Market announcement

Title

2014 6 months and II quarter consolidated unaudited interim report

Message

Tallinn, Estonia, 2015-08-06 07:00 CEST (GLOBE NEWSWIRE) --




COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

Sales revenue for Merko Ehitus group for 6 months rose to EUR 116.2 million and
the second quarter figure reached EUR 70.6 million, which was significantly
influenced by an increasingly active real estate segment and the growth of
Latvian and Lithuanian construction service revenue. The share of construction
service revenue earned outside Estonia rose to 31% in the first half-year. The
management is pleased of the launche of the first electrical engineering
project in the Latvian electrical construction market, where we entered last
year, and also that in the second quarter the first construction contract of
sizeable volume was signed in Finland. 

The group’s management is satisfied with the volume of new construction
contracts signed in the second quarter in Estonia, yet maintaining and growing
the contract portfolio will continue to be a big challenge for construction
companies as the competition is tight and the market is price-sensitive, due to
which major risks are being taken in bidding on contracts. The group’s focus
continues to lie on offering a comprehensive selection of design and
construction services, we’re glad that most of the contracts from the last
quarter are design-build contracts signed with private customers. In a number
of the cases, it should be noted that the actual construction activity will go
ahead only in 2016, and the design and engineering must be tackled first. At
the same time the management is not satisfied with the profitability during the
first half of the year, which was impacted negatively by additional income tax
expense and lower margin from real estate development projects as the group
sold some apartments in projects with lower return that were started at a time
in order to create the basis for improving future return on capital. Achieving
last year’s profitability will not be easy, considering also that there are no
similar volumes of civil engineering projects compared to last year. 

The gross profit margin for Merko Ehitus in the second quarter was 7.6% and
profit before tax was EUR 2.7 million, with the respective six-month figures
being 7.7% and EUR 3.6 million. The company earned EUR 1.6 million in net
profit in second quarter and EUR 2.4 million in 6 months. Net profit was
influenced by EUR 0.9 million in additional income tax expense in Estonia on
dividends paid to shareholders. 

Revenue in the field of real estate development has grown according to plan –
revenue increased by 57% during the first six months and the share of group’s
total revenues to 28%. The group has launched several apartment development
projects this year and is engaged in preparations for new ones, including the
Noblessner residential district to be developed in cooperation with BLRT Group.
The sales results show that even with the active supply on the Baltics’
apartment market, there is still demand for quality residential space
developed, built and sold by Merko. Yet the supply of new apartments has
continued to grow, above all in Tallinn and Vilnius, and thus we’re constantly
monitoring the market and considering the possibility that sales periods may
become longer in the future. 

In the Baltics in 6 months 2015, Merko sold 168 apartments with a total price
of EUR 31.7 million; and the corresponding figures for second quarter alone
were 106 apartments and EUR 20.9 million (amounts not including VAT). Revenue
in the real estate development sector grew 57% in the 6 months, which was
influenced by sales transactions involving apartments in a development project
more exclusive than the average. This year the company has launched
construction of a total of 335 apartments (6 months 2014: 136 apartments),
including ones in Tallinn city centre (Tartu mnt 52) in the Kalamaja district
(Jahu tn 1a), Paepargi (Perepargi), Tartu rural municipality (Kaupmehe street)
and downtown Vilnius, Lithuania (Krokuvos 73). 



OVERVIEW OF THE 6 MONTHS AND II QUARTER RESULTS

PROFITABILITY

Profit before tax in 6M 2015 was EUR 3.6 million (6M 2014: EUR 4.7 million),
which is equivalent to a profit before tax margin of 3.1% (6M 2014: 4.1%).
Gross margin in 6M was 7.7% (6M 2014: 8.9%), which has decreased by 13.2%
compared to the same period last year. Q2 2015 profit before tax was EUR 2.7
million (Q2 2014: EUR 3.6 million). Net margin in 6M 2015 decreased to 2.1% (6M
2014: 3.8%) and net profit was EUR 2.4 million (6M 2014: EUR 4.4 million),
having decreased by 44.5% compared to the same period last year. Q2 net profit
was EUR 1.6 million (Q2 2014: EUR 3.6 million). 

