Market announcement

Title

2016 II quarter and 6 months consolidated interim report (unaudited)

Message

This announcement includes Nordecon AS’s consolidated financial statements for
the second quarter and first half of 2016 (unaudited), overview of the key
events influencing the period’s financial result, outlook for the market and
description of the main risks. 

Interim report is attached to the announcement and is also published on NASDAQ
OMX Tallinn and Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/financial-reports/interim-reports)
. 

Period’s investor presentation are attached to the announcement and are also
published on Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR ‘000                                          30 June 2016  31 December 2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                5,336             6,332
Trade and other receivables                             28,914            17,503
Prepayments                                              1,768             1,599
Inventories                                             25,853            23,603
Total current assets                                    61,871            49,037
Non-current assets                                                              
Investments in equity-accounted investees                1,516             1,179
Other investments                                           26                26
Trade and other receivables                             10,764            10,516
Investment property                                      3,549             4,929
Property, plant and equipment                           11,642             9,623
Intangible assets                                       14,621            14,609
Total non-current assets                                42,118            40,882
TOTAL ASSETS                                           103,989            89,919
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Borrowings                                              17,786            15,715
Trade payables                                          31,678            22,538
Other payables                                           6,497             5,475
Deferred income                                          2,296             3,233
Provisions                                                 595               825
Total current liabilities                               58,852            47,786
Non-current liabilities                                                         
Borrowings                                               8,012             5,098
Trade payables                                             104               104
Other payables                                             126                96
Provisions                                                 986               768
Total non-current liabilities                            9,228             6,066
TOTAL LIABILITIES                                       68,080            53,852
                                                                                
EQUITY                                                                          
Share capital                                           20,692            20,692
Own (treasury) shares                                   -1,582            -1,582
Share premium                                              547               547
Statutory capital reserve                                2,554             2,554
Translation reserve                                      1,470             1,358
Retained earnings                                       10,473            10,970
Total equity attributable to owners of the              34,154            34,539
 parent                                                                         
Non-controlling interests                                1,755             1,528
TOTAL EQUITY                                            35,909            36,067
TOTAL LIABILITIES AND EQUITY                           103,989            89,919



Condensed consolidated interim statement of comprehensive income

EUR ‘000                           First    Second     First    Second      Full
                                    half   quarter      half   quarter      year
                                    2016      2016      2015      2015      2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                           73,829    46,098    69,211    42,098   145,515
Cost of sales                    -69,676   -43,098   -66,140   -39,436  -136,484
Gross profit                       4,153     3,000     3,071     2,662     9,031
                                                                                
Marketing and distribution          -218      -115      -222      -104      -412
 expenses                                                                       
Administrative expenses           -2,782    -1,490    -2,224    -1,115    -5,026
Other operating income                97        56       253       149       464
Other operating expenses            -460      -448       -74       -36      -124
Operating profit                     790     1,003       804     1,556     3,933
                                                                                
Finance income                       235       111       325       160       655
Finance costs                       -466       -27      -662         9    -4,383
Net finance income/costs            -231        84      -337       169    -3,728
                                                                                
Share of profit of                   484       365        33       129       226
 equity-accounted investees                                                     
                                                                                
Profit before income tax           1,043     1,452       500     1,854       431
Income tax expense                  -245      -245      -257      -257      -257
Profit for the period                798     1,207       243     1,597       174
                                                                                
Other comprehensive                                                             
 income/expense                                                                 
Items that may be reclassified                                                  
 subsequently to profit or                                                      
 loss                                                                           
Exchange differences on              112      -176       331      -193       587
 translating foreign                                                            
 operations                                                                     
Total other comprehensive            112      -176       331      -193       587
 income/expense                                                                 
TOTAL COMPREHENSIVE INCOME           910     1,031       574     1,404       761
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent               426       996       397     1,681       179
- Non-controlling interests          372       211      -154       -84        -5
Profit for the period                798     1,207       243     1,597       174
                                                                                
Total comprehensive                                                             
 income/expense attributable                                                    
 to:                                                                            
- Owners of the parent               538       820       728     1,488       766
- Non-controlling interests          372       211      -154       -84        -5
Total comprehensive income for       910     1,031       574     1,404       761
 the period                                                                     
                                                                                
Earnings per share                                                              
 attributable to owners of the                                                  
 parent:                                                                        
Basic earnings per share (EUR)      0.01      0.03      0.01      0.05      0.01
Diluted earnings per share          0.01      0.03      0.01      0.05      0.01
 (EUR)                                                                          



Condensed consolidated interim statement of cash flows

EUR ‘000                                              First half      First half
                                                            2016            2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                             74,740          73,141
Cash paid to suppliers2                                  -66,264         -67,292
VAT paid                                                  -2,480          -1,898
Cash paid to and for employees                            -9,831         -10,977
Income tax paid                                             -170             -37
Net cash used in operating activities                     -4,005          -7,063
                                                                                
Cash flows from investing activities                                            
Paid on acquisition of property, plant and                  -103            -380
 equipment                                                                      
Paid on acquisition of intangible assets                     -18               0
Proceeds from sale of property, plant and                     28             238
 equipment                                                                      
Acquisition of investments in associates                       0              -1
Disposal of a subsidiary                                       6               0
Loans provided                                               -35             -27
Repayment of loans provided                                   31              55
Dividends received                                           153             103
Interest received                                              0               5
Net cash from/used in investing activities                    62              -7
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                               5,703           6,909
Repayment of loans received                                 -470          -1,797
Finance lease principal paid                                -894            -875
Interest paid                                               -321            -348
Dividends paid                                            -1,068          -1,091
Net cash from financing activities                         2,950           2,798
                                                                                
