Market announcement

Title

2016 9 months and III quarter consolidated unaudited interim report

Message

Tallinn, Estonia, 2016-11-03 07:00 CET (GLOBE NEWSWIRE) --




COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

In Q3 2016 Merko Ehitus posted revenue of EUR 67.8 million, remaining on par
with the same quarter in 2015. As of the nine-month mark, revenue has been held
back by the slower than planned launch of large-scale projects. In the 9 months
of 2016, the company sold close to 270 apartments and launched the construction
of 280 new apartments. Real estate development continues to make a quarter of
the group’s revenue. 

The group’s management considers it positive that in spite of the slump on the
Baltic states' construction market Merko was able to keep Q3 revenue at last
year’s levels. Yet the results for the nine months are clearly below
management’s expectations, above all because of the fact that the potential of
our fairly strong secured order book has not been fully realised. The delays in
the preparation for construction of a number of large sites and obtaining
permits has kept from starting construction work at the desired pace and the
work will be postponed to next year. Sales revenue for apartment development in
2016 is also underperforming as the formalities for sales in two completed
apartment buildings are mired in delays in local government department. For
that reason, the delivery of the apartments already covered with preliminary
sales contracts and planned for Q4 sales will be delayed and the corresponding
part of the revenue will likely shift to next year and influence the results
for this year. 

The Baltic construction market is characterized by the continued relatively
active residential construction activity, extremely stiff price competition for
new commercial, manufacturing and public building contracts and the low number
of infrastructure projects among the procurements. Still, in the years ahead,
we expect various larger procurements in road construction, where we will be
participating in Estonia. Merko Ehitus group’s revenue has expectedly increased
this year on the Estonian market, and declined somewhat in Latvia and
Lithuania, where our secured order book was lower at the beginning of the year.
In Latvia, we have achieved a strong position among leading general contractors
and we are competitive at most major procurements. In Lithuania, we are
continuing our strategy of focusing our construction activity first and
foremost on foreign customers and our own apartment development projects where
we have made a number of investments in recent years. In Norway, our focus lies
on setting up a project management system with the aim of laying the groundwork
for concluding larger general contracting agreements in the coming years. The
group’s management confirms, that as a whole, we will stay on track with our
strategic plan. 

In Q3, the group posted revenue of EUR 67.8 million, net profit of EUR 2.9
million, profit before taxes of EUR 3.0 million and operating profit of EUR 3.0
million. In the first 9 months of 2016, the group posted revenue of EUR 173.4
million, net profit of EUR 4.7 million, profit before taxes of EUR 5.7 million
and operating profit of EUR 6.1 million. 

According to the group’s managements estimation, the Tallinn and Vilnius
apartment market continue to be in good shape, but the market in Riga has not
yet achieved the expected level of activity. As of the end of Q3, we have
invested EUR 39 million into new development projects, which meets our
long-term investment plan. This year, we have launched construction of 280 new
apartments, of which the biggest ones are Noblessner in Tallinn, the second
phase of Tartu mnt 52 and the Paepargi projects; and in Riga, the Skanstes
Parks development. In 9 months of 2016, the group sold 268 apartments for a
total price of EUR 31.7 million; in Q3, it sold 109 apartments with a total
price of EUR 14.3 million (both figures not including VAT). In 9 months of
2016, the group has launched construction of 284 apartments in the Baltics. 

In Q3 2016, the group companies entered into new construction contracts
amounting to EUR 31.5 million, including the Pärnu mnt 22 office building
design and construction in Tallinn and the residential complex of four
buildings in Jurmala. As at 30 September 2016, the group´s had a secured order
book balance of EUR 256.4 million. Major projects in progress for Merko in Q3
included, in Estonia, Maakri Kvartal, an office building at Mustamäe tee 3, the
Öpiku Maja building, the T1 shopping centre, Tallink Tennis Centre, the Bauhaus
store in Rocca al Mare and the tram line that will serve the airport, the
buildings and infrastructure at Viru Infantry Battalion’s technical base and
the Juuliku junction on Tallinn ring road. In Latvia, the largest projects in
progress were the second phase of the passenger terminal at Riga airport, which
was completed in late September, and the school complex in Pinki near Riga and
phase II of the passenger terminal at Riga Airport and construction on the
Magdal?nas nami apartment development project; in Lithuania, the Kauno/Algirdo
residential complex with office space and the Narbuto 5 office building were
ongoing. 