REVENUE

Revenue in 6M 2015 was EUR 116.2 million (6M 2014: EUR 113.7 million), which
has increased by 2.2% compared to the same period last year. Q2 revenue was EUR
70.6 million (Q2 2014: EUR 64.8 million). The share of construction service
revenue earned outside of Estonia has incresed in 6M 2015 to 31.4% (6M 2014:
24.4%) and the number of apartments sold in 6 months of 2015 (168 pcs, revenues
of EUR 31.7 million) has decreased by 15.2% (6 months of 2014: 198 apartments,
revenues of EUR 18.6 million), while the revenue from apartment sales has
increased by 71.2%. 

CASH POSITION

At the end of the reporting period, the group had EUR 24.4 million in cash and
cash equivalents and equity EUR 122.2 million (54.3% of total assets).
Comparable figures as at 30 June 2014 were accordingly EUR 43.4 million and EUR
119.0 million (48.8% of total assets). As at 30 June 2015 the group had net
debt of positive EUR 10.7 million (30 June 2014: negative EUR 9.2 million). 

SECURED ORDER BOOK

In Q2 2015, group companies signed new contracts in the amount of EUR 98.9
million (Q2 2014: EUR 21.7 million). 6M 2015 new contracts signed in amount of
EUR 121.3 million (6M 2014: EUR 70.3 million). As at 30 June 2015, the group’s
secured order book stood at EUR 217.2 million (30 June 2014: EUR 191.6
million). 



                        6M ‘15  6M ‘14  Varianc  Q2 ‘15  Q2 ‘14  Varianc  12M   
                                        e                        e         ‘14  
--------------------------------------------------------------------------------
Revenue       million   116.2   113.7   +2.2%    70.6    64.8    +8.9%    252.3 
               EUR                                                              
--------------------------------------------------------------------------------
Gross profit  million   8.9     10.1    -11.3%   5.4     6.1     -12.5%   24.7  
               EUR                                                              
--------------------------------------------------------------------------------
Gross profit  %         7.7     8.9     -13.2%   7.6     9.5     -19.6%   9.8   
 margin                                                                         
--------------------------------------------------------------------------------
EBITDA        million   5.6     6.1     -9.3%    3.7     4.3     -13.6%   16.4  
               EUR                                                              
--------------------------------------------------------------------------------
EBITDA        %         4.8     5.4     -11.2%   5.2     6.6     -20.7%   6.5   
 margin                                                                         
--------------------------------------------------------------------------------
Profit        million   3.6     4.7     -23.9%   2.7     3.6     -23.1%   13.3  
 before tax    EUR                                                              
--------------------------------------------------------------------------------
PBT margin    %         3.1     4.1     -25.6%   3.9     5.5     -29.4%   5.3   
--------------------------------------------------------------------------------
Net profit    million   2.4     4.4     -44.5%   1.6     3.6     -55.9%   12.4  
 (parent)      EUR                                                              
--------------------------------------------------------------------------------
Net profit    %         2.1     3.8     -45.7%   2.3     5.6     -59.5%   4.9   
 margin                                                                         
--------------------------------------------------------------------------------
EPS           EUR       0.14    0.25    -44.5%   0.09    0.21    -55.9%   0.70  
--------------------------------------------------------------------------------



                                    30.06.2015  30.06.2014  Variance  31.12.2014
--------------------------------------------------------------------------------
ROE (on yearly basis)  %            8.4         8.9         -5.4%     10.1      
--------------------------------------------------------------------------------
Equity ratio           %            54.3        48.8        +11.2%    51.0      
--------------------------------------------------------------------------------
Secured order book     million EUR  217.2       191.6       +13.3%    179.1     
--------------------------------------------------------------------------------
Total assets           million EUR  225.2       243.9       -7.7%     249.3     
--------------------------------------------------------------------------------
Number of employees    people       825         851         -3.1%     765       
--------------------------------------------------------------------------------