Net cash flow                                               -993          -4,272
                                                                                
Cash and cash equivalents at beginning of year             6,332           8,802
Effect of movements in foreign exchange rates                 -3              -1
Decrease in cash and cash equivalents                       -993          -4,272
Cash and cash equivalents at end of year                   5,336           4,529

1 Line item Cash receipts from customers includes VAT paid by customers.

2 Line item Cash paid to suppliers includes VAT paid.



Financial review

Financial performance

Nordecon Group ended the first half of 2016 with a gross profit of 4,153
thousand euros (first half 2015: 3,071 thousand euros) and a gross margin of
5.6% (first half 2015: 4.4%). Despite increasing competition, we succeeded in
improving the gross margin compared with the same period last year. Most of the
profit was earned by the Buildings segment which raised its gross margin from
6% to 9%. The performance of the Infrastructure segment, however, proved less
than satisfactory – the profit generated in the second quarter was not
sufficient to cover the loss incurred at the beginning of the year due to the
usual seasonal factors and thus the Infrastructure segment ended the first
half-year with a loss. The weak result is mainly attributable to lack of
self-performed projects (such as major earthworks) during the winter season and
a large proportion of uncovered fixed costs. Taking into account the market
situation where the so-called EU projects are still in the start-up phase and
competition in road construction is exceptionally stiff, we expect that in 2016
the profitability of the Infrastructure segment will remain lower than in the
previous year. 

Hence, on securing long-term contracts we remain alert to the risks resulting
from growth in input prices and strive to prioritise, where possible, the
contracts’ expected profitability over revenue growth. 

Administrative expenses for the first half of 2016 totalled 2,782 thousand
euros. Compared with the same period last year, administrative expenses
increased somewhat (first half 2015: 2,224 thousand euros), primarily due to
the Group’s expansion to the Swedish market. The ratio of administrative
expenses to revenue (12 months rolling) was 3.7% (first half 2015: 3.3%), which
is below the target ceiling of 4% of revenue. 

Operating profit for the period was influenced by the write-down of other
receivables by 409 thousand euros (see note 12) in connection with the entry
into force of the final judgement in the Group’s dispute with Teede REV-2 AS
over the performance of the Koidula border crossing point contract in 2010
where our then venture partner ceased to fulfil its obligations and we had to
complete the contract on our own. Although the litigation which ended in June
had an essentially successful outcome for the Group, some of our claims were
rejected. Accordingly, Nordecon ended the first half of 2016 with an operating
profit of 790 thousand euros (first half 2015: 804 thousand euros). EBITDA for
the period amounted to 1,714 thousand euros (first half 2015: 1,732 thousand
euros). 

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange
losses that were smaller than a year earlier. During the period, the Ukrainian
currency weakened by around 5%, which meant that Group entities whose
functional currency is the hryvnia had to restate their euro-denominated
liabilities. Exchange losses reported in finance costs totalled 115 thousand
euros (first half 2015: 316 thousand euros). The same movements in the exchange
rate increased the translation reserve in equity by 112 thousand euros (first
half 2015: 331 thousand euros) and the net effect of exchange differences on
our net assets was a loss of 3 thousand euros (first half 2015: a gain of 15
thousand euros). Although exchange losses continue to undermine the Group’s net
profit, the weakening of the Ukrainian hryvnia has slowed and exchange losses
have become consistently smaller. 

The Group’s net profit was 798 thousand euros (first half 2015: 243 thousand
euros), of which net profit attributable to owners of the parent, Nordecon AS,
amounted to 426 thousand euros (first half 2015: 397 thousand euros). 

Cash flows

In the first half of 2016, operating activities resulted in a net cash outflow
of 4,005 thousand euros (first half 2015:  an outflow of 7,063 thousand euros).
Although cash receipts from customers exceeded cash paid to suppliers,
operating cash flow proved negative due to VAT paid and payments to and for
employees. Negative operating cash flow is typical of the first half-year and
stems from the cyclical nature of the construction business. Operating cash
flow is also strongly affected by the fact that neither public nor private
sector customers are required to make advance payments while the Group has to
make prepayments to subcontractors, materials suppliers, etc. In addition, cash
inflow is reduced by retentions which extend from 5 to 10% of the contract
price and are released at the end of the construction period only. 

Investing activities produced a net cash inflow of 62 thousand euros (first
half 2015: an outflow of 7 thousand euros). The largest line items were
payments made for property, plant and equipment of 103 thousand euros (first
half 2015: 380 thousand euros) and dividends received of 153 thousand euros
(first half 2015: 103 thousand euros). 

Financing activities generated a net cash inflow of 2,950 thousand euros (first
half 2015: an inflow of 2,798 thousand euros). Our financing cash flow is
strongly influenced by loan and lease transactions. Proceeds from loans
received amounted to 5,703 thousand euros, consisting of use of overdraft
facilities and development loans (first half 2015: 6,909 thousand euros). Loan
repayments totalled 470 thousand euros consisting of scheduled repayments of
long-term investment and development loans. In the comparative period, loan
repayments amounted to 1,797 thousand euros, resulting largely from changes in
overdraft balances. Compared with a year ago, there has been slight growth in
finance lease payments which totalled 894 thousand euros (first half 2015: 875
thousand euros). Dividends paid amounted to 1,068 thousand euros (first half
2015: 1,091 thousand euros). 

