Market announcement

Title

2015 9 months and III quarter consolidated unaudited interim report

Message

Tallinn, Estonia, 2015-11-05 07:00 CET (GLOBE NEWSWIRE) --




COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

The sales revenue of Merko Ehitus in Q3 stood at 68.4 million euros and for the
first 9 months at 184.6 million euros and has stayed at the level of the
previous year. The net profit of the group for Q3 stood at 3.1 million euros
and for the first 9 months at 5.6 million euros, and it includes the additional
income tax expenses arising from the payment of dividends. The decrease in the
sales revenue from construction services in Estonia has been compensated by the
growth of the sales revenue in Latvia and Lithuania, and also by active real
estate development, where the sales revenue has grown by 73% in the first 9
months and accounts for a quarter of the group’s sales revenue. 

In this challenging year, the group has managed to maintain the sales revenue
at a level comparable to the previous year, which has not been easy, given the
situation in the Baltic construction market and the relatively weak position of
the group’s secured order book at the beginning of the year. As expected, the
volume of construction service in Estonia has decreased, because the number of
orders by the government has decreased in civil engineering and the company has
sought to avoid excess risks in price competitions within the general
construction segment. Group-wide, the growth of sales revenue in Latvia and
Lithuania and more active real estate development throughout the Baltic states
has helped to balance the sales revenue. 

Even though the group’s portfolio of new contracts has increased in comparison
with the corresponding 9 months of the previous year, its volume cannot be
deemed satisfying. As the public sector has recently placed only a few orders
and only a few procurements have been large, the price war at these tenders is
very fierce. The private customers have nevertheless had the courage to invest
and several private customers have had trust in Merko – to date, the majority
of new contracts in the portfolio have been entered into with private
customers. Within the first 9 months of the year, the group has entered into
new contracts to the value of 152.2 million euros. As of 30 September 2015, the
group had a secured an order book balance of 193.6 million euros (30 September
2014: 166.4 million euros). 

The management estimates that 2016 will definitely be challenging, particularly
due to the fact that the launch of the projects co-funded by the EU has been
postponed longer than expected and the growth in the Baltic states remains at
only a few percentage points. In Latvia, the group has completed the
construction of several large-scale projects, but this year has not succeeded
in entering into new contracts in the same volume, which may affect the volume
of construction work in Latvia next year. The results of the group are also
substantially affected by the trends in the Baltic apartment market, where
developments have so far been positive for us, although the rapid growth in the
last three years has begun to stabilise. We believe that the long-term outlooks
of the construction market will remain good in our home markets despite the
current challenges as investments in infrastructure and housing construction
are still essential, and the yield on commercial property remains at a
competitive level for investors. 

The sales revenue of Merko Ehitus in Q3 of 2015 stood at 68.4 million euros and
for the first 9 months at 184.6 million euros (Q3 in 2014: 68.5 million euros
and the first 9 months in 2014: 182.2 million euros). The Q3 gross margin of
the group was 9.3% and the profit before taxes was 3.5 million euros; the
performance for the first 9 months was 8.3% and 7.0 million euros,
respectively. The net profit of the company in Q3 stood at 3.1 million euros
and for the first 9 months at 5.6 million euros. The net profit for the first 9
months was influenced by additional income tax expenses in Estonia in the
amount of 0.9 million euros, which resulted from the payment of dividends to
the shareholders in Q2. 

The real estate development projects launched by the group in this year have
progressed as planned and although the apartment markets in Tallinn and Vilnius
have begun to stabilise, potential customers are still interested in purchasing
apartments developed by Merko. In order to maintain and strengthen our
longstanding market position, the group has also acquired new land plots, the
largest of these is the approximately 1.3-hectare Rinktines development area in
the city centre of Vilnius, where more than 300 new apartments can be built. It
is relevant to note that the group has purchased the new land plots for the
company’s own resources without drawing on external funding this year. Over the
first 9 months, the group has invested 30.1 million euros into the construction
of apartments and 11.7 million euros into the acquisition of different land
plots. During the first 9 months, the share of the sales revenue from real
estate development has increased to about 25% of the total revenues of the
group (the first 9 months in 2014: 14.5%). 