OPERATING RESULTS

Revenue and gross profit

Merko Ehitus group generated a total of EUR 116.2 million in revenue in 6
months of 2015 (6 months of 2014: EUR 113.7 million). 40.6% of the revenue was
generated in Estonian construction service, 31.4% in Latvian and Lithuanian
construction service and 28.0% in and real estate development segment (6 months
of 2014: 57.4% in Estonian construction service, 24.4% in Latvian and
Lithuanian construction service and 18.2% in real estate development segment).
Compared to the 6 months of 2014 the group revenue has increased by 2.2%.
Compared to the 6 months of the previous year in the 6 months of 2015 the share
of Latvian and Lithuanian construction service revenue in the group’s revenue
has increased from 24.4% to 31.4%. Revenue in Q2 2015 was EUR 70.6 million,
which has increased 8.9% compared to the previous year (Q2 2014: EUR 64.8
million).The main changes in the revenue structure compared to the same period
last year, can mainly be 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 and anticipated since the beginning of
2014. 

In 6 months of 2015 the group’s gross profit from development and construction
activities totalled EUR 8.9 million (6 months of 2014: EUR 10.1 million) and in
Q2 2015 EUR 5.4 million (Q2 2014: EUR 6.1 million). The 6 months gross profit
margin (7.7%) has decreased by 1.2 pp compared to the same period last year (6
months of 2014: 8.9%). Maintaining the stability of profit margins during the 6
months of 2015 in the Estonian construction service segment has been vital for
the group, despite the decline in sales volumes, the profitability has been
supported by the slight decrease in input prices, which may not necessarily
continue over the whole of 2015. Gross profit margin has also been impacted by
the reduced profitability in the real estate development segment, which depends
largely on the price of the land as part of the total specific project expenses
and is thus different on a project basis. 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 6 months of 2015, the group’s profit before tax totalled EUR 3.6 million and
net profit attributable to equity holders of the parent was EUR 2.4 million as
compared to the pre-tax profit or EUR 4.7 million and net profit attributable
to equity holders of the parent of EUR 4.4 million in 6 months of 2014. The 6
months of 2015 group’s higher than usual additional income tax expense in the
amount of EUR 0.9 million was incurred in connection with the announcement and
disbursement of dividends. The 6 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 3.1% (6 months of 2014: 4.1%) and
the net profit margin was 2.1% (6 months of 2014: 3.8%). Both the group’s
profit before tax (EUR 3.6 million) and the profit before tax margin (3.1%)
have decreased compared to the same period last year (6 months of 2014: EUR 4.7
million and 4.1%, respectively). 

In Q2 of 2015, the group’s pre-tax profit totalled EUR 2.7 million and net
profit was EUR 1.6 million as compared to the pre-tax profit of EUR 3.6 million
and net profit of EUR 3.6 million in Q2 of 2014. Similarily to the 6 months of
2015, also both the group’s quarterly profit before tax (EUR 2.7 million) and
the quarterly profit before tax margin (3.9%) have decreased compared to the
same period last year (Q2 2014: EUR 3.6 million and 5.5%, respectively). 

In the second quarter of 2015, the group paid EUR 7.3 million in dividends,
which incurred additional income tax expense in the amount of EUR 0.9 million.
The situation in the second quarter of 2014 was alike, when the group paid EUR
7.3 million in dividends, with the exception that then the group incurred no
additional income tax expense in connection with previously received and taxed
distribution of profits from subsidiaries. 



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 (incl. construction services in Finland), Latvian
and Lithuanian construction service and real estate development. 