At 30 June 2016, the Group’s cash and cash equivalents totalled 5,336 thousand
euros (30 June 2015: 4,529 thousand euros). Management’s commentary on
liquidity risks is presented in the chapter Description of the main risks. 



Key financial figures and ratios

Figure/ratio                      First half  First half  First half   Full year
                                        2016        2015        2014        2015
--------------------------------------------------------------------------------
Revenue (EUR ’000)                    73,829      69,211      67,444     145,515
Revenue change                            7%          3%        -11%       -9.8%
Net profit (EUR ’000)                    798         243         454         174
Net profit attributable to               426         397         221         179
 owners of the parent (EUR ’000)                                                
Weighted average number of        30,756,728  30,756,728  30,756,728  30,756,728
 shares                                                                         
Earnings per share (EUR)                0.01        0.01        0.01        0.01
                                                                                
Administrative expenses to              3.8%        3.2%        3.7%        3.5%
 revenue                                                                        
Administrative expenses to              3.7%        3.3%        3.1%        3.5%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR ’000)                      1,714       1,732       2,455       5,769
EBITDA margin                           2.3%        2.5%        3.6%        4.0%
Gross margin                            5.6%        4.4%        6.2%        6.2%
Operating margin                        1.1%        1.2%        2.2%        2.7%
Operating margin excluding gain         1.0%        0.8%        2.1%        2.4%
 on asset sales                                                                 
Net margin                              1.1%        0.4%        0.7%        0.1%
Return on invested capital              2.3%        1.3%        1.6%        2.1%
Return on equity                        2.2%        0.7%        1.3%        0.5%
Equity ratio                           34.5%       33.8%       33.8%       40.1%
Return on assets                        0.8%        0.2%        0.4%        0.2%
Gearing                                33.2%       39.6%       31.6%       25.5%
Current ratio                           1.05        1.03        1.07        1.03
                                                                                
                                     30 June     30 June     30 June      31 Dec
                                        2016        2015        2014        2015
--------------------------------------------------------------------------------
Order book (EUR ’000)                131,363      70,837      87,236     125,698
--------------------------------------------------------------------------------

Revenue change = (revenue for the     Operating margin excluding gain on asset  
 reporting period / revenue for the    sales = ((operating profit – gain on     
 previous period) – 1 * 100            sales of non-current assets – gain on    
Earnings per share (EPS) = net         sales of real estate) / revenue) * 100   
 profit attributable to owners of     Net margin = (net profit for the period / 
 the parent / weighted average         revenue) * 100                           
 number of shares outstanding         Return on invested capital = ((profit     
Administrative expenses to revenue =   before tax + interest expense) / the     
 (administrative expenses / revenue)   period’s average (interest-bearing       
 * 100                                 liabilities + equity)) * 100             
Administrative expenses to revenue    Return on equity = (net profit for the    
 (rolling) = (past four quarters’      period / the period’s average total      
 administrative expenses / past four   equity) * 100                            
 quarters’ revenue) * 100             Equity ratio = (total equity / total      
EBITDA = operating profit +            liabilities and equity) * 100            
 depreciation and amortisation +      Return on assets = (net profit for the    
 impairment losses on goodwill         period / the period’s average total      
EBITDA margin = (EBITDA / revenue) *   assets) * 100                            
 100                                  Gearing = ((interest-bearing liabilities –
Gross margin = (gross profit /         cash and cash equivalents) /             
 revenue) * 100                        (interest-bearing liabilities + equity)) 
Operating margin = (operating profit   * 100                                    
 / revenue) * 100                     Current ratio = total current assets /    
                                       total current liabilities                
--------------------------------------------------------------------------------



Performance by geographical market

In the first half of 2016, Nordecon earned around 7% of its revenue outside
Estonia compared with 4% in the same period last year. The contribution of
foreign markets has increased through revenue generated in Sweden where the
Group has a contract for the construction of a five-floor apartment building.
The contribution of the Ukrainian market where we are performing two large
building construction contracts has remained relatively stable.  Finnish
revenues result from concrete works in the building construction segment. 

         First half 2016  First half 2015  First half 2014  Full year 2015
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Estonia              93%              96%              93%             96%
Sweden                4%               0%               0%              0%
Ukraine               2%               3%               1%              3%
Finland               1%               1%               6%              1%

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive reliance on a
single market. However, conditions in our chosen foreign markets are also
volatile and have a strong impact on our current results. Increasing the
contribution of foreign markets is on Nordecon’s strategic agenda. Our vision
of our foreign operations is described in the chapter Outlooks of the Group’s
geographical markets. 



Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing construction operations in more challenging
circumstances where one sub-segment may experience noticeable shrinkage. 

Nordecon’s revenue for the first half of 2016 totalled 73,829 thousand euros, a
roughly 7% increase on the 69,211 thousand euros generated in the same period
last year. The overall downturn in the infrastructure construction market is
also affecting our revenue structure. The revenue of the Buildings segment grew
as anticipated, primarily thanks to contracts secured from the private sector,
while the revenue of the Infrastructure segment decreased by around 30%
compared with the same period last year. In the comparative period, we were
carrying out two major road construction projects that generated a substantial
amount of revenue (construction package 5 of the Tartu western bypass and the
Keila-Valkse section of national road no. 8 Tallinn-Paldiski, km 24.9-29.5). In
the first half of this year, we did not have projects of a similar size. 

