Market announcement

Title

2016 6 months and II quarter consolidated unaudited interim report

Message

Tallinn, Estonia, 2016-08-04 07:00 CEST (GLOBE NEWSWIRE) --




COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

In Q2 of 2016, Merko Ehitus posted revenue of EUR 58.7 million, EBIDTA of EUR
3.4 million and profit before taxes of EUR 2.4 million. Gross profit margin
increased to 9% in the second quarter and the group’s construction contract
order book reached EUR 279 million. The Baltic construction market – in a slump
with regard to new buildings and infrastructure construction contracts –
continues to be supported by residential construction, and Merko is on track
with its investment plan in the apartment development sector. In the 6 months
of 2016, the company sold close to 160 apartments and launched the construction
of 280 new flats. 

The group’s management is satisfied with the improved profitability – the
second quarter gross profit margin of 9% outperforms the expectations to some
degree and is better than it was a year ago. Considering the general depressed
state of construction contracts on the market, the management also appreciates
the volume of new contracts signed in the second quarter and the level of the
secured order book. According to the management the integration of the
Norwegian company acquired in the first quarter has also gone according to
plan. 

The sales revenue in the first half-year has been kept back by the slower than
planned launch of construction work on several projects due to customer-side
changes either related to the project design solutions or the completion
timetable. The ratio of new contracts to sales revenue was also lower than
expected as a result of the sluggish Baltic construction market in regard to
buildings and infrastructure contracted for by the state – a trend that has
lasted a couple of years now. The drop in the share of sales revenue from
construction services in Latvia and Lithuania was as expected, as several large
projects were completed last year in Latvia and the work volumes are lower this
year. The construction market is largely supported by residential construction,
yet the group companies are actively continuing to tender for contracts on all
markets in which the group operates, including road construction and other
infrastructure project procurements in Estonia. 

The group’s Q2 revenue was EUR 58.7 million, EBITDA was EUR 3.4 million, profit
before taxes was EUR 2.4 and net profit was EUR 1.7 million. The respective
figures for 6 months of 2016 were: revenue of EUR 105.6 million, EBITDA of EUR
4.6 million, profit before taxes of EUR 2.7 and net profit of EUR 1.8 million.
The 6 months net profit was impacted by income tax expenses amounting to EUR
0.9 million, including EUR 0.6 million additional income tax expense on
dividends in the second quarter. 

The development of the apartment market in the Baltic capital cities was in
line with expectations in the second quarter, supply has increased and the
price level has stabilised. The launch of the group’s development projects and
sale of apartments has conformed to plans and the group will continue
fulfilling it’s investment plan. This year, Merko has launched construction of
more than 280 new apartments, including 100 apartments in the Tallinn’s
Paepargi neighbourhood and 66 apartments in the first phase of Noblessner
Homeport development and, in Riga, 137 flats in the Skanstes Parks development.
In the six months of 2016, Merko sold 159 apartments for a total price of EUR
17.4 million (without VAT), including 58 apartments and EUR 6.0 million
(without VAT) in Q2. 

In Q2 of 2016, the group’s companies entered into new construction contracts
amounting to EUR 87 million. In Estonia, these included the Juuliku traffic
junction and the Viru infantry battalion equipment depot; in Lithuania, the
expansion of the Radisson Blu Hotel Lietuva; and a warehouse complex in Riga,
Latvia. As at 30 June 2016, the group had a secured order book of EUR 279
million. Major projects in progress for Merko in Q2 in Estonia included the
Hilton Tallinn Park in Tallinn, opened in early June, Maakri Quarter, an office
building at Mustamäe tee 3, the Öpiku Maja office building, the T1 shopping
centre, Tallink Tennis Centre, the Bauhaus DIY store in Rocca al Mare and the
tram line that will serve the airport. In Latvia, the largest projects in
progress were the kindergarten and school complex in Pinki near Riga and phase
II of the passenger terminal at Riga Airport; in Lithuania, the Kauno/Algirdo
residential complex with office space and the Narbuto 5 office building were
ongoing. 



OVERVIEW OF THE 6 MONTHS AND II QUARTER RESULTS

PROFITABILITY

Q2 2016 profitability improved and the gross margin increased to 9.3%
(comparable figure in Q2 2015: 7.6%). Q2 net profit was EUR 1.7 million (Q2
2015: EUR 1.6 million) and net profit margin increased to 2.9% (Q2 2015: 2.3%).
Q2 net profit was influenced by additional income tax expense on dividends in
the amount of EUR 0.6 million (Q2 2015: EUR 0.9 million). Profit before tax in
6M 2016 was EUR 2.7 million (6M 2015: EUR 3.6 million), which is equivalent to
a profit before tax margin of 2.6% (6M 2015: 3.1%). Gross margin in 6M was 8.0%
(6M 2015: 7.7%), which has increased by 4.6% compared to the same period last
year. Q2 2016 profit before tax was EUR 2.4 million (Q2 2015: EUR 2.7 million).
Net margin in 6M 2016 decreased to 1.7% (6M 2015: 2.1%) and net profit was EUR
1.8 million (6M 2015: EUR 2.4 million), having decreased by 24.6% compared to
the same period last year. 