OVERVIEW OF THE 9 MONTHS AND III QUARTER RESULTS

PROFITABILITY

Net profit in 9M 2016 was EUR 4.7 million (9M 2015: EUR 5.6 million), having
decreased by 15.1% compared to the same period last year and net profit margin
decreased to 2.7% (9M 2015: 3.0%). Q3 net profit was EUR 2.9 million (Q3 2015:
EUR 3.1 million). Profit before tax in 9M 2016 was EUR 5.7 million (9M 2015:
EUR 7.0 million), which is equivalent to a profit before tax margin of 3.3% (9M
2015: 3.8%). Q3 profit before tax was EUR 3.0 million (Q3 2015: EUR 3.5
million). 

REVENUE

Revenue in 9M 2016 was EUR 173.4 million (9M 2015: EUR 184.6 million), which
has decreased by 6.1% compared to last year. Q3 revenue was EUR 67.8 million
(Q3 2015: EUR 68.4 million). The share of revenue earned outside Estonia has
decreased in 9M 2016 to 31% (9M 2015: 40%) and the share of revenue earned in
Estonia has accordingly increased to 69% (3M 2015: 60%). The number of
apartments (268 units) sold in 9 months of 2016 has increased by 8.1% and the
revenue from apartment sales (EUR 31.7 million) has decreased by 25.6% (9
months of 2015: 248 units, revenues of EUR 42.6 million). 

CASH POSITION

At the end of the reporting period, the group had EUR 20.8 million in cash and
cash equivalents and equity EUR 121.4 million (56.5% of total assets).
Comparable figures as at 30 September 2015 were accordingly EUR 19.9 million
and EUR 121.3 million (53.4% of total assets). As at 30 September 2016 the
group had net debt of EUR 11.1 million (30 September 2015: EUR 10.0 million). 

SECURED ORDER BOOK

As at 30 September 2016, the group’s secured order book had grown to EUR 256.4
million (30 September 2015: EUR 193.6 million). In 9M 2016, group companies
signed new contracts in the amount of EUR 140.5 million (9M 2015: EUR 152.2
million). Q3 2016 new contracts signed in amount of EUR 31.5 million (Q3 2015:
EUR 30.9 million). 

                                9M     9M  Varianc    Q3    Q3  Varianc      12M
                              2016   2015        e  2016  2015        e     2015
--------------------------------------------------------------------------------
Revenue           million    173.4  184.6    -6.1%  67.8  68.4    -0.8%    251.0
                   EUR                                                          
--------------------------------------------------------------------------------
EBITDA            million      8.4    9.9   -15.3%   3.9   4.4   -12.2%     15.5
                   EUR                                                          
--------------------------------------------------------------------------------
EBITDA margin     %            4.9    5.4    -9.9%   5.7   6.4   -11.5%      6.2
--------------------------------------------------------------------------------
EBIT              %            6.1    7.6   -20.4%   3.0   3.7   -18.5%     12.5
--------------------------------------------------------------------------------
EBIT margin       %            3.5    4.1   -15.3%   4.4   5.4   -17.8%      5.0
--------------------------------------------------------------------------------
Profit before     million      5.7    7.0   -18.7%   3.0   3.5   -14.0%     11.7
 tax               EUR                                                          
--------------------------------------------------------------------------------
PBT margin        %            3.3    3.8   -13.5%   4.4   5.1   -13.3%      4.7
--------------------------------------------------------------------------------
Net profit        million      4.7    5.6   -15.1%   2.9   3.1    -7.9%     10.0
 (parent)          EUR                                                          
--------------------------------------------------------------------------------
Net profit        %            2.7    3.0    -9.7%   4.3   4.6    -7.1%      4.0
 margin                                                                         
--------------------------------------------------------------------------------
EPS               EUR         0.27   0.31   -15.1%  0.16  0.18    -7.9%     0.56
--------------------------------------------------------------------------------



                                    30.09.2016  30.09.2015  Variance  31.12.2015
--------------------------------------------------------------------------------
ROE (on yearly basis)  %                   7.5         8.3    -10.3%         8.0
--------------------------------------------------------------------------------
Equity ratio           %                  56.5        53.4     +5.8%        59.5
--------------------------------------------------------------------------------
Secured order book     million EUR       256.4       193.6    +32.5%       246.9
--------------------------------------------------------------------------------
Total assets           million EUR       214.8       227.0     -5.4%       211.1
--------------------------------------------------------------------------------
Number of employees    people              816         798     +2.3%         791
--------------------------------------------------------------------------------