In the first 9 months, the group sold 248 apartments at the total cost of 42.6
million euros, and in Q3 it sold 80 apartments at the total cost of 10.9
million euros (figures exclusive of VAT), (the first 9 months in 2014: 235
apartments, sales revenue 23.5 million euros). The sales revenue from real
estate development has increases by 72.7% over the first 9 months. This year,
the company has launched the construction of a total of 386 apartments in the
Baltic states (the first 9 months in 2014: 310 apartments), including apartment
buildings in the city centre of Tallinn at 52 Tartu mnt (I stage), at 33
Sõpruse pst in Kristiine district, at 1a Jahu Street in Kalamaja district, in
Paepargi Perepark, Kaupmehe Street in Tartu rural municipality and at 73
Krokuvos Street in the city centre of Vilnius. 



OVERVIEW OF THE 9 MONTHS AND III QUARTER RESULTS

PROFITABILITY

Profit before tax in 9M 2015 was EUR 7.0 million (9M 2014: EUR 8.0 million),
which is equivalent to a profit before tax margin of 3.8% (9M 2014: 4.4%).
Gross margin in 9M was 8.3% (9M 2014: 8.9%), which has decreased by 7.3%
compared to the same period last year. Q3 2015 profit before tax was EUR 3.5
million (Q3 2014: EUR 3.3 million). Net margin in 9M 2015 decreased to 3.0% (9M
2014: 4.2%) and net profit was EUR 5.6 million (9M 2014: EUR 7.6 million),
having decreased by 27.1% compared to the same period last year. Q3 net profit
was EUR 3.1 million (Q3 2014: EUR 3.3 million). 

REVENUE

Revenue in 9M 2015 was EUR 184.6 million (9M 2014: EUR 182.2 million), which
has increased by 1.3% compared to the same period last year. Q3 revenue was EUR
68.4 million (Q3 2014: EUR 68.5 million). The share of construction service
revenue earned outside of Estonia has increased in 9M 2015 to 31.9% (9M 2014:
25.7%). The number of apartments sold in 9 months of 2015 (248 pcs, revenues of
EUR 42.6 million) has increased by 5.5% and the revenue from apartment sales
has increased by 81.5%(9 months of 2014: 235 apartments, revenues of EUR 23.5
million). 

CASH POSITION

At the end of the reporting period, the group had EUR 19.9 million in cash and
cash equivalents and equity EUR 121.3 million (53.4% of total assets).
Comparable figures as at 30 September 2014 were accordingly EUR 40.3 million
and EUR 122.2 million (47.5% of total assets). As at 30 September 2015 the
group had net debt of positive EUR 10.0 million (30 September 2014: positive
EUR 0.1 million). 

SECURED ORDER BOOK

In Q3 2015, group companies signed new contracts in the amount of EUR 30.9
million (Q3 2014: EUR 37.2 million). 9M 2015 new contracts signed in amount of
EUR 152.2 million (9M 2014: EUR 107.5 million). As at 30 September 2015, the
group’s secured order book stood at EUR 193.6 million (30 September 2014: EUR
166.4 million). 



                        9M ‘15  9M ‘14  Varianc  Q3 ‘15  Q3 ‘14  Varianc     12M
                                              e                        e     ‘14
--------------------------------------------------------------------------------
Revenue       million    184.6   182.2    +1.3%    68.4    68.5    -0.3%   252.3
               EUR                                                              
--------------------------------------------------------------------------------
Gross profit  million     15.3    16.3    -6.1%     6.3     6.2    +2.4%    24.7
               EUR                                                              
--------------------------------------------------------------------------------
Gross profit  %            8.3     8.9    -7.3%     9.3     9.0    +2.7%     9.8
 margin                                                                         
--------------------------------------------------------------------------------
EBITDA        million      9.9    10.2    -2.5%     4.4     4.1    +7.8%    16.4
               EUR                                                              
--------------------------------------------------------------------------------
EBITDA        %            5.4     5.6    -3.7%     6.4     5.9    +8.1%     6.5
 margin                                                                         
--------------------------------------------------------------------------------
Profit        million      7.0     8.0   -12.0%     3.5     3.3    +4.9%    13.3
 before tax    EUR                                                              
--------------------------------------------------------------------------------
PBT margin    %            3.8     4.4   -13.1%     5.1     4.8    +5.1%     5.3
--------------------------------------------------------------------------------
Net profit    million      5.6     7.6   -27.1%     3.1     3.3    -3.8%    12.4
 (parent)      EUR                                                              
--------------------------------------------------------------------------------
Net profit    %            3.0     4.2   -28.0%     4.6     4.8    -3.5%     4.9
 margin                                                                         
--------------------------------------------------------------------------------
EPS           EUR         0.31    0.43   -27.1%    0.18    0.18    -3.8%    0.70
--------------------------------------------------------------------------------