REVENUE

Revenue in 6M 2016 was EUR 105.6 million (6M 2015: EUR 116.2 million), which
has decreased by 9.2% compared to last year. Q2 revenue was EUR 58.7 million
(Q2 2015: EUR 70.6 million). The share of revenue earned outside Estonia has
expectedly decreased in 6M 2016 to 32% (6M 2015: 38%) in connection with the
slump in orders on the Latvian and Lithuanian construction market and the share
of revenue earned in Estonia has accordingly increased to 68% (3M 2015: 62%).
The number of apartments (159 units) sold in 6 months of 2016 has decreased by
5.4% and the revenue from apartment sales (EUR 17.4 million) by 45.2% (6 months
of 2015: 168 units, revenues of EUR 31.7 million). 

CASH POSITION

At the end of the reporting period, the group had EUR 21.7 million in cash and
cash equivalents and equity EUR 118.5 million (54.8% of total assets).
Comparable figures as at 30 June 2015 were accordingly EUR 24.4 million and EUR
122.2 million (54.3% of total assets). As at 30 June 2016 the group had net
debt of EUR 13.3 million (30 June 2015: EUR 10.7 million). 

SECURED ORDER BOOK

As at 30 June 2016, the group’s secured order book had grown to EUR 279.4
million (30 June 2015: EUR 217.2 million). In 6M 2016, group companies signed
new contracts in the amount of EUR 109.0 million (6M 2015: EUR 121.3 million).
Q2 2016 new contracts signed in amount of EUR 86.6 million (Q2 2015: EUR 98.9
million). 



                                6M     6M  Varianc    Q2    Q2  Varianc      12M
                              2016   2015        e  2016  2015        e     2015
--------------------------------------------------------------------------------
Revenue           million    105.6  116.2    -9.2%  58.7  70.6   -16.8%    251.0
                   EUR                                                          
--------------------------------------------------------------------------------
Gross profit      million      8.5    8.9    -4.9%   5.4   5.4    +1.1%     23.0
                   EUR                                                          
--------------------------------------------------------------------------------
Gross profit      %            8.0    7.7    +4.6%   9.3   7.6   +21.5%      9.1
 margin                                                                         
--------------------------------------------------------------------------------
EBITDA            million      4.6    5.6   -17.9%   3.4   3.7    -8.3%     15.5
                   EUR                                                          
--------------------------------------------------------------------------------
EBITDA margin     %            4.3    4.8    -9.6%   5.8   5.2   +10.2%      6.2
--------------------------------------------------------------------------------
Profit before     million      2.7    3.6   -23.3%   2.4   2.7   -11.0%     11.7
 tax               EUR                                                          
--------------------------------------------------------------------------------
PBT margin        %            2.6    3.1   -15.6%   4.1   3.9    +7.0%      4.7
--------------------------------------------------------------------------------
Net profit        million      1.8    2.4   -24.6%   1.7   1.6    +6.4%     10.0
 (parent)          EUR                                                          
--------------------------------------------------------------------------------
Net profit        %            1.7    2.1   -17.0%   2.9   2.3   +27.9%      4.0
 margin                                                                         
--------------------------------------------------------------------------------
EPS               EUR         0.10   0.14   -24.6%  0.09  0.09    +6.4%     0.56
--------------------------------------------------------------------------------



                                    30.06.2016  30.06.2015  Variance  31.12.2015
--------------------------------------------------------------------------------
ROE (on yearly basis)  %                   7.7         8.4     -8.7%         8.0
--------------------------------------------------------------------------------
Equity ratio           %                  54.8        54.3     +0.9%        59.5
--------------------------------------------------------------------------------
Secured order book     million EUR       279.4       217.2    +28.7%       246.9
--------------------------------------------------------------------------------
Total assets           million EUR       216.4       225.2     -3.9%       211.1
--------------------------------------------------------------------------------
Number of employees    people              826         825     +0.1%         791
--------------------------------------------------------------------------------



OPERATING RESULTS

Revenue and gross profit

Merko Ehitus group generated a total of EUR 105.6 million in revenue in 6
months of 2016 (6 months of 2015: EUR 116.2 million). 50.3% of the revenue was
generated in Estonian construction service, 22.3% in Latvian and Lithuanian
construction service and 27.4% in and real estate development segment (6 months
of 2015: 40.6% in Estonian construction service, 31.4% in Latvian and
Lithuanian construction service and 28.0% in real estate development segment).
Compared to the 6 months of 2015 the group revenue has decreased by 9.2%, which
is mainly due to the slower than expected launch of several large-scale sites
in the first half of the year – above all due to circumstances related to the
customer’s side. Compared to the 6 months of the previous year in the 6 months
of 2016 the share of Latvian and Lithuanian construction service revenue in the
group’s revenue has decreased from 31.4% to 22.3% and the share of Estonian
construction service has increased from 40.6% to 50.3%. Revenue in Q2 2016 was
EUR 58.7 million, which has decreased by 16.8% compared to the previous year
(Q2 2015: EUR 70.6 million). The main changes in the revenue structure compared
to the same period last year lie in the growth in revenue from Estonian
construction services’ general construction projects and in one-off increase in
the sales revenue from immovable properties in the real estate development
segment and. At the same time, revenue is down in the Latvian and Lithuanian
constructions service segment. This trend has been in line with the group’s
expectations, considering the slump in new construction orders in Latvia and
Lithuania in 2015 and the distribution of the secured order book as at the end
of 2015. The Latvian and Lithuanian subsidiaries are actively continuing to
secure new orders. 