During the period, Buildings and Infrastructure generated revenue of 58,317
thousand euros and 13,026 thousand euros respectively. The corresponding
figures for the first half of 2015 were 49,154 thousand euros and 18,543
thousand euros (see note 8). Our order book has a similar structure: at
period-end 71% of contracts secured but not yet performed was attributable to
the Buildings segment (first half 2015: 63%). 

Operating              First half      First half      First half      Full year
 segments*                   2016            2015            2014           2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Buildings                     79%             68%             71%            64%
Infrastructure                21%             32%             29%            36%

* In the Directors’ report, the Ukrainian buildings segment and the EU
buildings segment, which are disclosed separately in the financial statements
as required by IFRS 8 Operating Segments, are presented as a single segment. 

In the Directors’ report, projects have been allocated to operating segments
based on their nature (i.e., building or infrastructure construction). In the
segment reporting presented in the financial statements, allocation is based on
the subsidiaries’ main field of activity (as required by IFRS 8 Operating
Segments). In the financial statements, the results of a subsidiary that is
primarily engaged in infrastructure construction are presented in the
Infrastructure segment. In the Directors’ report, the revenues of such a
subsidiary are presented based on their nature. The differences between the two
reports are not significant because in general Group entities specialise in
specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in
both building and infrastructure construction. The figures for the parent
company are allocated in both parts of the interim report based on the nature
of the work. 



Sub-segment revenues

Compared with last year, the revenue structure of the Buildings segment has
changed considerably. In the period under review, the largest revenue source
was the public buildings sub-segment where growth was underpinned by the
state’s increasing investment in national defence. We completed the
construction of the Piusa border guard station and a barracks for the Tapa
military base. We continue the construction of a building complex for the Ämari
air base and the Järveküla school as well as the design and construction of the
Lintsi warehouse complex and the reconstruction of Ugala Theatre in the city of
Viljandi. 

Most of our apartment building revenue resulted from general contracting. In
Estonia, a major share of apartment buildings we are working on is located in
Tallinn. The period’s main revenue contributors were phase III of the Tondi
residential quarter, the three phases of the Pikksilma homes in Kadriorg and
the Meerhof 2.0 building complex at Pirita tee 20a. The contributions of
foreign markets continue to grow. In Ukraine, we continue to build the Lepse
street residential quarter in Kiev and five apartment buildings in the city of
Brovary in Kiev region. In Sweden, we are building a five-floor apartment
building in Stockholm. 

The contribution of our own development projects in Tartu and Tallinn continues
to increase as well. In the first three development phases of the Tammelinn
project in Tartu we have completed 4 apartment buildings. Sales have been
highly successful: by period-end, only 6 of the 75 apartments were still for
sale. In March, we began building phase IV which comprises a five-floor
apartment building with 25 apartments. By the reporting date, around 70% of the
apartments were already sold or reserved (www.tammelinn.ee). By period-end, we
had also sold 14 of the 20 apartment ownerships in the first three phases of
our Magasini 29 development project in Tallinn (www.magasini.ee). We continue
to build the development’s fifth and last terraced house. In carrying out our
development activities, we monitor potential risks in the housing development
market that stem from rapid growth in the supply of new housing as well as
relative price increases with due care. 

The volumes of the commercial buildings sub-segment, which used to dominate the
Buildings segment for a long time, have declined considerably. We anticipated
the shrinkage already at the end of last year. During the period, we completed
and delivered on time the Veerenni business building in Tallinn. The largest
project in progress is the office and retail complex Arsenali Keskus in
Tallinn. 

The volumes of the industrial and warehouse facilities sub-segment have grown
compared with the same period last year. Private investment in industrial and
warehouse buildings has increased. The period’s largest projects were the
construction of a warehouse for Riigiressursside Keskus OÜ in Tallinn and a
production building for Vecta Design OÜ in Pärnu. Work continued on the
construction of the KEVILI South Terminal (a cereals storage and handling
complex) and an extension to the Smarten warehouse. 

Revenue breakdown in          First half    First half   First half    Full year
 Buildings segment                  2016          2015         2014         2015
--------------------------------------------------------------------------------
Public buildings                     35%           13%           6%          16%
Apartment buildings                  31%           18%          12%          22%
Commercial buildings                 15%           59%          49%          50%
Industrial and warehouse             19%           10%          33%          12%
 facilities                                                                     



Similarly to previous years, in the first half of 2016 the main revenue source
in the Infrastructure segment was road construction where we had mostly
medium-sized and small projects. We continue to render road maintenance
services in the Järva and Hiiu counties and the Keila and Kose maintenance
areas of the Harju county. Kose is a new area, where work started in February
2016. During the period, we also provided the State Forest Management Centre
with forest road improvement services. We expect that road construction will
remain the main revenue source in the Infrastructure segment through 2016 but
its volume will decrease compared with the previous year. 

Although the contribution of other engineering (utility network construction)
has increased compared with a year ago, the contracts secured are small and
continuing growth of the sub-segment is unlikely. Contraction in the EU support
continues to have an adverse impact on our environmental engineering volumes
and we do not expect the sub-segment to grow. In specialist engineering, there
is no sign of major hydraulic engineering investments in the current year and
addition of other complex engineering projects is also likely to be irregular. 