                                    30.09.2015  30.09.2014  Variance  31.12.2014
--------------------------------------------------------------------------------
ROE (on yearly basis)  %                   8.3         8.3     +0.2%        10.1
--------------------------------------------------------------------------------
Equity ratio           %                  53.4        47.5    +12.5%        51.0
--------------------------------------------------------------------------------
Secured order book     million EUR       193.6       166.4    +16.3%       179.1
--------------------------------------------------------------------------------
Total assets           million EUR       227.0       257.3    -11.8%       249.3
--------------------------------------------------------------------------------
Number of employees    people              798         804     -0.7%         765
--------------------------------------------------------------------------------



OPERATING RESULTS

Revenue and gross profit

Merko Ehitus group generated a total of EUR 184.6 million in revenue in 9
months of 2015 (9 months of 2014: EUR 182.2 million). 43.4% of the revenue was
generated in Estonian construction service, 31.9% in Latvian and Lithuanian
construction service and 24.7% in and real estate development segment (9 months
of 2014: 59.8% in Estonian construction service, 25.7% in Latvian and
Lithuanian construction service and 14.5% in real estate development segment).
Compared to the 9 months of 2014 the group revenue has increased by 1.3%.
Compared to the 9 months of the previous year in the 9 months of 2015 the share
of Latvian and Lithuanian construction service revenue in the group’s revenue
has increased from 25.7% to 31.9%. Revenue in Q3 2015 was EUR 68.4 million,
which has decreased by 0.3% compared to the previous year (Q3 2014: EUR 68.5
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 9 months of 2015 the group’s gross profit from development and construction
activities totalled EUR 15.3 million (9 months of 2014: EUR 16.3 million) and
in Q3 2015 EUR 6.3 million (Q3 2014: EUR 6.2 million). The 9 months gross
profit margin (8.3%) has decreased by 0.6 pp compared to the same period last
year (9 months of 2014: 8.9%). Maintaining the stability of profit margins
during the 9 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 9 months of 2015, the group’s profit before tax totalled EUR 7.0 million and
net profit attributable to equity holders of the parent was EUR 5.6 million as
compared to the pre-tax profit or EUR 8.0 million and net profit attributable
to equity holders of the parent of EUR 7.6 million in 9 months of 2014. The 9
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 9 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 3.8% (9 months of 2014: 4.4%) and
the net profit margin was 3.0% (9 months of 2014: 4.2%). Both the group’s
profit before tax (EUR 7.0 million) and the profit before tax margin (3.8%)
have decreased compared to the same period last year (9 months of 2014: EUR 8.0
million and 4.2%, respectively). 

In Q3 of 2015, the group’s pre-tax profit totalled EUR 3.5 million and net
profit was EUR 3.1 million as compared to the pre-tax profit of EUR 3.3 million
and net profit of EUR 3.3 million in Q3 of 2014. Contrary to the 9 months of
2015, both the group’s quarterly profit before tax (EUR 3.5 million) and the
quarterly profit before tax margin (5.1%) have increased compared to the same
period last year (Q3 2014: EUR 3.3 million and 4.8%, 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. 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 (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

The Estonian construction services segment consists of various services in the
field of general construction, civil engineering (including construction of
electrical and external networks) and road construction. 

In the 9 months of 2015, the revenue of the Estonian construction service
segment was EUR 80.0 million (9 months of 2014: EUR 109.0 million), having
decreased by 26.5% from the same period last year. The 9 months revenue also
includes revenue from the Finnish pile works project in the amount of EUR 2.5
million. The decrease of revenues is largely due to the fact that in the first
9 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). Also, part of the general construction projects have
proceeded somewhat more slowly than originally planned; however, this will not
result in changes in the final project deadlines. In this segment, the group
earned a gross profit of EUR 7.7 million for 9 months (9 months of 2014: EUR
9.9 million). The Estonian construction service segment revenues for 9 months
2015 were 43.4% of the group’s revenue, forming the largest proportion in the
group’s revenue, but still having decreased by 27.5%. 

In 9 months of 2015, the gross margin of the Estonian construction service
segment was 9.6%, which increased by 5.8% compared to the 9 months of 2014
(9.1%). 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. 