In 6 months of 2016 the group’s gross profit from development and construction
activities totalled EUR 8.5 million (6 months of 2015: EUR 8.9 million) and in
Q2 2016 EUR 5.4 million (Q2 2015: EUR 5.4 million). The 6 months gross profit
margin (8.0%) has increased by 0.3 pp compared to the same period last year (6
months of 2015: 7.7%). The group’s aim is to preserve the profitability both in
the Estonian but also Latvian and Lithuanian construction service domain in
spite of the prevailing competition situation on the construction market and
the decrease in sales volumes in regard to previously higher-margin civil
engineering projects, which was supported by somewhat of a drop in input
prices, but which may not continue in 2016. Considering the small size of the
Estonian market, the current situation – where 4-6 large-scale building
construction projects have been launched simultaneously – means occasionally
limited capability for subcontractors to carry out work or to do so under
reasonable conditions, which in turn puts pressure on the general contractors’
margins. Gross profit margin has also been impacted to some extent by the
recovery in 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 2016, the group’s profit before tax totalled EUR 2.7 million and
net profit attributable to equity holders of the parent was EUR 1.8 million as
compared to the pre-tax profit or EUR 3.6 million and net profit attributable
to equity holders of the parent of EUR 2.4 million in 6 months of 2015. Group’s
profit before tax margin was 2.6% (6 months of 2015: 3.1%) and the net profit
margin was 1.7% (6 months of 2015: 2.1%). Both the group’s profit before tax
(EUR 2.7 million) and the profit before tax margin (2.6%) have decreased
compared to the same period last year (6 months of 2015: EUR 3.6 million and
3.1%, respectively). 

In Q2 of 2016, the group’s pre-tax profit totalled EUR 2.4 million and net
profit was EUR 1.7 million as compared to the pre-tax profit of EUR 2.7 million
and net profit of EUR 1.6 million in Q2 of 2015. Contrary to the 6 months of
2016 group’s quarterly profit before tax (EUR 2.4 million) has decreased
compared to the same period last year (Q2 2015: EUR 2.7 million), while the
quarterly profit before tax margin (4.1%) increased 3.9%). 

In the second quarter of 2016, the group paid EUR 9.0 million in dividends,
which incurred additional income tax expense in the amount of EUR 0.6 million.
The situation in the second quarter of 2015 was alike, when the group paid EUR
7.3 million in dividends, with the exception that then the group incurred
additional income tax expense in the amount of EUR 0.9 million. 



Business segments

The group operates mainly in Estonian, Latvian and Lithuanian market through
its subsidiaries. By purchasing a majority shareholding the group has formed
the basis for entering the Norwegian market starting from Q1 2016. Depending on
the country the group provides construction services and real estate
development services across the following business segments: Estonian
construction service (incl. construction services on project basis in Finland),
Latvian and Lithuanian construction service (incl. construction services in
Norway) and real estate development. The group’s segment structure is aligned
with group’s management structure. 

Estonian construction service (incl. construction services on project basis in
Finland) and Latvian and Lithuanian construction service (incl. construction
services in Norway) 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 and starting from Q1 2016 also in Norway.

  -- The civil engineering projects 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 and construction
services on project basis in Finland. 

In the 6 months of 2016, the revenue of the Estonian construction service
segment was EUR 53.1 million (6 months of 2015: EUR 47.2 million), having
increased by 12.5% from the same period last year. The 6 months revenue also
includes revenue from Finnish projects in the amount of EUR 0.4 million (6
months of 2015: EUR 0.4 million). The revenues have clearly decreased in the
field of civil engineering and increased in the field of general construction.
The increase in revenue in the field is primarily due to the fact that
large-scale general construction projects launched in 2015 – where previously
design development took place – are starting to reach a stage of more extensive
construction activity. The Estonian construction service segment revenues for 6
months 2016 were 50.3% of the group’s revenue, forming the largest proportion
in the group’s revenue, having increased by 23.9% in the yearly comparison. 

In this segment, the group earned a gross profit of EUR 4.1 million for 6
months (6 months of 2015: EUR 4.3 million). In 6 months of 2016, the gross
margin of the Estonian construction service segment was 7.8%, which decreased
by 1.4 pp compared to the 6 months of 2015 (9.2%), mainly due to the scarcity
of projects in the field of civil engineering. 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. Due to the decrease in the volume of public procurements, we are
critically monitoring any changes in the volume of work-in-progress and also
constantly improving the efficiencies of internal project management processes.
We have reduced and re-allocated staff within the group and, in order to
maintain the efficiency of the cost base, made preparations for responding to
further market changes. 

