         %        13.7    13.9    13.6     11.9
--------------------------------------------------------------------------------
Revenue per employee                  thousand       62      61      57      319
                                        EUR                                     
--------------------------------------------------------------------------------



Other significant                 31.03.2015  31.03.2014  31.03.2013  31.12.2014
 indicators                                                                     
--------------------------------------------------------------------------------
Return on equity           %            10.1         7.8         8.1        10.1
--------------------------------------------------------------------------------
Return on assets           %             5.0         3.9         4.1         5.0
--------------------------------------------------------------------------------
Return on invested         %             8.5         7.3         7.0         8.8
 capital                                                                        
--------------------------------------------------------------------------------
Equity ratio               %            53.1        51.0        52.9        51.0
--------------------------------------------------------------------------------
Debt ratio                 %            14.6        13.4        14.5        15.1
--------------------------------------------------------------------------------
Current ratio            times           2.6         2.0         2.2         2.3
--------------------------------------------------------------------------------
Quick ratio              times           1.1         1.1         1.2         1.1
--------------------------------------------------------------------------------
Accounts receivable       days            51          59          58          56
 turnover                                                                       
--------------------------------------------------------------------------------
Accounts payable          days            41          41          46          39
 turnover                                                                       
--------------------------------------------------------------------------------
Average number of       people           742         800         839         790
 employees                                                                      
--------------------------------------------------------------------------------
Secured order book      million        167.2       224.0       193.4       179.1
                          EUR                                                   
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros

                                             Note      2015      2014       2014
                                                   3 months  3 months  12 months
--------------------------------------------------------------------------------
Revenue                                       2      45,599    48,868    252,323
--------------------------------------------------------------------------------
Cost of goods sold                            3    (42,038)  (44,932)  (227,591)
--------------------------------------------------------------------------------
Gross profit                                          3,561     3,936     24,732
--------------------------------------------------------------------------------
Marketing expenses                                    (779)     (854)    (3,190)
--------------------------------------------------------------------------------
General and administrative expenses                 (2,193)   (2,120)    (9,128)
--------------------------------------------------------------------------------
Other operating income                                  428       406      1,901
--------------------------------------------------------------------------------
Other operating expenses                               (17)      (50)      (340)
--------------------------------------------------------------------------------
Operating profit                                      1,000     1,318     13,975
--------------------------------------------------------------------------------
Finance income/costs                                  (164)     (180)      (667)
--------------------------------------------------------------------------------
incl. finance income/costs from joint                  (44)      (34)      (130)
 ventures                                                                       
--------------------------------------------------------------------------------
finance income/costs from other long-term                 -         -          2
 investments                                                                    
--------------------------------------------------------------------------------
interest expense                                      (150)     (178)      (662)
--------------------------------------------------------------------------------
foreign exchange gain (loss)                              3       (1)       (12)
--------------------------------------------------------------------------------
other financial income (expenses)                        27        33        135
--------------------------------------------------------------------------------
Profit before tax                                       836     1,138     13,308
--------------------------------------------------------------------------------
Corporate income tax expense                           (95)     (522)    (1,055)
--------------------------------------------------------------------------------
Net profit for financial year                           741       616     12,253
--------------------------------------------------------------------------------
incl. net profit attributable to equity                 809       711     12,417
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to non-controlling             (68)      (95)      (164)
 interest                                                                       
--------------------------------------------------------------------------------
Other comprehensive income                                                      
--------------------------------------------------------------------------------
Currency translation differences of foreign             (2)         -          4
 entities                                                                       
--------------------------------------------------------------------------------
Comprehensive income for the period                     739       616     12,257
--------------------------------------------------------------------------------
incl. net profit attributable to equity                 807       711     12,421
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to non-controlling             (68)      (95)      (164)
 interest                                                                       
--------------------------------------------------------------------------------
Earnings per share for profit attributable    4        0.05      0.04       0.70
 to equity holders of the parent (basic and                                     
 diluted, in EUR)                                                               
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros

                                        Note  31.03.2015  31.03.2014  31.12.2014
--------------------------------------------------------------------------------
ASSETS                                                                          
--------------------------------------------------------------------------------
Current assets                                                                  
--------------------------------------------------------------------------------
Cash and cash equivalents                5        40,912      51,917      51,583
--------------------------------------------------------------------------------
Trade and other receivables              6        43,587      58,204      46,382
--------------------------------------------------------------------------------
Prepaid corporate income tax                          26          21           3
--------------------------------------------------------------------------------
Inventories                              7       123,222      88,734     117,638
--------------------------------------------------------------------------------
                                                 207,747     198,876     215,606
--------------------------------------------------------------------------------
Non-current assets                                                              
--------------------------------------------------------------------------------
Long-term financial assets               8        11,425      21,601      11,476
--------------------------------------------------------------------------------
Deferred income tax assets                         1,580       1,592       1,535
--------------------------------------------------------------------------------
Investment property                      9         4,557       4,615       4,619
--------------------------------------------------------------------------------
Property, plant and equipment            10       14,614      12,704      15,003
--------------------------------------------------------------------------------
Intangible assets                        11          907       1,139       1,011
--------------------------------------------------------------------------------
                                                  33,083      41,651      33,644
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL ASSETS                                     240,830     240,527     249,250
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
LIABILITIES                                                                     
--------------------------------------------------------------------------------
Current liabilities                                                             
--------------------------------------------------------------------------------
Borrowings                               12       11,516      15,836      14,287
--------------------------------------------------------------------------------
Payables and prepayments                 13       62,932      77,352      71,122
--------------------------------------------------------------------------------
Income tax liability                                 478         197         352
--------------------------------------------------------------------------------
Short-term provisions                    14        4,889       5,152       6,239
--------------------------------------------------------------------------------
                                                  79,815      98,537      92,000
--------------------------------------------------------------------------------
Non-current liabilities                                                         
--------------------------------------------------------------------------------
Long-term borrowings                     12       23,600      16,321      23,359
--------------------------------------------------------------------------------
Deferred income tax liability                        751         574         738
--------------------------------------------------------------------------------
Other long-term payables                 15        4,442       1,667       1,671
--------------------------------------------------------------------------------
                                                  28,793      18,562      25,768
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                108,608     117,099     117,768
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EQUITY                                                                          
--------------------------------------------------------------------------------
Non-controlling interests                          4,388         854       4,455
--------------------------------------------------------------------------------
Equity attributable to equity holders                                           
 of the parent                                                                  
--------------------------------------------------------------------------------
Share capital                                     12,000      12,000      12,000
--------------------------------------------------------------------------------
Statutory reserve capital                          1,200       1,200       1,200
--------------------------------------------------------------------------------
Currency translation differences                   (667)       (669)       (665)
--------------------------------------------------------------------------------
Retained earnings                                115,301     110,043     114,492
--------------------------------------------------------------------------------
                                                 127,834     122,574     127,027
--------------------------------------------------------------------------------
TOTAL EQUITY                                     132,222     123,428     131,482
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                     240,830     240,527     249,250
--------------------------------------------------------------------------------



Interim report and the investor presentation are attached to the announcement
and are also published on NASDAQ Tallinn and Merko’s web page (group.merko.ee). 



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



AS Merko Ehitus (group.merko.ee) consists of Estonia’s leading construction
company AS Merko Ehitus Eesti, the Latvian-market-oriented SIA Merks, UAB Merko
Statyba that is operating on the Lithuanian market and the real estate
development business unit along with real estate holding companies. As at the
end of the year 2014, the group employed 765 people and the company’s revenue
for 2014 was EUR 252.3 million.