OPERATING RESULTS

Revenue and operating profit

Merko Ehitus group generated a total of EUR 173.4 million in revenue in 9
months of 2016 (9 months of 2015: EUR 184.6 million). 50.9% of the revenue was
generated in Estonian construction service, 23.2% in other home markets
construction service and 25.9% in and real estate development segment (9 months
of 2015: 43.4% in Estonian construction service, 31.9% in other home markets
construction service and 24.7% in real estate development segment). Compared to
the 9 months of 2015 the group revenue has decreased by 6.1%, which is mainly
due to a somewhat slower than expected launch of several large-scale projects
in the first half of the year. This is above all due to circumstances on the
customer side as the design work and obtaining related approvals has kept
construction from being launched at the expected rate in a number of projects
across the Baltics. Another factor is the generally lower number of large-scale
projects with respect to the comparison period. Compared to the 9 months of the
previous year in the 9 months of 2016 the share of other home markets
construction service revenue in the group’s revenue has decreased from 31.9% to
23.2% and the share of Estonian construction service has increased from 43.4%
to 50.9%. Revenue in Q3 2016 was EUR 67.8 million, in spite of the continuing
general downtrend in the Baltic construction market, which on the same level
compared to the previous year (Q3 2015: EUR 68.4 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, which has helped to compensate for the lower
sales revenue from apartment sales in the first half of 2016. At the same time,
revenue is down in the other home markets 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 sales revenue earned in
Norway is a new component in the group’s turnover this year. 

In 9 months of 2016 the group’s operating profit from development and
construction activities totalled EUR 6.1 million (9 months of 2015: EUR 7.6
million) and in Q3 2016 EUR 3.0 million (Q3 2015: EUR 3.7 million). The 9
months operating profit margin (3.5%) has decreased by 0.6 pp compared to the
same period last year (9 months of 2015: 4.1%). The group’s aim is to preserve
the profitability both in the Estonian but also other home markets 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. 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. Operating 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 level of operating profit
compared to that of last year was additionally influenced by higher marketing,
general and administrative expenses, mainly due to the additional activity in
Norway, where the group is investing into capability to build a project
management system in order to solidify prospects of concluding larger general
contracting agreements in the years ahead. 

The scarcity of projects and the ever-tightening competition in the
construction sector poses a great challenge in the maintaining of the current
level of operating profit in all segments. The number of companies
participating in tenders and the risk of low pricing bids is high in all three
Baltic states. 

Profit before tax and net profit

In 9 months of 2016, the group’s profit before tax totalled EUR 5.7 million (9
months of 2015: EUR 7.0 million) and net profit attributable to equity holders
of the parent was EUR 4.7 million (9 months of 2015: EUR 5.6 million). Group’s
profit before tax margin was 3.3% (9 months of 2015: 3.8%) and the net profit
margin was 2.7% (9 months of 2015: 3.0%). Both the group’s profit before tax
(EUR 5.7 million) and the profit before tax margin (3.3%) have decreased
compared to the same period last year (9 months of 2015: EUR 7.0 million and
3.8%, respectively). 

In Q3 of 2016, the group’s pre-tax profit totalled EUR 3.0 million and net
profit was EUR 2.9 million as compared to the pre-tax profit of EUR 3.5 million
and net profit of EUR 2.9 million in Q3 of 2015. Similarly to the 9 months of
2016 group’s quarterly profit before tax (EUR 3.0 million) and the quarterly
profit before tax margin (4.4%) have decreased compared to the same period last
year (Q3 2015: EUR 3.5 million and 5.1%). 

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),
other home markets construction service (incl. construction services in Latvia,
Lithuania and 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 other home markets construction service (incl. construction
services in Latvia, Lithuania and 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 9 months of 2016, the revenue of the Estonian construction service
segment was EUR 88.2 million (9 months of 2015: EUR 80.0 million), having
increased by 10.2% from the same period last year. The 9 months revenue
includes revenue from Finnish projects in the amount of EUR 0.5 million (9
months of 2015: EUR 2.5 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 segment is primarily influenced by the fact that
several large-scale general construction projects launched in 2015. The
Estonian construction service segment revenues for 9 months 2016 were 50.9% of
the group’s revenue, forming the largest proportion in the group’s revenue,
having increased by 17.3% in the yearly comparison. 

In this segment, the group earned a gross profit of EUR 7.2 million for 9
months (9 months of 2015: EUR 7.7 million). In 9 months of 2016, the gross
margin of the Estonian construction service segment was 8.1%, which decreased
by 1.5 pp compared to the 9 months of 2015 (9.6%), mainly due to the scarcity
of projects in the field of civil engineering. We consider this as a good
result, in light of the close competition on the Estonian construction services
market, in a situation where new contracts have not been concluded in the
desired level at new procurements, especially at public procurements, and where
the construction market volumes have decreased. 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 with the aim for responding to further market changes. 

Our major projects in the third quarter in Tallinn included the design and
construction works of office building located at Mustamäe tee 3, Tallink Tennis
Centre, Öpik Office Building, BAUHAUS DIY store, Maakri Kvartal, Poordi st 1
residential and commercial building and T1 shopping centre. Additionally the
construction works of Büroomaailm sales office in Tartu, Viru Infantry
Battalion technology park buildings and facilities, Juuliku road junction and
road section at Tallinn roundabout and the road maintenance works done under
the service agreement with Tallinn had a significant impact. 