Revenue breakdown in                First half  First half      First  Full year
 Infrastructure segment                   2016        2015  half 2014       2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance          82%         82%        74%        81%
Other engineering                          14%         10%         7%        14%
Environmental engineering                   4%          7%        15%         4%
Specialist engineering (including           0%          1%         4%         1%
 hydraulic engineering)                                                         



Order book

At 30 June 2016, the Group’s order book (backlog of contracts signed but not
yet performed) stood at 131,363 thousand euros, an 85% increase year over year.
Order books grew in both the Buildings and the Infrastructure segment. In the
second quarter, Group companies secured new contracts of 47,622 thousand euros. 

                      30 June 2016  30 June 2015  30 June 2014  31 December 2015
--------------------------------------------------------------------------------
Order book (EUR            131,363        70,837        87,236           125,698
 ’000)                                                                          

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 71% and 29% of the Group’s order book
respectively (30 June 2015: 63% and 37% respectively). 

Compared with a year ago, the order book of the Buildings segment has grown
more than two-fold. Major growth has been posted in all sub-segments. The order
book is the largest in the apartment buildings sub-segment where growth is
attributable to large contracts signed at the end of 2015, including those for
the construction of the Meerhof 2.0 building complex at Pirita tee 20a in
Tallinn, five apartment buildings in the city of Brovary in the Kiev region in
Ukraine and a five-floor apartment building in Stockholm, Sweden. In the first
half of 2016, we also secured contracts for the construction of phase III in
the Pikksilma homes development in Kadriorg and apartment buildings at Kopli 4a
and 6, phase II of the development at Pirita tee 20a and Virbi 10 in Tallinn. 
Growth in the order book of the public buildings sub-segment is mostly
attributable to the construction of the Järveküla school and a depot for the
Tapa military base, the design and construction of the Lintsi warehouse complex
and the reconstruction of Ugala Theatre in Viljandi. The growth in the order
book of the industrial and warehouse facilities sub-segment is supported by the
construction of a warehouse for Riigiressursside Keskus OÜ and an extension to
the Smarten warehouse. After some decline, the order book of the commercial
buildings sub-segment has also started to grow. In the second quarter, we
signed large-scale contracts for the design and construction of the office
premises complex Viimsi Äritare and the non-renovated part of the historical
Luther furniture factory and the accompanying outdoor facilities at Vana-Lõuna
39 in Tallinn. Construction work under both contracts will begin in the third
quarter. 

Compared with a year earlier, the order book of the Infrastructure segment has
grown by 49%. The rise is largely underpinned by growth in the road
construction sub-segment, which is supported by the contracts secured for the
provision of road maintenance services in the Järva, Hiiu, and Kose road
maintenance areas in the period 2016-2021. The order book of the road
construction sub-segment is also influenced by the reconstruction of Logi
street and the construction of new checkpoints and waiting areas in the
north-western part of the Old City Harbour in Tallinn as well as the
reconstruction of km 67.1-75.3 of the Mustvee bypass. The order book of the
environmental engineering sub-segment, where we continue to perform a contract
for the design and construction of an extension to the Kohtla-Järve wastewater
treatment plant, has also grown somewhat. The order books of other
Infrastructure sub-segments have decreased. According to our estimates, in 2016
the volume of public investments will not increase substantially compared with
2015 and the new EU financial framework (2014-2020) will not have a marked
impact on the construction sector before the second half-year. Thus, it is more
likely than not that in 2016 the revenue of the Infrastructure segment will
decrease compared with a year earlier (for further information, see the
Business risks section of the chapter Description of the main risks). 

However, in the light of order book growth and developments in our chosen
markets, we forecast overall volume growth for 2016. In an environment of stiff
competition, we pursue the policy of avoiding unjustified risks whose
realisation in the contract performance phase would have an adverse impact on
our results.  Instead, we prefer to keep costs under control and focus on
projects with positive prospects. 

Between the reporting date (30 June 2016) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 6,219 thousand euros. 



People

Staff and personnel expenses

In the first half of 2016, Nordecon Group (the parent and the subsidiaries)
employed, on average, 670 people including 365 engineers and technical
personnel (ETP). Compared with the same period in 2015, the number of workers
decreased by around 3% due to shrinkage in the portfolio of self-performed
projects while the number of engineers and technical personnel grew slightly. 

Average number of the Group’s employees (at the parent and the subsidiaries)

               First half 2016  First half 2015  First half 2014  Full year 2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ETP                        365              351              353             356
Workers                    305              342              388             334
Total average              670              693              741             690

Our personnel expenses for the first half of 2016 including all taxes totalled
9,361 thousand euros (first half 2015: 8,329 thousand euros), a roughly 16%
increase year over year. The growth in personnel expenses is attributable to
the Group’s expansion to the Swedish market, selective pay-rises and projects’
performance bonuses. 

The service fees of the members of the council of Nordecon AS for the first
half of 2016 amounted to 69 thousand euros and associated social security
charges totalled 23 thousand euros (first half 2015: 71 thousand euros and 23
thousand euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 178
thousand euros and associated social security charges totalled 59 thousand
euros (first half 2015: 171 thousand euros and 56 thousand euros respectively). 