Our major projects in the third quarter in Tallinn included the construction
works of Hilton Tallinn Park hotel, the reconstruction work at the
North-Estonia Medical Centre in Mustamäe, the design and construction works of
logistics centre in Maardu, the design and renovation of the infrastructure of
tram line No. 4, the design and construction works of Öpik Office Building and
pile works in Tripla development are in Helsinki. Also the reconstruction works
of Läsna-Kodasoo sections of Tallinn-Narva main road, the repair works of
Kohtlase bridge, the reconstruction works of national highway No 12 Kose-Jägala
and the road maintenance works done under the service agreement with Tallinn
were in progress. 

Latvian and Lithuanian construction service

The Latvian and Lithuanian construction service segment consists of general
construction work in both of these countries and provision of civil engineering
services in Latvia. 

The revenue of the Latvian and Lithuanian construction service segment amounted
to EUR 58.9 million in the 9 months of 2015 (9 months of 2014: EUR 46.8
million), which is 25.7% more than in the 9 months of 2014. If the Latvian and
Lithuanian construction service segment revenues of 9 months of 2014 formed
25.7% of the group’s revenue, then during 9 months of the current year the
segments revenues have increased to 31.9%. This increase was expected
considering the completion of large contracts signed in late 2013 in Latvia,
such as the Liepaja Concert Hall and the Dzintaru 28 apartment building. The
group’s continued focus is on increasing the revenues outside Estonia. The 9
month gross profit of the Latvian and Lithuanian construction service segment
amounted to EUR 2.5 million (9 months of 2014: EUR 2.1 million) and the gross
profit margin was 4.3% (9 months of 2014: 4.4%), which decreased by 1.1%
compared to the same period previous year. 

In the third quarter of 2015, the main ongoing projects included were the
construction of multifunctional concert hall in Liepaja, the construction of
Dzintaru 28 apartment building in Jurmala, the construction of professional
schools in Riga and Valmiera, the construction works of apartment building
Magdal?nas nami in Riga, the re-cultivation and construction works of waste
recycling site at A. Deglava Street in Riga, the engineering preparation works
for Mežaparks development area in Riga, the construction of concrete
foundations for wind turbine generators in Šilute wind farm, the construction
works of Kauno/Algirdo residential complex with office premises in Vilnius and
the general construction works of the ABB HVDC transformer substation in
Klaipeda. 

Real estate development

The real estate development segment includes residential construction, the
development of apartment projects, long-term real estate investments and
commercial real estate projects. 

The group sold a total of 248 apartments in 9 months of 2015 at the total value
of EUR 42.6 million (excl. VAT), compared to 235 apartments and EUR 23.5
million in 9 months of 2014. In Q3 of 2015 a total of 80 apartments were sold
at the total value of EUR 10.9 million (excl. VAT), (Q3 2014: 37 apartments and
EUR 4.9 million). In 9 months of 2015, the group has earned EUR 2.1 million of
revenue from the sale of immovable properties (9 months of 2014: EUR 1.4
million). In 9 months of 2015 real estate development segment revenues have
increased 72.7% 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 9 months to 24.7% of the group’s total
revenue (9 months of 2014: 14.5%). 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 9 month gross profit of the segment amounted to EUR 5.1 million (9 months
of 2014: EUR 4.3 million) and the gross profit margin was 11.1% (9 months of
2014: 16.4%), which decreased by 32.6% 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. 

At the end of the period, Merko Ehitus group’s inventory comprised 241
apartments where a preliminary agreement had been signed: 22 completed
apartments (3 in Estonia and 19 in Latvia) and 219 apartments under
construction (175 in Estonia and 44 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 September 2015, Merko Ehitus group had a total of 412 apartments for
active sale (as at 30 September 2014: 366 apartments), for which there are no
pre-sale agreements and of which 72 have been completed (17 in Estonia, 54 in
Latvia and 1 in Lithuania) and 340 are under construction (210 in Estonia, 120
in Lithuania and 10 in Finland). 