Other home markets construction service

The Other home markets construction service segment consists of general
construction work in Latvia, Lithuania and stating from the first quarter of
2016 also in Norway and provision of civil engineering services in Latvia. 

The revenue of the other home markets construction service segment amounted to
EUR 40.2 million in the 9 months of 2016 (9 months of 2015: EUR 58.9 million),
which is 31.8% less than in the 9 months of 2015. If the other home markets
construction service segment revenues of 9 months of 2015 formed 31.9% of the
group’s revenue, then during 9 months of the current year the segments revenues
have decreased to 23.2%. 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 Liepaja Concert Hall and Polipaks NT
manufacturing and logistics centre. 

The 9 month gross profit of the other home markets construction service segment
amounted to EUR 1.9 million (9 months of 2015: EUR 2.5 million) and the gross
profit margin was 4.7% (9 months of 2015: 4.3%), which increased by 8.2%
compared to the same period previous year. Merko’s strategic position in Latvia
is currently strong, as we are now among the leading general contractors there
and see opportunities for growing our business volumes. In Lithuania, we are
continuing on our strategic plan to focus first and foremost on external
customers who make up the predominant part of the group’s Lithuanian
construction contracts portfolio. In Norway, the group is performing
smaller-scale agreements, but we are actively working on building project
management capability and systems to conclude larger general contracting
agreements in the years ahead. The group’s continued focus is on increasing the
revenues outside Estonia. 

In the third quarter of 2016, the main ongoing projects included in the other
home markets construction service segment 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 268 apartments in 9 months of 2016 at the total value
of EUR 31.7 million (excl. VAT), compared to 248 apartments and EUR 42.6
million in 9 months of 2015. In Q3 of 2016 a total of 109 apartments were sold
at the total value of EUR 14.3 million (excl. VAT), (Q3 2015: 80 apartments and
EUR 10.9 million). In 9 months of 2016, the group has earned EUR 8.8 million of
revenue from the sale of immovable properties (9 months of 2015: EUR 2.1
million). Q3 2016 revenue from the sale of immovable properties was EUR 0.2
million (Q3 2015: EUR 1.9 million). Although in 9 months of 2016 real estate
development segment revenues are essentially on the same level compared to the
same period last year, then the revenues from apartment sales have decreased by
approximately 25%. The decline is primarily influenced by sales of apartments
in a more exclusive development in the reference period where the sales price
per apartment was higher than the apartments sold during 2016. In the 9 months
of 2016 the share of revenue from the real estate development segment formed as
anticipated 25.9% of the group’s total revenue (9 months of 2015: 24.7%),
having increased in a year by 5.0%. 

The 9-month gross profit of the real estate development segment amounted to EUR
4.9 million (9 months of 2015: EUR 5.1 million) and the gross profit margin was
11.0% (9 months of 2015: 11.1%), which decreased by 1.0% 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 9 months of 2016 was higher than in the reference period, but on
the other hand the sector’s gross profit of the first nine 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. 

In Q4 2016, the group will complete, and hand over to customers, apartments in
Tallinn, Riga and Vilnius. The formalities concerning sales of apartments with
preliminary agreements already in place depend to a significant degree on the
pace at which the apartments will be delivered in the last months of the year;
as a result, the process could extend into 2017. 

At the end of the period, group’s inventory comprised 311 apartments where a
preliminary agreement had been signed: 76 completed apartments (73 in Estonia
and 3 in Latvia) and 235 apartments under construction (141 in Estonia, 28 in
Latvia and 66 in Lithuania). The sale of these apartments had not yet been
finalised and delivered to customers, because the development site is still
under construction or the site was completed at the end of the reporting period
and the sales transactions have not all been finalised yet. 

As at 30 September 2016, the group had a total of 388 apartments for active
sale (as at 30 September 2015: 412 apartments), for which there are no pre-sale
agreements and of which 56 have been completed (31 in Estonia, 12 in Latvia, 9
in Lithuania and 4 in Finland) and 332 are under construction (190 in Estonia,
110 in Latvia and 32 in Lithuania). The slight decrease in the number of
apartments on active sale as at 30 September 2016, compared to 30 September
2015 is mainly due to the lower volume of projects launched in the summer of
the current year. 