Our major projects in the second quarter in Tallinn included the construction
works of Hilton Tallinn Park hotel, the design and construction works of Öpik
Office Building, BAUHAUS DIY store, Tallink Tennis Centre, Maakri Kvartal,
Poordi st 1 residential and commercial building and T1 shopping centre, the
reconstruction work an office building located at Mustamäe tee 3 and the road
maintenance works done under the service agreement with Tallinn. 

Latvian and Lithuanian construction service

The Latvian and Lithuanian construction service segment consists of general
construction work in both of the aforementioned Baltic countries and stating
from the first quarter of 2016 also in Norway and provision of civil
engineering services in Latvia. 

The revenue of the Latvian and Lithuanian construction service segment amounted
to EUR 23.5 million in the 6 months of 2016 (6 months of 2015: EUR 36.5
million), which is 35.6% less than in the 6 months of 2015. If the Latvian and
Lithuanian construction service segment revenues of 6 months of 2015 formed
31.4% of the group’s revenue, then during 6 months of the current year the
segments revenues have decreased to 22.3%. The change in this percentage was in
line with expectations, considering the lower level of new contracts signed in
Latvia and Lithuania during 2015 and the 2015 comparison base, where
large-scale projects were finished in Latvia, such as the construction of
Liepaja Concert Hall and Polipaks NT manufacturing and logistics centre. The
group’s continued focus is on increasing the revenues outside Estonia. 

The 6 month gross profit of the Latvian and Lithuanian construction service
segment amounted to EUR 1.3 million (6 months of 2015: EUR 1.5 million) and the
gross profit margin was 5.5% (6 months of 2015: 4.2%), which increased by 31.0%
compared to the same period previous year. 

In the second quarter of 2016, the main ongoing projects included were the
construction of kindergarten and school buildings complex near Riga in Pinki,
the construction works of the second phase of the passenger terminal in Riga
International Airport and the construction works of Kauno/Algirdo residential
complex with office premises in Vilnius. 

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 159 apartments in 6 months of 2016 at the total value
of EUR 17.4 million (excl. VAT), compared to 168 apartments and EUR 31.7
million in 6 months of 2015. In Q2 of 2016 a total of 58 apartments were sold
at the total value of EUR 6.0 million (excl. VAT), (Q2 2015: 106 apartments and
EUR 20.9 million). In 6 months of 2016, the group has earned EUR 8.6 million of
revenue from the sale of immovable properties (6 months of 2015: EUR 0.2
million). Q2 2016 revenue from the sale of immovable properties was EUR 1.1
million (Q2 2015: EUR 0.2 million). In 6 months of 2016 real estate development
segment revenues have decreased 11.0% compared to the same period last year.
The decline is primarily influenced by sales of apartments in more exclusive
developments in the reference period where the sales price per apartment was
higher than the apartments sold during the current year. In the 6 months of
2016 the share of revenue from the real estate development segment formed as
anticipated 27.4% of the group’s total revenue (6 months of 2015: 28.0%),
having decreased in a year by 2.0%. 

The 6 month gross profit of the segment amounted to EUR 3.1 million (6 months
of 2015: EUR 3.1 million) and the gross profit margin was 10.6% (6 months of
2015: 9.5%), which increased by 11.4% 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. The profitability of the apartments sold in the 6
months of 2016 was higher than in the reference period, but on the other hand
the sector’s gross profit of the first six months was also significantly
influenced by the fact that the one-time effect of revenues from the sale of
immovable properties that are strategically not needed by the group, the
profitability of which is not comparable with a situation where the value of
land is increased by passing through all phases of the development process made
up a noteworthy share of total revenue in the segment. 

At the end of the period, group’s inventory comprised 298 apartments where a
preliminary agreement had been signed: 21 completed apartments (15 in Estonia,
5 in Latvia and 1 in Lithuania) and 277 apartments under construction (200 in
Estonia, 24 in Latvia and 53 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 2016, Merko Ehitus group had a total of 510 apartments for active
sale (as at 30 June 2015: 467 apartments), for which there are no pre-sale
agreements and of which 58 have been completed (16 in Estonia, 25 in Latvia, 12
in Lithuania and 5 in Finland) and 452 are under construction (293 in Estonia,
114 in Latvia and 45 in Lithuania). The number of apartments on sale as at 30
June 2016 has somewhat increased, compared to 30 June 2015, mainly due to the
volume of projects launched in the first half of the current year. 

In 6 months of 2016, we launched the construction of a total of 284 new
apartments in the Baltic states (6 months of 2015: 335 apartments). In the 6
months of this year, the group has invested a total of EUR 25.1 million (6
months of 2015: EUR 19.1 million) in new development projects launched in 2016
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 2016, the group plans to launch the
construction of approximately 500-550 new apartments in the Baltic states
(2015: construction of 574 new apartments launched). In 2016, the group’s plans
investments in both development projects initiated in the previous years and
new projects to be launched in 2016 in the range of EUR 40-45 million (2015:
EUR 42.4 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 June 2016, the group's inventories included land plots with
the development potential, where the construction works have not started, of
EUR 50.3 million (30.06.2015: EUR 59.4 million; 31.12.2015: EUR 58.0 million). 