In 9 months of 2015, we launched the construction of a total of 386 new
apartments in the Baltic States (9 months of 2014: 310 apartments) – including
the first stage of Tartu mnt 52 development project, the preparation works of
which took place in 2014. After the balance sheet date, the group has launched
an additional apartment developments with 55 apartments at Grostonas 12 in
Riga, Latvia. In the 9 months of this year, the group has invested a total of
EUR 30.1 million (9 months of 2014: EUR 32.3 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 will 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
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 30 September 2015, the group's inventories included land plots
with the development potential of EUR 61.5 million (30.09.2014: EUR 55.6
million; 31.12.2014: EUR 55.2 million). 

In the 9 months of 2015, the group has purchased new land plots in Estonia at
an acquisition cost of EUR 6.6 million and in Lithuania  EUR 5.1 million (9
months of 2014: in Lithuania at an acquisition cost of EUR 3.2 million). In
Lithuania, in Q3 2015, the group bought an approximately 1.3-hectare Rinktines
development area in the city centre of Vilnius, where up to 350 apartments can
be constructed. 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 to build
approximately 200 apartments. 



Secured order book

As at 30 September 2015, the group’s secured order book (without own
developments) amounted to EUR 193.6 million as compared to EUR 166.4 million as
at 30 September 2014. The secured order book excludes the group's own
residential development projects and construction work related to developing
real estate investments. 

In third quarter of 2015, EUR 30.9 million worth of new contracts were signed
(without own developments) as compared to EUR 37.2 million in same period last
year. The value of new contracts signed (without own developments) in the 9
months of 2015 amounted to EUR 152.2 million (9 months of 2014: EUR 107.5
million). 

After the balance sheet date, the group concluded three large construction
contracts: 

  -- On 9 October 2015, SIA Merks – a subsidiary of AS Merko Ehitus – signed a
     contract with SIA LMH to perform the construction works of kindergarten and
     school buildings complex near Riga in Pinki, in Latvia. The value of the
     contract is approximately EUR 6.0 million. The works are scheduled for
     completion in October 2016.
  -- On 16 October 2015, AS Merko Ehitus Eesti, 100% owned subsidiary part of AS
     Merko Ehitus group, and EKEREPOL OÜ, part of EKE Invest AS group, signed a
     contract to perform the construction works of an 14-storey office building,
     located at Mustamäe tee 3 ja 3A, Tallinn, Estonia. The contract value is
     approximately EUR 10.6 million. The works are scheduled to complete by the
     end of 2016.
  -- On 3 November 2015, AS Merko Ehitus group company AS Merko Ehitus Eesti and
     KMG Insenerehituse AS, and Tallinn's city’s transport operator Tallinna
     Linnatranspordi AS entered into a contract to perform the design and
     construction work on the infrastructure of Tallinn airport tram line. The
     contract value is approximately EUR 11.5 million. The works will be
     performed during 2016 and 2017.

Of the contracts signed in the 9 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 4/5 (as at
31.12.2014 approximately 1/2). Apart from a few large-scale procurements where
Merko companies were not as optimistic as our competitors in bidding at a low
price, the share of government contracts in the first 9 months of 2015 has been
modest. 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 in 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

As at 30 September 2015 the group had cash equivalents in the amount of EUR
19.9 million (30.09.2014: EUR 40.3 million). The group's cash level is lower
compared to the same period last year; still, the financial position is strong,
as the group has not utilized its credit lines of existing overdrafts and loan
agreements and has not concluded loan agreements for financing all of the
projects in development. 

The 9-month cash flow from operating activity was negative at EUR 16.1 million
(9 months of 2014: negative EUR 0.2 million), cash flow from investing activity
was negative at EUR 0.1 million (9 months of 2014: negative EUR 1.6 million)
and the cash flow from financing activity was negative at EUR 15.5 million (9
months of 2014: negative EUR 4.4 million). 

The cash flow from operating activity was mostly influenced by the operating
profit EUR 7.6 million (9 months of 2014: EUR 8.5 million), by the positive
change in receivables and liabilities related to construction contracts
recognised under the stage of completion method EUR 7.0 million (9 months of
2014: positive change of EUR 2.3 million), by the negative change in the
provisions EUR 3.7 million (9 months of 2014: negative change of EUR 0.3
million), by the negative change in trade and other receivables related to
operating activities EUR 12.6 million, incl. a negative change in financing
co-financed projects of EUR 3.6 million (9 months of 2014: negative change of
EUR 5.6 million, incl. a negative change in financing co-financed projects of
EUR 0.4 million), by the positive change in inventory EUR 1.9 million, incl.
negative cash flow from purchase of new land plots in the amount of EUR 11.7
million (9 months of 2014: negative change of EUR 16.0 million, incl. negative
cash flow from purchase of new land plots in the amount of EUR 3.2 million), by
the negative change in trade and other payables related to operating activities
EUR 16.1 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 (9 months of 2014: positive change of EUR
10.1 million) and by the corporate income tax paid EUR 1.6 million (9 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 and
Lithuanian 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 (13.2% as at 30.09.2015; 15.7%
as at 30.09.2014). 