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 (incl. construction services in Finland) 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 6 months of 2015, the revenue of the Estonian construction service
segment was EUR 47.2 million (6 months of 2014: EUR 65.3 million), having
decreased by 27.7% from the same period last year. The 6 months revenue also
includes revenue from the Finnish pile works project in the amount of EUR 0.8
million. The decrease of revenues is largely due to the fact that in the first
six 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
4.3 million for 6 months (6 months of 2014: EUR 5.4 million). The Estonian
construction service segment revenues for 6 months 2015 were 40.6% of the
group’s revenue, forming the largest proportion in the group’s revenue, but
still having decreased by 29.3%. 

In 6 months of 2015, the gross margin of the Estonian construction service
segment was 9.2%, which increased by 11.6% compared to the 6 months of 2014
(8.2%). 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 good result, which is mainly due to improvement of internal
efficiencies in project management. Due to the decrease in public procurement
volumes, above all in civil engineering, we continue to monitor closely 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 36.5 million in the 6 months of 2015 (6 months of 2014: EUR 27.8
million), which is 31.5% more than in the 6 months of 2014. If the Latvian and
Lithuanian construction service segment revenues of 6 months of 2014 formed
24.4% of the group’s revenue, then during 6 months of the current year the
segments revenues have increased to 31.4%. This proportional increase was
expected, especially given the knowledge that group’s continued focus has been
on increasing the revenues outside Estonia. The 6 month gross profit of the
Latvian and Lithuanian construction service segment amounted to EUR 1.5 million
(6 months of 2014: EUR 1.0 million) and the gross profit margin was 4.2% (6
months of 2014: 3.5%), which increased by 19.3% compared to the same period
previous year. 

Real estate development

The group sold a total of 168 apartments in 6 months of 2015 at the total value
of EUR 31.7 million (excl. VAT), compared to 198 apartments and EUR 18.5
million in 6 months of 2014. In Q2 of 2015 a total of 106 apartments were sold
at the total value of EUR 20.9 million (excl. VAT), (Q2 2014: 99 apartments and
EUR 9.5 million). In 6 months of 2015, the group has earned EUR 0.2 million of
revenue from the sale of immovable properties (6 months of 2014: EUR 1.4
million). Despite a lower number of apartments sold and a lower sales revenue
of immovable properties, 6 months real estate development segment revenues have
increased 57.4% 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 as anticipated in the 6 months to 28.0% of the group’s total
revenue (6 months of 2014: 18.2%). 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 6 month gross profit of the segment amounted to EUR 3.1 million (6 months
of 2014: EUR 3.7 million) and the gross profit margin was 9.5% (6 months of
2014: 18.1%), which decreased by 47.6% compared to the same period previous
year. The profitability of the apartment development projects varies by project
and depends greatly on the cost structure of the specific project, incl. the
land acquisition price. In addition, the gross profit obtained from sales of
the immovable property during 2014 makes up an important part of the 6-month
comparison base with previous year. 

At the end of the period, Merko Ehitus group’s inventory comprised 215
apartments where a preliminary agreement had been signed: 63 completed
apartments (10 in Estonia and 53 in Latvia) and 152 apartments under
construction (127 in Estonia and 25 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 30 June 2015, Merko Ehitus group had a total of 467 apartments for active
sale (as at 30 June 2014: 234 apartments), for which there are no pre-sale
agreements and of which 89 have been completed (18 in Estonia, 69 in Latvia and
2 in Lithuania) and 378 are under construction (229 in Estonia, 139 in
Lithuania and 10 in Finland). 

In 6 months of 2015, we launched the construction of a total of 335 new
apartments in the Baltic States (6 months of 2014: 136 apartments) – including
the first stage of Tartu mnt 52 development project, the preparation works of
which took place in 2014. In the 6 months of this year, the group has invested
a total of EUR 19.1 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 59.4 million (30.06.2014: EUR 38.1 million;
31.12.2014: EUR 55.2 million). 