In the 6 months of 2016, the group has not purchased any new land plots for
real estate development purposes (6 months of 2015: different new land plots in
Tallinn, Estonia acquired at an acquisition cost of EUR 6.6 million). In Q1
2015, the group also signed a notarised contract of sale of registered
immovables, under which all of the real estate governed by an option agreement
in Tallinn were realised for total of EUR 4.0 million. In Q2 2015 AS Merko
Ehitus group 50% joint venture Kodusadam OÜ additionally signed a contract for
the acquisition of approximately 1.7 hectares of land in the Noblessner
quarter, an historically prestigious industrial area in Tallinn with great
potential, for development purpose to build approximately 200 apartments. The
group is searching for new land plots for real estate development purposes
primarily in Estonian and Lithuania. 

In the second quarter of 2016, the group completed the competition for an
international development and architectural concept for the Latvian Zakusala
development area (close to 1,500 apartments). Entries came in from Estonia,
Norway, Poland and Latvia. The competition was organised based on the
regulations handed down by the Latvian Architects Union. Six entries from among
the works submitted met the qualifications. A five-member jury picked an entry
by RUUME arhitekti (https://ruumearhitekti.wordpress.com/), a practice of young
Latvian architects, as the winner. The group will continue preparations in
order to launch construction in the development area in 3-5 years’ time. 



Secured order book

As at 30 June 2016, the group’s secured order book (without own developments)
amounted to EUR 279.4 million as compared to EUR 217.2 million as at 30 June
2015, having increased by approximately 30% in the annual comparison. The
secured order book excludes the group's own residential development projects
and construction work related to developing real estate investments. 

In 6 months of 2016, EUR 109.0 million worth of new contracts were signed
(without own developments) as compared to EUR 121.3 million in same period last
year. The value of new contracts signed (without own developments) in the
second quarter of 2016 amounted to EUR 86.6 million (Q2 2015: EUR 98.9 million,
which included the T1 shopping centre contract in the amount of EUR 70.0
million). 

After the balance sheet date, the group concluded one large construction
contract: 

  -- On 21 July 2016, SIA Merks – a subsidiary of AS Merko Ehitus – signed a
     contract with SIA Jasm?nu residence to perform the construction works of a
     residential complex consisting of four houses, located at Jasm?nu st. 10,
     Jurmala, Latvia. The value of the contract is approximately EUR 4.9
     million. The works are scheduled for completion by August of 2017.

In the second quarter of 2016, Merko Ehitus Eesti AS (a 100% owned Merko
subsidiary) entered into a design-build contract worth EUR 19.7 million with
the group’s 50% joint venture Kodusadam OÜ for the establishment of the
apartment building at Staapli 4 and the underground parking level connecting
the entire Noblessner development area. The sales revenue and profit from the
contract will become realised in the Estonian construction service segment
pursuant to provision of construction service. 

Of the contracts signed in the 6 months of 2016, private sector orders
accounted for the majority proportion, which is also represented in the group’s
secured order book as at the end of the reporting period, where private sector
orders from projects in progress constitute approximately 80% (30.06.2015:
approximately 75%; 31.12.2015: approximately 80%). 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 6 months of
2016 has been modest. The group continues to focus on comprehensive design and
construction contracts. In this regard, four important contracts were signed in
the 6 months of 2016 (incl. two in Q2 2016). 

The portfolio of contracts stands strong, especially in Estonia. At the same
time, the group has not managed to conclude new contracts in the estimated
volume, especially in Latvia and Lithuania. This is due to a
lower-than-estimated number of orders on the market, which will also affect the
volumes for 2016. Considering the beginning phase of the current EU funding
period, one can forecast the volume of public procurements to stay at the
previous years level. We forecast that the volume of public procurements will
start to increase in the end of 2016. 

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 and strengthen
the groups competitive advantages and are closely monitoring the development
and opportunities both in the Baltic states and the Nordic countries. In the
last few years, the group has taken part in various individual Finnish, Swedish
and Norwegian construction procurements in a selective and project-based manner
in order to gain experience and regarding the conditions and requirements set
out in these countries for qualifying for construction company procurements, as
well as assess the risks so as to evaluate potential competitive advantages for
entering these markets. In March 2016, the group concluded a transaction
through which it acquired a controlling holding in Peritus Entreprenør AS, a
Norwegian construction company that provides general construction services. In
2016, the group will continue implementing its chosen strategy with the goal of
increasing revenue earned on new markets, focusing above all on the Norwegian
market and taking part in a project-based manner in Finnish construction
procurements as well. 



Cash flows

As at 30 June 2016 the group had cash equivalents in the amount of EUR 21.7
million (30.06.2015: EUR 24.4 million; 31.12.2015: EUR 39.9 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 utilised its credit lines of
existing overdrafts and loan agreements and has not concluded loan agreements
for financing all of the projects in development. 