Labour productivity and labour cost efficiency

We measure the efficiency of our operating activities using the following
productivity and efficiency indicators, which are based on the number of
employees and personnel expenses incurred: 

                                  First half  First half  First half   Full year
                                        2016        2015        2014        2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity            222.9       225.8       224.1       210.9
 (rolling), (EUR ’000)                                                          
Change against the comparative         -1.3%        0.7%       -0.2%       -4.3%
 period                                                                         
                                                                                
Nominal labour cost efficiency           7.8         8.4         7.9         8.0
 (rolling), (EUR)                                                               
Change against the comparative         -6.8%        5.8%      -16.0%       -0.6%
 period                                                                         

Nominal labour productivity (rolling) = (past four quarters’ revenue) / (past   
 four quarters’ average number of employees)                                    
Nominal labour cost efficiency (rolling) = (past four quarters’ revenue) / (past
 four quarters’ personnel expenses)                                             
--------------------------------------------------------------------------------

Nominal labour productivity declined compared with the same period last year
due to growth in personnel expenses (see the chapter Staff and personnel
expenses). 



Description of the main risks

Business risks

The main factors which affect the Group’s business volumes and profit margins
are competition in the construction market and changes in the demand for
construction services. 

Competition continues to be stiff in all segments of the construction market
and in 2016 public investment is not likely to grow markedly. Thus, builders’
bid prices are under strong competitive pressure while the prices of
construction inputs in the aggregate have not decreased noticeably. Even though
unhealthily aggressive competition in building construction has started to
recede thanks to growth in the volume of projects put out to tender, the slump
in infrastructure construction is fuelling fierce competition for the limited
number of contracts available. Bidders increasingly include not only well-known
general contractors but also former subcontractors, a trend attributable to the
state and local governments’ policy to lower the qualification requirements of
public procurement tenders. We acknowledge the risks inherent in the
performance of contracts concluded in an environment of stiff competition.
Securing a long-term construction contract at an unreasonably low price in a
situation where input prices cannot be lowered significantly and competition is
tough is risky because negative developments in the economy may quickly render
the contract onerous. Thus, in price-setting we currently prioritise a
reasonable balance of contract performance risks and tight cost control over
revenue growth. 

Demand for construction services continues to be strongly influenced by the
volume of public investment, which in turn depends on the co-financing received
from the EU structural funds. Total support allocated to Estonia during the
current EU budget period (2014-2020) amounts to 5.9 billion euros, exceeding
the figure of the previous financial framework, but the amounts earmarked for
construction work are substantially smaller. Moreover, the allocations are not
expected to have an impact on the construction sector before the second half of
2016. 

Despite the above factors, we see opportunities for achieving overall
year-on-year business growth in 2016: the rise in the Estonian building
construction segment is increasingly supported by positive developments in our
chosen foreign markets. Our action plan foresees using our resources (including
some of the labour released from the Infrastructure segment) to increase the
share of contracts secured from the private sector. According to its business
model, Nordecon operates in all segments of the construction market. Therefore,
we are somewhat better positioned than companies that operate in one narrow
(and in the current market situation particularly some infrastructure) segment. 

Our business is also influenced by seasonal changes in weather conditions,
which have the strongest impact on infrastructure construction where a lot of
work is done outdoors (road and port construction, earthwork, etc.). To
disperse the risk, we secure road maintenance contracts that generate
year-round business. Our strategy is to counteract the seasonality of
infrastructure operations with building construction that is less exposed to
seasonal fluctuations. Our long-term goal is to be flexible and keep our two
operating segments in relative balance (see also the chapter Performance by
business line). Where possible, our entities implement appropriate technical
solutions that allow working efficiently also in changeable weather conditions. 

Operational risks

To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
insurance contracts are used. In addition, as a rule, subcontractors are
required to secure performance of their obligations with a bank guarantee
provided to a Group company or the Group retains part of the amount due until
the contract has been completed. To remedy construction deficiencies which may
be detected during the warranty period, Group companies create warranty
provisions based on their historical experience. At 30 June 2016, the Group’s
warranty provisions (including current and non-current ones) totalled 1,122
thousand euros (30 June 2015: 1,036 thousand euros). 

In addition to managing the risks directly related to construction operations,
in recent years we have also sought to mitigate the risks inherent in
preliminary activities. In particular, we have focused on the bidding process,
i.e., compliance with the procurement terms and conditions, and budgeting. The
errors made in the planning stage are usually irreversible and, in a situation
where the price is contractually fixed, may result in a direct financial loss. 

Financial risks

Credit risk

During the period, we recognised credit losses of 424 thousand euros of which
15 thousand euros resulted from the write-down of trade receivables and 409
thousand euros from the write-down of other receivables (see also the chapter
Financial performance). In the comparative period, we did not incur any credit
losses. The overall credit risk exposure of receivables is low because the
solvency of all prospective customers is evaluated, the share of public sector
customers is large and customers’ settlement behaviour is consistently
monitored. The main indicator of the realisation of credit risk is settlement
default that exceeds 180 days along with no activity on the part of the debtor
that would confirm the intent to settle. 

Liquidity risk

The Group remains exposed to higher than usual liquidity risk.

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.05-fold (30 June 2015: 1.03-fold). The key factors which
influence the current ratio are the classification of the Group’s loans to its
Ukrainian associates as non-current assets and the banks’ general policy not to
refinance interest-bearing liabilities (particularly overdraft facilities) for
a period exceeding twelve months. 

Due to the strained political and economic situation in Ukraine, we believe
that the Group’s investment properties in that country cannot be realised
within a short term. Accordingly, as at the reporting date the Group’s loans to
its Ukrainian associates of 8,498 thousand euros are classified as non-current
assets. 

Interest-bearing liabilities make up a significant share of our current
liabilities. Under IFRS EU, loan commitments have to be classified into current
and non-current based on contract terms in force at the reporting date. At 30
June 2016, short-term loan liabilities of 17,786 thousand euros included a
significant amount of overdraft facilities (11,784 thousand euros) which will
probably be refinanced after 12 months. 