In the 6 months of 2015, the group has purchased new land plots in Estonia at
an acquisition cost of EUR 6.6 million (6 months of 2014: EUR 1.2 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. Similarly in the second
quarter of 2014, the group realized an option agreement to acquire the Rästa 18
land plot in Tallinn. 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 30 June 2015, the group’s secured order book (without own developments)
amounted to EUR 217.2 million as compared to EUR 191.6 million as at 30 June
2014. The secured order book excludes the group's own residential development
projects and construction work related to developing real estate investments. 

In second quarter of 2015, EUR 98.9 million worth of new contracts were signed
(without own developments) as compared to EUR 21.7 million in same period last
year. The value of new contracts signed (without own developments) in the 6
months of 2015 amounted to EUR 121.3 million (6 months of 2014: EUR 70.3
million). 

After the balance sheet date, on 10 July 2015, UAB Merko Statyba – a subsidiary
of AS Merko Ehitus – signed a contract with GE WIND ENERGY GmbH to perform the
construction works of 24 reinforced concrete foundations for wind turbine
generators in Šilute wind farm in Lithuania. The value of the contract is
approximately EUR 6.5 million. The works are scheduled for completion in
November 2015. 

Of the contracts signed in the 6 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 already more than 3/4 (as at
31.12.2014 approximately 1/2). The group will continue to focus on
comprehensive design and construction contracts. In this regard, three
important contracts were signed in Estonia in the last quarter, although it
should be noted that for the most part, the actual construction activity on
these projects will largely start only in 2016. 

Since a large proportion of new contracts signed since the beginning of the
year is coming from one single contract, the total level of contracts signed
with private customers is below expectations. 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 30
June 2015 the group had cash equivalents in the amount of EUR 24.4 million
(30.06.2014: EUR 43.4 million). The group's cash level is lower compared to the
same period last year. 

The 6-month cash flow from operating activity was negative at EUR 16.8 million
(6 months of 2014: positive EUR 6.6 million), cash flow from investing activity
was at EUR 0.0 million (6 months of 2014: negative EUR 0.9 million) and the
cash flow from financing activity was negative at EUR 10.3 million (6 months of
2014: negative EUR 9.0 million). 

The cash flow from operating activity was mostly influenced by the operating
profit EUR 4.0 million (6 months of 2014: EUR 5.0 million), by the positive
change in receivables and liabilities related to construction contracts
recognised under the stage of completion method EUR 0.8 million (6 months of
2014: positive change of EUR 6.0 million), by the negative change in the
provisions EUR 3.4 million (6 months of 2014: negative change of EUR 1.3
million), by the negative change in trade and other receivables related to
operating activities EUR 10.7 million (6 months of 2014: negative change of EUR
3.9 million), by the positive change in inventory EUR 6.3 million, incl.
negative cash flow from purchase of new land plots in the amount of EUR 6.6
million (6 months of 2014: negative change of EUR 7.6 million, incl. negative
cash flow from purchase of new land plots in the amount of EUR 1.2 million), by
the negative change in trade and other payables related to operating activities
EUR 13.4 million, incl. significant negative outflow from the realization of an
option agreement in the amount of EUR 4.0 million but also from the advances
for real estate development projects (6 months of 2014: positive change of EUR
8.0 million) and by the corporate income tax paid EUR 1.4 million (6 months of
2014: EUR 0.1 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 (15.6% as at 30.06.2015; 14.0% as
at 30.06.2014). 

Cash flows from investment activities include negative cash flow from the
acquisition of non-current asset in the amount of EUR 0.3 million (6 months of
2014: EUR 0.6 million) and the positive cash flow from the sale of non-current
assets in the amount of EUR 0.3 million (6 months of 2014: EUR 0.0 million).
Cash flows from investment activities in 6 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 million. The
group mainly invested in non-current assets for the purpose of renewing its
fleet of machinery in the road construction segment. 