The 6-month cash flow from operating activity was negative at EUR 13.2 million
(6 months of 2015: negative EUR 16.8 million), cash flow from investing
activity was at EUR 0.0 million (6 months of 2015: EUR 0.0 million) and the
cash flow from financing activity was negative at EUR 4.9 million (6 months of
2015: negative EUR 10.3 million). 

The cash flow from operating activity was mostly influenced by the EBITDA
(operating profit adjusted with depreciation and amortisation) EUR 4,6 million
(6 months of 2015: EUR 5.6 million), by the negative change in receivables and
liabilities related to construction contracts recognised under the stage of
completion method EUR 0.3 million (6 months of 2015: positive change of EUR 0.8
million), by the negative change in the provisions EUR 2.7 million (6 months of
2015: negative change of EUR 3.4 million), by the negative change in trade and
other receivables related to operating activities EUR 18.8 million, incl. a
positive change in financing co-financed projects of EUR 0.3 million (6 months
of 2015: negative change of EUR 10.7 million, incl. a negative change in
financing co-financed projects of EUR 3.6 million), by the negative change in
inventory EUR 1.6 million, incl. positive cash flow from sale of immovable
properties in the amount of EUR 8.4 million (6 months of 2015: positive change
of EUR 6.3 million, incl. negative cash flow from purchase of new land plots in
the amount of EUR 6.6 million and positive cash flow from sale of immovable
properties in the amount of EUR 0.2 million), by the positive change in trade
and other payables related to operating activities EUR 7.7 million (6 months of
2015: negative change of 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) and by the
corporate income tax paid EUR 1.3 million (6 months of 2015: EUR 1.4 million). 

To support cash flows arising from operating activity, the group has been
cautious in raising additional external capital, including factoring. At the
same time, the debt ratio has remained at a moderate level (16.2% as at
30.06.2016; 15.6% as at 30.06.2015; 14.8% as at 31.12.2015). 

Cash flows from investment activities include negative cash flow from the
acquisition of non-current asset in the amount of EUR 1.7 million (6 months of
2015: EUR 0.3 million) and the positive cash flow from the sale of non-current
assets in the amount of EUR 0.4 million (6 months of 2015: 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. Cash flows from investment
activities in 6 months of 2015 was also positively impacted by the acquisition
of majority shareholding in subsidiary Peritus Entreprenør AS (related to the
offering of construction services on Norwegian market) in the amount of EUR 1.2
million. 

The largest single negative item in cash flows from financing was the dividend
payment of EUR 9.0 million (6 months of 2015: 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 2015: negative cash flow in the
amount of EUR 0.3 million). Net of loans received and loans repaid in
connection with development projects amounted to positive cash flow of EUR 6.6
million (6 months of 2015: net negative cash flow of EUR 1.9 million) and
finance lease principal repayments of EUR 0.4 million (6 months of 2015: EUR
0.8 million). In addition, over the first six months of 2016, the group made
repayments in the amount of EUR 1.0 million to related party AS Järvevana
pursuant to the terms and conditions of an overdraft agreement between the
parties. 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. 

The Q2 2016 cash flow from operating activity was negative at EUR 11.6 million
(Q2 2015: negative EUR 9.0 million), cash flow from investing activity was
negative at EUR 0.9 million (Q2 2015: positive EUR 0.2 million) and the cash
flow from financing activity was negative at EUR 0.2 million (Q2 2015: negative
EUR 7.7 million). 

The quarterly cash flows from operating activities were negative primarily as a
result of the need for working capital for construction projects due to the
start of the construction season and to cover investments in development
projects. On the positive side the quarterly cash flows included a positive
change in financing co-financed projects of EUR 2.0 million. Cash flows from
operating activities was also negatively impacted by the corporate income tax
paid EUR 1.1 million (Q2 2015: EUR 1.4 million). 

The second quarter cash flows from investment activities was negative primarily
due to the purchase of non-current asset in the amount of EUR 1.1 million,
which is mainly related to the renewal of equipment in the road construction
segment. 

The quarterly cash flow from financing activities included the dividend payment
of EUR 9.0 million as an one-time negative cash flow, which was supplemented on
the positive side by the increased borrowings in in the net amount of EUR 9.0
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 27 April
2016 approved the Supervisory Board’s proposal to pay the shareholders the
total amount of EUR 9.0 million (EUR 0.51 per share) as dividends from net
profit brought forward, which is equivalent to a 90% dividend rate and a 6.0%
dividend yield for the year 2015 (using the share price as at 31 December
2015), (comparable figures in 2015 were accordingly: EUR 7.3 million (EUR 0.41
per share) as dividends, which is equivalent to a 58% dividend rate and a 5.7%
dividend yield (using the share price as at 31 December 2014)). 

According to the Estonian Income Tax Law §50 section 11 AS Merko Ehitus can pay
certain portion of 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 during 2016, the group incurred
additional income tax expense in connection with the disbursement of dividends
of EUR 0.6 million (Q2 2015: EUR 0.9 million) in Estonia in the second quarter
of 2016.The dividend payment to the shareholders took place on 20 May 2016. 