At the reporting date, the Group’s cash and cash equivalents totalled 5,336
thousand euros (30 June 2015: 4,529 thousand euros). 

Interest rate risk

Our interest-bearing liabilities to banks have both fixed and floating interest
rates. Finance lease liabilities have mainly floating interest rates. The base
rate for most floating-rate contracts is EURIBOR. Compared with the same period
last year, interest-bearing liabilities declined by 5,179 thousand euros. Loan
and factoring liabilities decreased (by 6,882 thousand euros) while finance
lease liabilities increased (by 1,703 thousand euros). The growth in finance
lease liabilities is mainly attributable to the acquisition of a new asphalt
concrete plant. We use factoring to counteract the mismatch in the settlement
terms agreed with customers and subcontractors.  At 30 June 2016,
interest-bearing liabilities totalled 25,798 thousand euros (30 June 2015:
30,977 thousand euros). Interest expense for the first half of 2016 amounted to
314 thousand euros (first half 2015: 342 thousand euros). 

The main source of interest rate risk is a possible rise in the variable
component of floating interest rates (EURIBOR, EONIA or the creditor’s own base
rate). In the light of the Group’s relatively heavy loan burden this would
cause a significant rise in interest expense, which would have an adverse
impact on profit. We mitigate the risk by pursuing a policy of entering, where
possible, into fixed-rate contracts when the market interest rates are low. As
regards loan products offered by banks, observance of the policy has proved
difficult and most new contracts have a floating interest rate. We have entered
into a derivative contract to hedge the risks resulting from changes in the
interest rates of the finance lease contract underlying the acquisition of the
new asphalt concrete plant. 

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in
the currency of the host country, i.e., in euros (EUR), Ukrainian hryvnias
(UAH), and Swedish kronas (SEK). 

The hryvnia has been weakening because the political and economic environment
in Ukraine continues to be strained due to the conflict between Ukraine and
Russia which broke out at the beginning of 2014 and at the beginning of 2015
the National Bank of Ukraine decided to discontinue determination of the
national currency’s indicative exchange rate. In the first six months of 2016,
the hryvnia weakened against the euro by around 5%. For our Ukrainian
subsidiaries, this meant additional foreign exchange losses on the translation
of their euro-denominated loans into the local currency. Relevant exchange
losses totalled 115 thousand euros (first half 2015: 316 thousand euros). 

Exchange gains and losses on financial instruments are recognised in Finance
income and Finance costs respectively. Translation of receivables and
liabilities from operating activities did not give rise to any exchange gains
or losses. 

The reciprocal receivables and liabilities of our Ukrainian and non-Ukrainian
entities which are connected with the construction business and denominated in
hryvnias do not give rise to exchange losses. Nor do the loans provided to the
Ukrainian associates in euros give rise to exchange losses that ought to be
recognised in the Group’s accounts. 

Due to movements in the Swedish krona/euro exchange rate, translation of
operating receivables and payables resulted in an exchange loss of 13 thousand
euros for the period (first half 2015: nil thousand euros). The exchange loss
has been recognised in Other operating expenses. 