The largest single negative item in cash flows from financing was the dividend
payment of EUR 7.3 million (6 months of 2014: EUR 7.3 million). Project
specific loans obtained using investment property as collateral were repaid in
the amount of EUR 0.3 million (6 months of 2014: negative cash flow in net
amount of EUR 0.3 million), net of loans received and loans repaid in
connection with development projects amounted to negative cash flow of EUR 1.9
million (6 months of 2014: positive cash flow of EUR 2.8 million) and finance
lease principal repayments of EUR 0.8 million (6 months of 2014: EUR 0.5
million). The group has not used bank loans to finance all 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 6 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 

The Q2 2015 cash flow from operating activity was negative at EUR 9.0 million
(Q2 2014: negative EUR 2.3 million), cash flow from investing activity was
positive at EUR 0.2 million (Q2 2014: negative EUR 0.4 million) and the cash
flow from financing activity was negative at EUR 7.7 million (Q2 2014: negative
EUR 5.8 million). 

The quarterly cash flows from operating activities were negative primarily as a
result of the need for working capital to cover group’s own large-scale
development projects. Cash flow from operating activities was also impacted
negatively by the acquisition cost of land plots for development activity and
the realization of land plots in Tallinn governed by an option agreement for
the total amount of EUR 5.5 million and by the corporate income tax paid EUR
1.4 million (Q2 2014: EUR 0.1 million). 

Cash flows from investment activities was positive primarily due to the sale of
non-current asset in the amount of EUR 0.2 million, which is mainly related to
the renewal of equipment in the road construction segment. 

Cash flow from financing activities included the dividend payment of EUR 7.3
million as an one-time negative cash flow, which was supplemented by the
finance lease principal repayments of EUR 0.4 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 incurred additional income tax expense in connection
with the disbursement of dividends of EUR 0.9 million (2014: EUR 0.0 million)
in Estonia in the second quarter of 2015.The dividend payment to the
shareholders took 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, which is expected
to take place in August 2015 with the disbursement to shareholders scheduled
for November 2015. The company will notify the shareholders via the stock
market system about the corresponding Commercial Register entry once it is made
and the specific date of the share capital payout. Shareholders, that were
entered into the share register of AS Merko Ehitus on 22 May 2015, at 23.59,
are entitled to the monetary payments from the reduction of share kapital. 

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)

                          6M ‘15  6M ‘14  6M ‘13  Q2 ‘15  Q2 ‘14  Q2 ‘13     12M
                                                                             ‘14
--------------------------------------------------------------------------------
Income statement                                                                
 summary                                                                        
--------------------------------------------------------------------------------
Revenue           millio   116.2   113.7   113.7    70.6    64.8    65.9   252.3
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit      millio     8.9    10.1     9.8     5.4     6.1     5.6    24.7
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit         %       7.7     8.9     8.6     7.6     9.5     8.5     9.8
 margin                                                                         
--------------------------------------------------------------------------------
Operating profit  millio     4.0     5.0     5.1     3.0     3.7     2.8    14.0
                   n EUR                                                        
--------------------------------------------------------------------------------
Operating profit     %       3.4     4.4     4.5     4.2     5.7     4.3     5.5
 margin                                                                         
--------------------------------------------------------------------------------
Profit before     millio     3.6     4.7     4.5     2.7     3.6     2.6    13.3
 tax               n EUR                                                        
--------------------------------------------------------------------------------
PBT margin           %       3.1     4.1     4.0     3.9     5.5     3.9     5.3
--------------------------------------------------------------------------------
Net profit        millio     2.4     4.2     4.0     1.6     3.6     2.2    12.3
                   n EUR                                                        
--------------------------------------------------------------------------------
attributable to   millio     2.4     4.4     4.0     1.6     3.6     2.3    12.4
 equity holders    n EUR                                                        
 of the parent                                                                  
--------------------------------------------------------------------------------
attributable to   millio   (0.0)   (0.2)     0.0     0.0     0.0   (0.1)   (0.1)
 non-controlling   n EUR                                                        
 interest                                                                       
--------------------------------------------------------------------------------
Net profit           %       2.1     3.8     3.6     2.3     5.6     3.5     4.9
 margin                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                                                    
 statement                                                                      
 indicators                                                                     
--------------------------------------------------------------------------------
EBITDA            millio     5.6     6.1     6.3     3.7     4.3     3.4    16.4
                   n EUR                                                        
--------------------------------------------------------------------------------
EBITDA margin        %       4.8     5.4     5.5     5.2     6.6     5.2     6.5
--------------------------------------------------------------------------------
General expense      %       5.0     5.1     5.0     4.0     4.4     4.7     4.9
 ratio                                                                          
--------------------------------------------------------------------------------
Labour cost          %      12.0    12.6    12.8    10.8    11.7    12.3    11.9
 ratio                                                                          
--------------------------------------------------------------------------------
Revenue per       thousa     154     144     130      93      82      75     319
 employee         nd EUR                                                        
--------------------------------------------------------------------------------