Ratios
(attributable to equity holders of the parent)

                              6M      6M      6M      Q2      Q2      Q2     12M
                            2016    2015    2014    2016    2015    2014    2015
--------------------------------------------------------------------------------
Income statement                                                                
 summary                                                                        
--------------------------------------------------------------------------------
Revenue           millio   105.6   116.2   113.7    58.7    70.6    64.8   251.0
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit      millio     8.5     8.9    10.1     5.4     5.4     6.1    23.0
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit         %       8.0     7.7     8.9     9.3     7.6     9.5     9.1
 margin                                                                         
--------------------------------------------------------------------------------
Operating profit  millio     3.1     4.0     5.0     2.6     3.0     3.7    12.5
                   n EUR                                                        
--------------------------------------------------------------------------------
Operating profit     %       2.9     3.4     4.4     4.4     4.2     5.7     5.0
 margin                                                                         
--------------------------------------------------------------------------------
Profit before     millio     2.7     3.6     4.7     2.4     2.7     3.6    11.7
 tax               n EUR                                                        
--------------------------------------------------------------------------------
PBT margin           %       2.6     3.1     4.1     4.1     3.9     5.5     4.7
--------------------------------------------------------------------------------
Net profit        millio     1.8     2.4     4.2     1.8     1.6     3.6     9.8
                   n EUR                                                        
--------------------------------------------------------------------------------
attributable to   millio     1.8     2.4     4.4     1.7     1.6     3.6    10.0
 equity holders    n EUR                                                        
 of the parent                                                                  
--------------------------------------------------------------------------------
attributable to   millio   (0.0)   (0.0)   (0.2)     0.1     0.0     0.0   (0.2)
 non-controlling   n EUR                                                        
 interest                                                                       
--------------------------------------------------------------------------------
Net profit           %       1.7     2.1     3.8     2.9     2.3     5.6     4.0
 margin                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                                                    
 statement                                                                      
 indicators                                                                     
--------------------------------------------------------------------------------
EBITDA            millio     4.6     5.6     6.1     3.4     3.7     4.3    15.5
                   n EUR                                                        
--------------------------------------------------------------------------------
EBITDA margin        %       4.3     4.8     5.4     5.8     5.2     6.6     6.2
--------------------------------------------------------------------------------
General expense      %       6.2     5.0     5.1     5.7     4.0     4.4     4.8
 ratio                                                                          
--------------------------------------------------------------------------------
Labour cost          %      13.9    12.0    12.6    13.8    10.8    11.7    12.2
 ratio                                                                          
--------------------------------------------------------------------------------
Revenue per       thousa     138     154     144      77      93      82     322
 employee         nd EUR                                                        
--------------------------------------------------------------------------------



Other significant                 30.06.2016  30.06.2015  30.06.2014  31.12.2015
 indicators                                                                     
--------------------------------------------------------------------------------
Return on equity           %             7.7         8.4         8.9         8.0
--------------------------------------------------------------------------------
Return on assets           %             4.4         4.3         4.4         4.4
--------------------------------------------------------------------------------
Return on invested         %             7.5         8.0         7.8         7.9
 capital                                                                        
--------------------------------------------------------------------------------
Equity ratio               %            54.8        54.3        48.8        59.5
--------------------------------------------------------------------------------
Debt ratio                 %            16.2        15.6        14.0        14.8
--------------------------------------------------------------------------------
Current ratio            times           2.8         2.5         2.0         3.2
--------------------------------------------------------------------------------
Quick ratio              times           1.1         1.0         1.0         1.2
--------------------------------------------------------------------------------
Accounts receivable       days            36          47          57          39
 turnover                                                                       
--------------------------------------------------------------------------------
Accounts payable          days            37          41          38          39
 turnover                                                                       
--------------------------------------------------------------------------------
Average number of       people           765         757         791         779
 employees                                                                      
--------------------------------------------------------------------------------
Secured order book      million        279.4       217.2       191.6       246.9
                          EUR                                                   
--------------------------------------------------------------------------------





CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited

in thousand euros

                                  2016       2015      2016      2015       2015
                              6 months   6 months        II        II  12 months
                                                    quarter   quarter           
--------------------------------------------------------------------------------
Revenue                        105,563    116,204    58,743    70,605    251,012
--------------------------------------------------------------------------------
Cost of goods sold            (97,066)  (107,265)  (53,308)  (65,227)  (228,044)
--------------------------------------------------------------------------------
Gross profit                     8,497      8,939     5,435     5,378     22,968
--------------------------------------------------------------------------------
Marketing expenses             (1,669)    (1,521)     (901)     (742)    (3,230)
--------------------------------------------------------------------------------
General and administrative     (4,868)    (4,245)   (2,451)   (2,052)    (8,907)
 expenses                                                                       
--------------------------------------------------------------------------------
Other operating income           1,244      1,003       596       575      1,943
--------------------------------------------------------------------------------
Other operating expenses         (124)      (213)      (82)     (196)      (278)
--------------------------------------------------------------------------------
Operating profit                 3,080      3,963     2,597     2,963     12,496
--------------------------------------------------------------------------------
Finance income/costs             (341)      (392)     (161)     (228)      (804)
--------------------------------------------------------------------------------
incl. finance income/costs        (46)       (76)      (29)      (32)      (138)
 from joint ventures                                                            
--------------------------------------------------------------------------------
finance income/costs from            1          1         1         1          3
 other long-term investments                                                    
--------------------------------------------------------------------------------
interest expense                 (299)      (366)     (143)     (216)      (756)
--------------------------------------------------------------------------------
foreign exchange gain (loss)       (7)          2         1       (1)        (3)
--------------------------------------------------------------------------------
other financial income              10         47         9        20         90
 (expenses)                                                                     
--------------------------------------------------------------------------------
Profit before tax                2,739      3,571     2,436     2,735     11,692
--------------------------------------------------------------------------------
Corporate income tax expense     (942)    (1,206)     (668)   (1,111)    (1,857)
--------------------------------------------------------------------------------
Net profit for financial         1,797      2,365     1,768     1,624      9,835
 year                                                                           
--------------------------------------------------------------------------------
incl. net profit                 1,823      2,417     1,711     1,608     10,000
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to        (26)       (52)        57        16      (165)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Other comprehensive income,                                                     
 which can subsequently be                                                      
 classified in the income                                                       
 statement                                                                      
--------------------------------------------------------------------------------
Currency translation                 8        (1)        10         1          2
 differences of foreign                                                         
 entities                                                                       
--------------------------------------------------------------------------------
incl. net profit                     7        (1)         9         1          1
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to           1          -         1         -          -
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Comprehensive income for the     1,805      2,364     1,778     1,625      9,837
 period                                                                         
--------------------------------------------------------------------------------
incl. net profit                 1,830      2,416     1,720     1,609     10,002
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to        (25)       (52)        58        16      (165)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Earnings per share for            0.10       0.14      0.09      0.09       0.56
 profit attributable to                                                         
 equity holders of the                                                          
 parent (basic and diluted,                                                     
 in EUR)                                                                        
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited

in thousand euros

                                              30.06.2016  30.06.2015  31.12.2015
--------------------------------------------------------------------------------
ASSETS                                                                          
--------------------------------------------------------------------------------
Current assets                                                                  
--------------------------------------------------------------------------------
Cash and cash equivalents                         21,702      24,428      39,905
--------------------------------------------------------------------------------
Trade and other receivables                       46,025      50,505      24,854
--------------------------------------------------------------------------------
Prepaid corporate income tax                         356         139         421
--------------------------------------------------------------------------------
Inventories                                      110,737     113,656     109,090
--------------------------------------------------------------------------------
                                                 178,820     188,728     174,270
--------------------------------------------------------------------------------
Non-current assets                                                              
--------------------------------------------------------------------------------
Long-term financial assets                        17,316      15,226      16,703
--------------------------------------------------------------------------------
Deferred income tax assets                         1,424       1,580       1,423
--------------------------------------------------------------------------------
Investment property                                4,239       4,495       4,371
--------------------------------------------------------------------------------
Property, plant and equipment                     13,609      14,321      13,442
--------------------------------------------------------------------------------
Intangible assets                                    985         865         879
--------------------------------------------------------------------------------
                                                  37,573      36,487      36,818
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL ASSETS                                     216,393     225,215     211,088
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
LIABILITIES                                                                     
--------------------------------------------------------------------------------
Current liabilities                                                             
--------------------------------------------------------------------------------
Borrowings                                         5,994      13,462       5,525
--------------------------------------------------------------------------------
Payables and prepayments                          52,295      57,416      43,266
--------------------------------------------------------------------------------
Income tax liability                                 343         292         711
--------------------------------------------------------------------------------
Short-term provisions                              4,137       4,930       5,013
--------------------------------------------------------------------------------
                                                  62,769      76,100      54,515
--------------------------------------------------------------------------------
Non-current liabilities                                                         
--------------------------------------------------------------------------------
Long-term borrowings                              28,970      21,621      25,660
--------------------------------------------------------------------------------
Deferred income tax liability                      1,025         763         788
--------------------------------------------------------------------------------
Other long-term payables                           1,434       1,167       1,159
--------------------------------------------------------------------------------
                                                  31,429      23,551      27,607
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                 94,198      99,651      82,122
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EQUITY                                                                          
--------------------------------------------------------------------------------
Non-controlling interests                          3,715       3,381       3,268
--------------------------------------------------------------------------------
Equity attributable to equity holders of the                                    
 parent                                                                         
--------------------------------------------------------------------------------
Share capital                                      7,929      12,000        7929
--------------------------------------------------------------------------------
Statutory reserve capital                            793       1,200       1,200
--------------------------------------------------------------------------------
Currency translation differences                   (656)       (666)       (663)
--------------------------------------------------------------------------------
Retained earnings                                110,414     109,649     117,232
--------------------------------------------------------------------------------
                                                 118,480     122,183     125,698
--------------------------------------------------------------------------------
TOTAL EQUITY                                     122,195     125,564     128,966
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                     216,393     225,215     211,088
--------------------------------------------------------------------------------



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) group 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 2015, the group employed 791 people and the company’s 2015
revenue was EUR 251 million.