We do not use derivatives to hedge our currency risk.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2016, public investments will not grow significantly and the extent to
     which they can be realised is still unclear. Although in the 2014-2020 EU
     budget period the support allocated to Estonia will increase to 5.9 billion
     euros (2007-2013: 4.6 billion euros), the portion that will influence the
     construction market will not increase. Instead, compared with the previous
     period, there will be a rise in allocations to intangible areas.
  -- Investments made by the largest public sector customers (e.g., state-owned
     real estate company Riigi Kinnisvara AS and National Road Administration)
     that reach signature of a construction contract in 2016 will not increase
     substantially. Even though the Ministry of Defence has been a positive
     exception for builders by carrying out procurements which have made a
     significant contribution to market revival, the Estonian construction
     market (particularly infrastructure construction segments) will remain in
     relative stagnation. The situation is mitigated by the positive level of
     private investments in building construction.
  -- The long and painful process of construction market consolidation will
     continue, albeit slowly. In particular, this applies to general contracting
     in building construction where the number of medium-sized construction
     service intermediaries (annual turnover of around 15-40 million euros) is
     too large. Based on recent years’ experience it is likely that stiff
     competition and insufficient demand will cause some intermediaries to go
     slowly out of business or shrink in size rather than merge or exit the
     market. According to our assessment, in recent years the process has
     decelerated due to customers’ (particularly public sector customers’)
     increasing desire to apply less stringent tendering requirements to
     increase competition and lower the price even though this increases their
     own risks related to security, quality, adherence to deadlines, and the
     builder’s liability.
  -- Competition is tough in all segments of the construction market,
     intensifying in line with market developments. The rise in the average
     number of bidders for a contract reflects this. However, the gap between
     the lowest bids made by winners and the average ones is narrowing, which
     shows that the quality of procurement documents is gradually improving and
     bid prices are evening up. It is clear that in the current market situation
     the prices of construction inputs are not going to decrease noticeably and
     in order to succeed companies need to be efficient. Regrettably, the number
     of materials producers, suppliers, and subcontractors that are trying to
     survive or succeed in a difficult environment by dishonest means, e.g., by
     supplying goods with concealed defects or considerably lower quality than
     the one recorded in the product certificate, has been increasing quite
     rapidly. If the trend continues, both construction service providers and
     end-customers will have to apply strict and substantive quality control
     measures to make sure that the outcome meets their expectations. Unfair
     competition is putting visible pressure on prices and the quality of the
     construction service. Unfortunately, the problem is underpinned by the
     customers’ (including state institutions’ and state-owned companies’)
     increasing tendency to lower the bidders’ qualification requirements and
     prioritise quality more on paper than in practice.
  -- In new housing development, the success of a project depends on the
     developer’s ability to control the input prices included in the business
     plan and, thus, set sales prices that are affordable for prospective
     buyers. The prices of new apartments are relatively high compared to the
     standard of living and the banks’ lending terms are strict. This has held
     back rapid growth of the housing market but since the second half of 2015
     the supply of new housing has grown significantly, slowing down the sale of
     apartments with relatively high sales prices. Similarly to previous
     periods, successful projects include those that create or fill a niche. In
     Tallinn and Tartu, the picture is encouraging but in the rest of the
     country activity is still relatively sluggish.
  -- There is a growing contrast between the stringent terms of public
     contracts, which require the builder to agree to extensive obligations,
     strict sanctions, various financial guarantees, long settlement terms,
     etc., and the modest tendering requirements. Lenient qualification
     requirements and the precondition of making a low bid have made it easier
     for an increasing number of builders to win a contract but have heightened
     the contract performance risks taken by customers in terms of funding,
     deadlines and quality.
  -- The prices of construction inputs will remain relatively stable but growth
     in housing development has made it unlikely that the prices charged by
     local subcontractors, particularly in building construction, will decline.
     Certainly there are areas where major changes in the environment may
     trigger more abrupt price movements. The rise in housing construction has
     lengthened the supply periods of various essential materials and services,
     making it impossible to carry out all processes in the former optimistic
     timeframes. As a result, activities require more extensive planning or need
     to be postponed.
  -- Persisting shortage of skilled labour (including project and site managers)
     may start restricting companies’ performance capacities, having an impact
     on different aspects of the construction process including quality. Labour
     migration to the Nordic countries will remain steady and the number of job
     seekers who return to the Estonian construction market is not likely to
     increase considerably. All of the above will sustain pressure for a wage
     increase, particularly in the case of younger and less experienced
     workforce whose mobility and willingness to change jobs is naturally
     higher.

Ukraine

In Ukraine, we provide general contracting and project management services to
private sector customers in the segment of building construction. Political and
economic instability continues to restrict the adoption of business decisions
but construction activity in Kiev and the surrounding area has not halted. In
2016, we will continue our operations in the Kiev region and our current
Ukrainian order book is larger than a year ago. Despite the armed conflict in
eastern Ukraine, for Nordecon the market situation in Kiev has not deteriorated
compared with a year or two ago. Hard times have reduced the number of
inefficient local (construction) companies and when the economy normalises we
will have considerably better prospects for increasing our operations and
profitability. We assess the situation in the Ukrainian construction market
regularly and critically and are ready to restructure our operations as and
when necessary. Should the crisis spread to Kiev (which at the date of release
of this report is highly unlikely), we can suspend our operations immediately.
We continue to seek opportunities for exiting our two real estate projects that
have been put on hold or signing a construction contract with a prospective new
owner. 

Finland

In Finland, we have provided mainly subcontracting services in the concrete
segment but based on experience gained have started preparations for expanding
into the general contracting market. The local concrete work market allows
competing for projects where the customer wishes to source all concrete works
from one reliable partner. Still, our policy is to maintain a rational approach
and avoid taking excessive risks. 

Sweden

In July 2015, Nordecon Group acquired a 100% stake in SWENCN AB, a company
registered in the Kingdom of Sweden, and expanded to the Swedish market where
we intend to offer mainly construction of residential and non-residential
buildings, particularly in central Sweden. In October 2015, we signed the first
contract on the construction of a five-floor apartment building in Stockholm.
The cost of the work amounts to around 8.4 million euros. We will sustain
efforts aimed at increasing our operations in Sweden and are currently
moderately optimistic about the developments. Interesting tenders have been
announced and at the end of the holiday season we hope to increase our contract
portfolio. 

Latvia and Lithuania

It is not likely that we will enter the Latvian or the Lithuanian construction
market in the next few years. 

However, we do not rule out the possibility of carrying out certain projects in
Latvia through our Estonian entities, with the involvement of partners where
necessary. Undertaking a project assumes that it can be performed profitably. 

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba
UAB, for the time being and are monitoring developments in the Lithuanian
construction market. Temporary suspension of operations does not cause any
major costs for us and does not change our interest to do business in the
Lithuanian construction market on a project basis through a subsidiary
operating in the local market. 





Nordecon is a group of construction companies whose core business is
construction project management and general contracting in the buildings and
infrastructures segment. Geographically the Group operates in Estonia, Ukraine,
Finland and Sweden. The parent of the Group is Nordecon AS, a company
registered and located in Tallinn, Estonia. In addition to the parent company,
there are more than 10 subsidiaries in the Group. The consolidated revenue of
the Group in 2015 was 145.5 million euros. Currently Nordecon Group employs
close to 700 people. Since 18 May 2006 the company's shares have been quoted in
the main list of the NASDAQ OMX Tallinn Stock Exchange. 




         Andri Hõbemägi
         Nordecon AS
         Head of Investor Relations
         Tel: +372 6272 022
         Email: [email protected]
         www.nordecon.com