Other significant                 30.06.2015  30.06.2014  30.06.2013  31.12.2014
 indicators                                                                     
--------------------------------------------------------------------------------
Return on equity           %             8.4         8.9         9.6        10.1
--------------------------------------------------------------------------------
Return on assets           %             4.3         4.4         4.8         5.0
--------------------------------------------------------------------------------
Return on invested         %             8.0         7.8         8.5         8.8
 capital                                                                        
--------------------------------------------------------------------------------
Equity ratio               %            54.3        48.8        48.8        51.0
--------------------------------------------------------------------------------
Debt ratio                 %            15.6        14.0        13.9        15.1
--------------------------------------------------------------------------------
Current ratio            times           2.5         2.0         1.9         2.3
--------------------------------------------------------------------------------
Quick ratio              times           1.0         1.0         1.1         1.1
--------------------------------------------------------------------------------
Accounts receivable       days            47          57          59          56
 turnover                                                                       
--------------------------------------------------------------------------------
Accounts payable          days            41          38          46          39
 turnover                                                                       
--------------------------------------------------------------------------------
Average number of       people           757         791         878         790
 employees                                                                      
--------------------------------------------------------------------------------
Secured order book      million        217.2       191.6       184.4       179.1
                          EUR                                                   
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros

                                  2015       2014      2015      2014       2014
                              6 months   6 months        II        II  12 months
                                                    quarter   quarter           
--------------------------------------------------------------------------------
Revenue                        116,204    113,701    70,605    64,833    252,323
--------------------------------------------------------------------------------
Cost of goods sold           (107,265)  (103,622)  (65,227)  (58,690)  (227,591)
--------------------------------------------------------------------------------
Gross profit                     8,939     10,079     5,378     6,143     24,732
--------------------------------------------------------------------------------
Marketing expenses             (1,521)    (1,509)     (742)     (655)    (3,190)
--------------------------------------------------------------------------------
General and administrative     (4,245)    (4,292)   (2,052)   (2,172)    (9,128)
 expenses                                                                       
--------------------------------------------------------------------------------
Other operating income           1,003        837       575       431      1,901
--------------------------------------------------------------------------------
Other operating expenses         (213)       (83)     (196)      (33)      (340)
--------------------------------------------------------------------------------
Operating profit                 3,963      5,032     2,963     3,714     13,975
--------------------------------------------------------------------------------
Finance income/costs             (392)      (337)     (228)     (157)      (667)
--------------------------------------------------------------------------------
incl. finance income/costs        (76)       (70)      (32)      (36)      (130)
 from joint ventures                                                            
--------------------------------------------------------------------------------
finance income/costs from            1          1         1         1          2
 other long-term                                                                
 investments                                                                    
--------------------------------------------------------------------------------
interest expense                 (366)      (333)     (216)     (155)      (662)
--------------------------------------------------------------------------------
foreign exchange gain                2        (1)       (1)         -       (12)
 (loss)                                                                         
--------------------------------------------------------------------------------
other financial income              47         66        20        33        135
 (expenses)                                                                     
--------------------------------------------------------------------------------
Profit before tax                3,571      4,695     2,735     3,557     13,308
--------------------------------------------------------------------------------
Corporate income tax           (1,206)      (482)   (1,111)        40    (1,055)
 expense                                                                        
--------------------------------------------------------------------------------
Net profit for financial         2,365      4,213     1,624     3,597     12,253
 year                                                                           
--------------------------------------------------------------------------------
incl. net profit                 2,417      4,360     1,608     3,649     12,417
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to        (52)      (147)        16      (52)      (164)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Other comprehensive income                                                      
--------------------------------------------------------------------------------
Currency translation               (1)          -         1         -          4
 differences of foreign                                                         
 entities                                                                       
--------------------------------------------------------------------------------
Comprehensive income for         2,364      4,213     1,625     3,597     12,257
 the period                                                                     
--------------------------------------------------------------------------------
incl. net profit                 2,416      4,360     1,609     3,649     12,421
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to        (52)      (147)        16      (52)      (164)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Earnings per share for            0.14       0.25      0.09      0.21       0.70
 profit attributable to                                                         
 equity holders of the                                                          
 parent (basic and diluted,                                                     
 in EUR)                                                                        
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros

                                              30.06.2015  30.06.2014  31.12.2014
--------------------------------------------------------------------------------
ASSETS                                                                          
--------------------------------------------------------------------------------
Current assets                                                                  
--------------------------------------------------------------------------------
Cash and cash equivalents                         24,428      43,434      51,583
--------------------------------------------------------------------------------
Trade and other receivables                       50,505      63,850      46,382
--------------------------------------------------------------------------------
Prepaid corporate income tax                         139          26           3
--------------------------------------------------------------------------------
Inventories                                      113,656      95,223     117,638
--------------------------------------------------------------------------------
                                                 188,728     202,533     215,606
--------------------------------------------------------------------------------
Non-current assets                                                              
--------------------------------------------------------------------------------
Long-term financial assets                        15,226      20,890      11,476
--------------------------------------------------------------------------------
Deferred income tax assets                         1,580       1,592       1,535
--------------------------------------------------------------------------------
Investment property                                4,495       4,556       4,619
--------------------------------------------------------------------------------
Property, plant and equipment                     14,321      13,242      15,003
--------------------------------------------------------------------------------
Intangible assets                                    865       1,095       1,011
--------------------------------------------------------------------------------
                                                  36,487      41,375      33,644
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL ASSETS                                     225,215     243,908     249,250
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
LIABILITIES                                                                     
--------------------------------------------------------------------------------
Current liabilities                                                             
--------------------------------------------------------------------------------
Borrowings                                        13,462      15,298      14,287
--------------------------------------------------------------------------------
Payables and prepayments                          57,416      82,043      71,122
--------------------------------------------------------------------------------
Income tax liability                                 292          54         352
--------------------------------------------------------------------------------
Short-term provisions                              4,930       5,457       6,239
--------------------------------------------------------------------------------
                                                  76,100     102,852      92,000
--------------------------------------------------------------------------------
Non-current liabilities                                                         
--------------------------------------------------------------------------------
Long-term borrowings                              21,621      18,904      23,359
--------------------------------------------------------------------------------
Deferred income tax liability                        763         614         738
--------------------------------------------------------------------------------
Other long-term payables                           1,167       1,770       1,671
--------------------------------------------------------------------------------
                                                  23,551      21,288      25,768
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                 99,651     124,140     117,768
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EQUITY                                                                          
--------------------------------------------------------------------------------
Non-controlling interests                          3,381         802       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                   (666)       (669)       (665)
--------------------------------------------------------------------------------
Retained earnings                                109,649     106,435     114,492
--------------------------------------------------------------------------------
                                                 122,183     118,966     127,027
--------------------------------------------------------------------------------
TOTAL EQUITY                                     125,564     119,768     131,482
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                     225,215     243,908     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.