In 9 months of 2016, we launched the construction of a total of 284 new
apartments in the Baltic states (9 months of 2015: 386 apartments). After the
balance sheet date, we have also launched in Estonia the construction of the
third high-rise building with 60 apartments in the Paepargi apartment
development at Paepargi 53. In the 9 months of this year, the group has
invested a total of EUR 39.1 million (9 months of 2015: EUR 30.1 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 in 2016, the
group plans to launch the construction of approximately 450 new apartments in
the Baltic states. This goal is about 100 units less than the level planned in
early 2016 (500-550 new apartments) and mainly due to the delay in receiving
building permits for projects. In 2015, construction was started on 574
apartments. The investment level in 2016 is similar to the level planned at the
start of the year: 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 September 2016, the group's inventories included land plots
with the development potential, where the construction works have not started,
of EUR 50.5 million (30.09.2015: EUR 59.4 million; 31.12.2015: EUR 58.0
million). 

In the 9 months of 2016, the group has not purchased any new land plots for
real estate development purposes (9 months of 2015: acquired different new land
plots in Tallinn, Estonia at an acquisition cost of EUR 6.6 million and in
Vilnius, Lithuania at an acquisition cost of EUR 5.1 million). After the
balance sheet date, the group has acquired the Pakraš?io 20 immovable property
in Vilnius, Lithuania at an approximate acquisition cost of EUR 2 million.
Nearly 200 apartments will be developed there in the years ahead. 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 first apartment
building in the development project, Staapli 4, is now under construction and
will be completed by the end of 2017. 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). A total of eleven 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 September 2016, the group’s secured order book (without own
developments) amounted to EUR 256.4 million as compared to EUR 193.6 million as
at 30 September 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 9 months of 2016, EUR 140.5 million worth of new contracts were signed
(without own developments) as compared to EUR 152.2 million in same period last
year. The value of new contracts signed (without own developments) in the third
quarter of 2016 amounted to EUR 31.5 million (Q3 2015: EUR 30.9 million). 

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

  -- On 19 October 2016, SIA Merks – a subsidiary of AS Merko Ehitus – signed a
     contract with SIA C?su 9 to perform the construction works of a residential
     apartment building located at C?su st 9, Riga, Latvia. The value of the
     contract is approximately EUR 5 million. The works are scheduled for
     completion by December of 2017.
  -- On 26 October 2016, AS Merko Ehitus group company UAB Merko Statyba and UAB
     Philip Morris Lietuva entered into a contract to perform the reconstruction
     and extension construction works of Klaipeda plant, located at Vilnius
     highway 16, Klaipeda. The contract value is approximately EUR 11 million.
     The works are scheduled for completion by January of 2018.
  -- On 31 October 2016, Tallinna Teede AS – subsidiary of AS Merko Ehitus
     Eesti, part of AS Merko Ehitus group – and Ministry of Defence entered into
     a contract to perform construction works of barracks in military campus
     depot in Tapa, Lääne-Virumaa, Estonia. The contract value is more than EUR
     7 million. The works are scheduled for completion by October of 2017

On 15 September 2016, UAB Merko Bustas, part of AS Merko Ehitus group, entered
into a preliminary sales-purchase agreement with UAB Hekon, subsidiary of Orbis
S.A., to sell upon completion the “ibis” hotel building and parking premises to
be built. UAB Merko Bustas will perform through UAB Merko Statyba the design
and construction works of a hotel on the land plot owned by UAB Merko Bustas
located at Ceikiniu street 3, Vilnius. According to the contract the total
sales price for the “ibis” hotel building and land shall not exceed EUR 8.5
million euros plus value added tax. As this is Merko’s own development project,
this contract is not recognized in the group’s secured order book. The sales
revenue and profit from the contract will become realised in the real estate
development segment pursuant to signing of the final sales-purchase agreement,
which according to the contract will occur at the latest in Summer of 2018. 

Of the contracts signed in the 9 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% (30.09.2015:
approximately 80%; 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 9 months of
2016 has been very modest. The group continues to focus on comprehensive design
and construction contracts. In this regard, five important contracts were
signed in the 9 months of 2016 (incl. one in Q3 2016). 

The portfolio of contracts stands relatively strong compared to the same period
of the last few years (30.09.2015: EUR 193.6 million; 30.09.2014: EUR 166.4
million). Yet aside from individual larger-scale agreements in Estonia, the
secured order book balance is not satisfactory. This is particularly the case
in regard to public procurements in Estonia and award of new contracts in
Latvia and Lithuania. In both of the latter two countries, new contract volumes
fell short of expectations in connection with the low volume of orders on the
market in 2016. Considering the beginning phase of the current EU funding
period, the volume of public procurements has stayed at the previous year’s
level and at the moment we predict that the volume of public procurements will
start to increase in 2017. 

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 September 2016 the group had cash equivalents in the amount of EUR
20.8 million (30.09.2015: EUR 19.9 million; 31.12.2015: EUR 39.9 million). The
group's cash level is higher compared to the same period last year; still, the
financial position is continually strong, as the group has not utilised its
credit lines of existing overdrafts and loan agreements. 