Cash flows from investment activities include negative cash flow from the
acquisition of non-current asset in the amount of EUR 0.4 million (9 months of
2014: EUR 1.1 million) and the positive cash flow from the sale of non-current
assets in the amount of EUR 0.3 million (9 months of 2014: EUR 0.1 million).
Cash flows from investment activities in 9 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, but also
negative cash flow from the acquisition of minority shareholding in subsidiary
AS Gustaf in the amount of EUR 0.1 million and the acquisition of subsidiary
UAB Timana (related to the purchase of a new land plot in Lithuania) in the
amount of EUR 0.3 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 activities was
the dividend payment of EUR 7.3 million (9 months of 2014: EUR 7.3 million).
Project specific loans obtained using investment property as collateral were
repaid mainly in Estonia in the amount of EUR 1.6 million (9 months of 2014:
negative cash flow in net amount of EUR 0.4 million), net of loans received and
loans repaid in connection with development projects mainly in Latvia amounted
to negative cash flow of EUR 4.9 million (9 months of 2014: positive cash flow
of EUR 7.5 million) and finance lease principal repayments of EUR 1.6 million
(9 months of 2014: EUR 0.7 million). All of the new land plots acquired by the
group both in the first 9 months of 2015 and 2014 were financed in full from
the group’s resources without drawing on external funding. 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 9 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 Q3 2015 cash flow from operating activity was positive at EUR 0.8 million
(Q3 2014: negative EUR 6.9 million), cash flow from investing activity was
negative at EUR 0.1 million (Q3 2014: negative EUR 0.8 million) and the cash
flow from financing activity was negative at EUR 5.2 million (Q3 2014: positive
EUR 4.6 million). 

The quarterly cash flows from operating activities were positive primarily as a
result of the decrease receivables and increase of liabilities calculated using
the percentage of completion method. On the negatice side cash flow from
operating activities was impacted by the acquisition cost of land plots for
development activity in Lithuania for the total amount of EUR 5.1 million. 

Cash flows from investment activities was negative primarily due to the
purchase of non-current asset in the amount of EUR 0.1 million, which is mainly
related to the renewal of equipment in the road construction segment. 

The quarterly cash flow from financing activities was negative primarily due
the net negative cash flow of EUR 4.4 million of loans received and loans
repaid to finance the construction costs of both investment property and
development projects mainly in Latvia but also in Estonia, which was
supplemented by the finance lease principal repayments of EUR 0.7 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 reduction of share capital in the Commercial Register was made on 14 August
2015 and the monetary payments to the shareholders in the amount of EUR
4,071,000 (EUR 0.23 per share), related to the reduction of share capital will
be made on 16 November 2015. 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 4.1 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)