The 9-month cash flow from operating activity was negative at EUR 11.1 million
(9 months of 2015: negative EUR 16.1 million), cash flow from investing
activity was at EUR 0.0 million (9 months of 2015: negative EUR 0.1 million)
and the cash flow from financing activity was negative at EUR 8.0 million (9
months of 2015: negative EUR 15.5 million). 

The cash flow from operating activity was mostly influenced by the EBITDA
(operating profit adjusted with depreciation and amortisation) EUR 8.4 million
(9 months of 2015: EUR 9.9 million), by the negative change in receivables and
liabilities related to construction contracts recognised under the stage of
completion method EUR 2.4 million (9 months of 2015: positive change of EUR 7.0
million), by the negative change in the provisions EUR 2.7 million (9 months of
2015: negative change of EUR 3.7 million), by the negative change in trade and
other receivables related to operating activities EUR 12.0 million, incl. a
positive change in financing co-financed projects of EUR 0.2 million (9 months
of 2015: negative change of EUR 12.6 million, incl. a negative change in
financing co-financed projects of EUR 3.6 million), by the negative change in
inventory EUR 5.3 million, incl. positive cash flow from sale of immovable
properties in the amount of EUR 8.5 million (9 months of 2015: positive change
of EUR 1.9 million, incl. negative cash flow from purchase of new land plots in
the amount of EUR 11.7 million and positive cash flow from sale of immovable
properties in the amount of EUR 1.8 million), by the positive change in trade
and other payables related to operating activities EUR 5.5 million (9 months of
2015: negative change of EUR 16.1 million, incl. significant negative outflow
from the realization of an option agreement in the amount of EUR 4.0 million
but also from the advances for real estate development projects), interest
received EUR 1.1 million (9 months of 2015: EUR 1.1 million) and by the
corporate income tax paid EUR 1.4 million (9 months of 2015: EUR 1.6 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 (14.8% as at
30.09.2016; 13.2% as at 30.09.2015; 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 1.9 million (9 months of
2015: EUR 0.5 million) and the positive cash flow from the sale of non-current
assets in the amount of EUR 0.6 million (9 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 9 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 (9 months of 2015: EUR 7.3 million). Project
specific loans obtained using investment property as collateral were repaid in
the amount of EUR 0.4 million (9 months of 2015: negative cash flow in the
amount of EUR 1.6 million). Net of loans received and loans repaid in
connection with development projects amounted to positive cash flow of EUR 2.8
million (9 months of 2015: net negative cash flow of EUR 4.9 million) and
finance lease principal repayments of EUR 0.6 million (9 months of 2015: EUR
1.6 million). In addition, over the first nine 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 Q3 2016 cash flow from operating activity was positive at EUR 2.2 million
(Q3 2015: positive EUR 0.8 million), cash flow from investing activity was at
EUR 0.0 million (Q3 2015: negative EUR 0.1 million) and the cash flow from
financing activity was negative at EUR 3.1 million (Q3 2015: negative EUR 5.2
million). 

The quarterly cash flows from operating activities were positive primarily as a
result of the change in trade and other receivables related to operating
activities in the amount of EUR 6.8 million. On the negative side the quarterly
cash flows was influenced by the increased investments into ongoing apartment
development projects in the amount of EUR 3.7 million. 

The third quarter cash flows from investment activities included a negative
cash flow from the purchase of non-current asset in the amount of EUR 0.2
million and a positive cash flow in the amount of EUR 0.2 million from the sale
of non-current assets, which were both mainly related to the renewal of
equipment in the road construction segment. 

The quarterly cash flow from financing activities was negative mainly due to
loans received and loans repaid in connection with financing the construction
costs of development projects in the net amount of EUR 2.7 million. 



Dividends and dividend policy

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

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

The annual general meeting of shareholders of AS Merko Ehitus held at 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)

                              9M      9M      9M      Q3      Q3      Q3     12M
                            2016    2015    2014    2016    2015    2014    2015
--------------------------------------------------------------------------------
Income statement                                                                
 summary                                                                        
--------------------------------------------------------------------------------
Revenue           millio   173.4   184.6   182.2    67.8    68.4    68.5   251.0
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit      millio    14.0    15.3    16.3     5.5     6.3     6.2    23.0
                   n EUR                                                        
--------------------------------------------------------------------------------
Gross profit         %       8.1     8.3     8.9     8.1     9.3     9.0     9.1
 margin                                                                         
--------------------------------------------------------------------------------
Operating profit  millio     6.1     7.6     8.5     3.0     3.7     3.5    12.5
                   n EUR                                                        
--------------------------------------------------------------------------------
Operating profit     %       3.5     4.1     4.7     4.4     5.4     5.1     5.0
 margin                                                                         
--------------------------------------------------------------------------------
Profit before     millio     5.7     7.0     8.0     3.0     3.5     3.3    11.7
 tax               n EUR                                                        
--------------------------------------------------------------------------------
PBT margin           %       3.3     3.8     4.4     4.4     5.1     4.8     4.7
--------------------------------------------------------------------------------
Net profit        millio     4.7     5.6     7.4     2.9     3.2     3.2     9.8
                   n EUR                                                        
--------------------------------------------------------------------------------
attributable to   millio     4.7     5.6     7.6     2.9     3.1     3.3    10.0
 equity holders    n EUR                                                        
 of the parent                                                                  
--------------------------------------------------------------------------------
attributable to   millio   (0.0)     0.0   (0.2)   (0.0)     0.1   (0.1)   (0.2)
 non-controlling   n EUR                                                        
 interest                                                                       
--------------------------------------------------------------------------------
Net profit           %       2.7     3.0     4.2     4.3     4.6     4.8     4.0
 margin                                                                         
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income                                                                    
 statement                                                                      
 indicators                                                                     
--------------------------------------------------------------------------------
EBITDA            millio     8.4     9.9    10.2     3.9     4.4     4.1    15.5
                   n EUR                                                        
--------------------------------------------------------------------------------
EBITDA margin        %       4.9     5.4     5.6     5.7     6.4     5.9     6.2
--------------------------------------------------------------------------------
General expense      %       5.5     4.8     4.9     4.4     4.4     4.5     4.8
 ratio                                                                          
--------------------------------------------------------------------------------
Labour cost          %      12.7    12.1    12.1    10.8    12.4    11.3    12.2
 ratio                                                                          
--------------------------------------------------------------------------------
Revenue per       thousa     220     239     230      86      89      87     322
 employee         nd EUR                                                        
--------------------------------------------------------------------------------



Other significant                 30.09.2016  30.09.2015  30.09.2014  31.12.2015
 indicators                                                                     
--------------------------------------------------------------------------------
Return on equity           %             7.5         8.3         8.3         8.0
--------------------------------------------------------------------------------
Return on assets           %             4.3         4.4         4.1         4.4
--------------------------------------------------------------------------------
Return on invested         %             7.2         8.3         7.1         7.9
 capital                                                                        
--------------------------------------------------------------------------------
Equity ratio               %            56.5        53.4        47.5        59.5
--------------------------------------------------------------------------------
Debt ratio                 %            14.8        13.2        15.7        14.8
--------------------------------------------------------------------------------
Current ratio            times           3.1         2.4         2.2         3.2
--------------------------------------------------------------------------------
Quick ratio              times           1.1         0.9         1.0         1.2
--------------------------------------------------------------------------------
Accounts receivable       days            33          43          61          39
 turnover                                                                       
--------------------------------------------------------------------------------
Accounts payable          days            36          40          38          39
 turnover                                                                       
--------------------------------------------------------------------------------
Average number of       people           787         771         792         779
 employees                                                                      
--------------------------------------------------------------------------------
Secured order book      million        256.4       193.6       166.4       246.9
                          EUR                                                   
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited

in thousand euros

                                  2016       2015      2016      2015       2015
                              9 months   9 months       III       III  12 months
                                                    quarter   quarter           
--------------------------------------------------------------------------------
Revenue                        173,377    184,564    67,814    68,360    251,012
--------------------------------------------------------------------------------
Cost of goods sold           (159,406)  (169,295)  (62,340)  (62,030)  (228,044)
--------------------------------------------------------------------------------
Gross profit                    13,971     15,269     5,474     6,330     22,968
--------------------------------------------------------------------------------
Marketing expenses             (2,377)    (2,347)     (708)     (826)    (3,230)
--------------------------------------------------------------------------------
General and administrative     (7,116)    (6,429)   (2,248)   (2,184)    (8,907)
 expenses                                                                       
--------------------------------------------------------------------------------
Other operating income           1,798      1,348       554       345      1,943
--------------------------------------------------------------------------------
Other operating expenses         (198)      (201)      (74)        12      (278)
--------------------------------------------------------------------------------
Operating profit                 6,078      7,640     2,998     3,677     12,496
--------------------------------------------------------------------------------
Finance income/costs             (361)      (605)      (20)     (213)      (804)
--------------------------------------------------------------------------------
incl. finance income/costs          66      (106)       112      (30)      (138)
 from joint ventures                                                            
--------------------------------------------------------------------------------
finance income/costs from            1          1         -         -          3
 other long-term                                                                
 investments                                                                    
--------------------------------------------------------------------------------
interest expense                 (438)      (575)     (139)     (209)      (756)
--------------------------------------------------------------------------------
foreign exchange gain              (7)        (1)         -       (3)        (3)
 (loss)                                                                         
--------------------------------------------------------------------------------
other financial income              17         76         7        29         90
 (expenses)                                                                     
--------------------------------------------------------------------------------
Profit before tax                5,717      7,035     2,978     3,464     11,692
--------------------------------------------------------------------------------
Corporate income tax           (1,034)    (1,471)      (92)     (265)    (1,857)
 expense                                                                        
--------------------------------------------------------------------------------
Net profit for financial         4,683      5,564     2,886     3,199      9,835
 year                                                                           
--------------------------------------------------------------------------------
incl. net profit                 4,714      5,555     2,891     3,138     10,000
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to        (31)          9       (5)        61      (165)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Other comprehensive income,                                                     
 which can subsequently be                                                      
 classified in the income                                                       
 statement                                                                      
--------------------------------------------------------------------------------
Currency translation                30          1        22         2          2
 differences of foreign                                                         
 entities                                                                       
--------------------------------------------------------------------------------
incl. net profit                    27          1        20         2          1
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to           3          -         2         -          -
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Comprehensive income for         4,713      5,565     2,908     3,201      9,837
 the period                                                                     
--------------------------------------------------------------------------------
incl. net profit                 4,741      5,556     2,911     3,140     10,002
 attributable to equity                                                         
 holders of the parent                                                          
--------------------------------------------------------------------------------
net profit attributable to        (28)          9       (3)        61      (165)
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Earnings per share for            0.27       0.31      0.16      0.18       0.56
 profit attributable to                                                         
 equity holders of the                                                          
 parent (basic and diluted,                                                     
 in EUR)                                                                        
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited

in thousand euros

                                              30.09.2016  30.09.2015  31.12.2015
--------------------------------------------------------------------------------
ASSETS                                                                          
--------------------------------------------------------------------------------
Current assets                                                                  
--------------------------------------------------------------------------------
Cash and cash equivalents                         20,782      19,936      39,905
--------------------------------------------------------------------------------
Short-term deposits                                    1           -           -
--------------------------------------------------------------------------------
Trade and other receivables                       42,337      52,669      24,854
--------------------------------------------------------------------------------
Prepaid corporate income tax                         467         296         421
--------------------------------------------------------------------------------
Inventories                                      114,528     118,138     109,090
--------------------------------------------------------------------------------
                                                 178,115     191,039     174,270
--------------------------------------------------------------------------------
Non-current assets                                                              
--------------------------------------------------------------------------------
Long-term financial assets                        17,132      15,272      16,703
--------------------------------------------------------------------------------
Deferred income tax assets                         1,423       1,580       1,423
--------------------------------------------------------------------------------
Investment property                                4,173       4,433       4,371
--------------------------------------------------------------------------------
Property, plant and equipment                     12,939      13,818      13,442
--------------------------------------------------------------------------------
Intangible assets                                    970         836         879
--------------------------------------------------------------------------------
                                                  36,637      35,939      36,818
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL ASSETS                                     214,752     226,978     211,088
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
LIABILITIES                                                                     
--------------------------------------------------------------------------------
Current liabilities                                                             
--------------------------------------------------------------------------------
Borrowings                                         2,697       7,856       5,525
--------------------------------------------------------------------------------
Payables and prepayments                          50,927      66,046      43,266
--------------------------------------------------------------------------------
Income tax liability                                 392         533         711
--------------------------------------------------------------------------------
Short-term provisions                              4,019       3,840       5,013
--------------------------------------------------------------------------------
                                                  58,035      78,275      54,515
--------------------------------------------------------------------------------
Non-current liabilities                                                         
--------------------------------------------------------------------------------
Long-term borrowings                              29,164      22,072      25,660
--------------------------------------------------------------------------------
Deferred income tax liability                      1,075         788         788
--------------------------------------------------------------------------------
Other long-term payables                           1,375       1,149       1,159
--------------------------------------------------------------------------------
                                                  31,614      24,009      27,607
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES                                 89,649     102,284      82,122
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
EQUITY                                                                          
--------------------------------------------------------------------------------
Non-controlling interests                          3,712       3,442       3,268
--------------------------------------------------------------------------------
Equity attributable to equity holders of the                                    
 parent                                                                         
--------------------------------------------------------------------------------
Share capital                                      7,929       7,929       7,929
--------------------------------------------------------------------------------
Statutory reserve capital                            793       1,200       1,200
--------------------------------------------------------------------------------
Currency translation differences                   (636)       (664)       (663)
--------------------------------------------------------------------------------
Retained earnings                                113,305     112,787     117,232
--------------------------------------------------------------------------------
                                                 121,391     121,252     125,698
--------------------------------------------------------------------------------
TOTAL EQUITY                                     125,103     124,694     128,966
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                     214,752     226,978     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.