                          9M ‘15  9M ‘14  9M ‘13  Q3 ‘15  Q3 ‘14  Q3 ‘13     12M
                                                                             ‘14
--------------------------------------------------------------------------------
Income statement                                                                
 summary                                                                        
--------------------------------------------------------------------------------
Revenue           millio   184.6   182.2   197.8    68.4    68.5    84.1   252.3
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit      millio    15.3    16.3    17.4     6.3     6.2     7.5    24.7
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit         %       8.3     8.9     8.8     9.3     9.0     9.0     9.8
 margin                                                                         
--------------------------------------------------------------------------------
Operating profit  millio     7.6     8.5     9.5     3.7     3.5     4.4    14.0
                   n EUR                                                        
--------------------------------------------------------------------------------
Operating profit     %       4.1     4.7     4.8     5.4     5.1     5.3     5.5
 margin                                                                         
--------------------------------------------------------------------------------
Profit before     millio     7.0     8.0     8.7     3.5     3.3     4.2    13.3
 tax               n EUR                                                        
--------------------------------------------------------------------------------
PBT margin           %       3.8     4.4     4.4     5.1     4.8     5.0     5.3
--------------------------------------------------------------------------------
Net profit        millio     5.6     7.4     7.9     3.2     3.2     3.9    12.3
                   n EUR                                                        
--------------------------------------------------------------------------------
attributable to   millio     5.6     7.6     7.9     3.1     3.3     3.9    12.4
 equity holders    n EUR                                                        
 of the parent                                                                  
--------------------------------------------------------------------------------
attributable to   millio     0.0   (0.2)     0.0     0.1   (0.1)     0.0   (0.1)
 non-controlling   n EUR                                                        
 interest                                                                       
--------------------------------------------------------------------------------
Net profit           %       3.0     4.2     4.0     4.6     4.8     4.6     4.9
 margin                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                                                    
 statement                                                                      
 indicators                                                                     
--------------------------------------------------------------------------------
EBITDA            millio     9.9    10.2    11.6     4.4     4.1     5.3    16.4
                   n EUR                                                        
--------------------------------------------------------------------------------
EBITDA margin        %       5.4     5.6     5.9     6.4     5.9     6.3     6.5
--------------------------------------------------------------------------------
General expense      %       4.8     4.9     4.7     4.4     4.5     4.2     4.9
 ratio                                                                          
--------------------------------------------------------------------------------
Labour cost          %      12.1    12.1    12.1    12.4    11.3    11.2    11.9
 ratio                                                                          
--------------------------------------------------------------------------------
Revenue per       thousa     239     230     226      89      87      96     319
 employee         nd EUR                                                        
--------------------------------------------------------------------------------



Other significant                 30.09.2015  30.09.2014  30.09.2013  31.12.2014
 indicators                                                                     
--------------------------------------------------------------------------------
Return on equity           %             8.3         8.3        10.5        10.1
--------------------------------------------------------------------------------
Return on assets           %             4.4         4.1         5.3         5.0
--------------------------------------------------------------------------------
Return on invested         %             8.3         7.1         9.4         8.8
 capital                                                                        
--------------------------------------------------------------------------------
Equity ratio               %            53.4        47.5        48.1        51.0
--------------------------------------------------------------------------------
Debt ratio                 %            13.2        15.7        13.9        15.1
--------------------------------------------------------------------------------
Current ratio            times           2.4         2.2         2.0         2.3
--------------------------------------------------------------------------------
Quick ratio              times           0.9         1.0         1.1         1.1
--------------------------------------------------------------------------------
Accounts receivable       days            43          61          55          56
 turnover                                                                       
--------------------------------------------------------------------------------
Accounts payable          days            40          38          43          39
 turnover                                                                       
--------------------------------------------------------------------------------
Average number of       people           771         792         877         790
 employees                                                                      
--------------------------------------------------------------------------------
Secured order book      million        193.6       166.4       218.1       179.1
                          EUR                                                   
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros

                                  2015       2014      2015      2014       2014
                              9 months   9 months       III       III  12 months
                                                    quarter   quarter           
--------------------------------------------------------------------------------
Revenue                        184,564    182,237    68,360    68,536    252,323
--------------------------------------------------------------------------------
Cost of goods sold           (169,295)  (165,979)  (62,030)  (62,357)  (227,591)
--------------------------------------------------------------------------------
Gross profit                    15,269     16,258     6,330     6,179     24,732
--------------------------------------------------------------------------------
Marketing expenses             (2,347)    (2,290)     (826)     (781)    (3,190)
--------------------------------------------------------------------------------
General and administrative     (6,429)    (6,577)   (2,184)   (2,285)    (9,128)
 expenses                                                                       
--------------------------------------------------------------------------------
Other operating income           1,348      1,265       345       428      1,901
--------------------------------------------------------------------------------
Other operating expenses         (201)      (156)        12      (73)      (340)
--------------------------------------------------------------------------------
Operating profit                 7,640      8,500     3,677     3,468     13,975
--------------------------------------------------------------------------------
Finance income/costs             (605)      (502)     (213)     (165)      (667)
--------------------------------------------------------------------------------
incl. finance income/costs       (106)      (103)      (30)      (33)      (130)
 from joint ventures                                                            
--------------------------------------------------------------------------------
finance income/costs from            1          1         -         -          2
 other long-term                                                                
 investments                                                                    
--------------------------------------------------------------------------------
interest expense                 (575)      (482)     (209)     (149)      (662)
--------------------------------------------------------------------------------
foreign exchange gain              (1)        (5)       (3)       (4)       (12)
 (loss)                                                                         
--------------------------------------------------------------------------------
other financial income              76         87        29        21        135
 (expenses)                                                                     
--------------------------------------------------------------------------------
Profit before tax                7,035      7,998     3,464     3,303     13,308
--------------------------------------------------------------------------------
Corporate income tax           (1,471)      (558)     (265)      (76)    (1,055)
 expense                                                                        
--------------------------------------------------------------------------------
Net profit for financial         5,564      7,440     3,199     3,227     12,253
 year                                                                           
--------------------------------------------------------------------------------
incl. net profit                 5,555      7,621     3,138     3,261     12,417
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to           9      (181)        61      (34)      (164)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Other comprehensive income                                                      
--------------------------------------------------------------------------------
Currency translation                 1          -         2         -          4
 differences of foreign                                                         
 entities                                                                       
--------------------------------------------------------------------------------
Comprehensive income for         5,565      7,440     3,201     3,227     12,257
 the period                                                                     
--------------------------------------------------------------------------------
incl. net profit                 5,556      7,621     3,140     3,261     12,421
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to           9      (181)        61      (34)      (164)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Earnings per share for            0.31       0.43      0.18      0.18       0.70
 profit attributable to                                                         
 equity holders of the                                                          
 parent (basic and diluted,                                                     
 in EUR)                                                                        
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros

                                              30.09.2015  30.09.2014  31.12.2014
--------------------------------------------------------------------------------
ASSETS                                                                          
--------------------------------------------------------------------------------
Current assets                                                                  
--------------------------------------------------------------------------------
Cash and cash equivalents                         19,936      40,332      51,583
--------------------------------------------------------------------------------
Trade and other receivables                       52,669      67,277      46,382
--------------------------------------------------------------------------------
Prepaid corporate income tax                         296          58           3
--------------------------------------------------------------------------------
Inventories                                      118,138     118,917     117,638
--------------------------------------------------------------------------------
                                                 191,039     226,584     215,606
--------------------------------------------------------------------------------
Non-current assets                                                              
--------------------------------------------------------------------------------
Long-term financial assets                        15,272       9,823      11,476
--------------------------------------------------------------------------------
Deferred income tax assets                         1,580       1,593       1,535
--------------------------------------------------------------------------------
Investment property                                4,433       4,498       4,619
--------------------------------------------------------------------------------
Property, plant and equipment                     13,818      13,774      15,003
--------------------------------------------------------------------------------
Intangible assets                                    836       1,051       1,011
--------------------------------------------------------------------------------
                                                  35,939      30,739      33,644
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL ASSETS                                     226,978     257,323     249,250
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
LIABILITIES                                                                     
--------------------------------------------------------------------------------
Current liabilities                                                             
--------------------------------------------------------------------------------
Borrowings                                         7,856      15,655      14,287
--------------------------------------------------------------------------------
Payables and prepayments                          66,046      83,170      71,122
--------------------------------------------------------------------------------
Income tax liability                                 533          93         352
--------------------------------------------------------------------------------
Short-term provisions                              3,840       5,770       6,239
--------------------------------------------------------------------------------
                                                  78,275     104,688      92,000
--------------------------------------------------------------------------------
Non-current liabilities                                                         
--------------------------------------------------------------------------------
Long-term borrowings                              22,072      24,740      23,359
--------------------------------------------------------------------------------
Deferred income tax liability                        788         651         738
--------------------------------------------------------------------------------
Other long-term payables                           1,149       1,688       1,671
--------------------------------------------------------------------------------
                                                  24,009      27,079      25,768
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                102,284     131,767     117,768
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EQUITY                                                                          
--------------------------------------------------------------------------------
Non-controlling interests                          3,442       3,329       4,455
--------------------------------------------------------------------------------
Equity attributable to equity holders of the                                    
 parent                                                                         
--------------------------------------------------------------------------------
Share capital                                      7,929      12,000      12,000
--------------------------------------------------------------------------------
Statutory reserve capital                          1,200       1,200       1,200
--------------------------------------------------------------------------------
Currency translation differences                   (664)       (669)       (665)
--------------------------------------------------------------------------------
Retained earnings                                112,787     109,696     114,492
--------------------------------------------------------------------------------
                                                 121,252     122,227     127,027
--------------------------------------------------------------------------------
TOTAL EQUITY                                     124,694     125,556     131,482
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                     226,978     257,323     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.