Market announcement

Title

2016 fourth quarter and twelve months consolidated interim report (unaudited)

Message

This announcement includes Nordecon AS’s consolidated financial statements for
the fourth quarter and twelve months 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/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/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR’000                                       31 December 2016  31 December 2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                9,786             6,332
Trade and other receivables                             21,055            17,503
Prepayments                                              1,644             1,599
Inventories                                             22,992            23,603
Total current assets                                    55,477            49,037
Non-current assets                                                              
Investments in equity-accounted investees                1,640             1,179
Other investments                                           26                26
Trade and other receivables                             10,816            10,516
Investment property                                      4,929             4,929
Property plant and equipment                            11,111             9,623
Intangible assets                                       14,623            14,609
Total non-current assets                                43,145            40,882
TOTAL ASSETS                                            98,622            89,919
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Borrowings                                               6,297            15,715
Trade payables                                          28,905            22,538
Other payables                                           6,295             5,475
Deferred income                                          4,128             3,233
Provisions                                                 753               825
Total current liabilities                               46,378            47,786
Non-current liabilities                                                         
Borrowings                                              13,102             5,098
Trade payables                                              98               104
Other payables                                             117                96
Provisions                                                 881               768
Total non-current liabilities                           14,198             6,066
TOTAL LIABILITIES                                       60,576            53,852
                                                                                
EQUITY                                                                          
Share capital                                           19,720            20,692
Own (treasury) shares                                   -1,550            -1,582
Share premium                                              564               547
Statutory capital reserve                                2,554             2,554
Translation reserve                                      1,549             1,358
Retained earnings                                       13,091            10,970
Total equity attributable to owners of the              35,928            34,539
 parent                                                                         
Non-controlling interests                                2,118             1,528
TOTAL EQUITY                                            38,046            36,067
TOTAL LIABILITIES AND EQUITY                            98,622            89,919



Condensed consolidated interim statement of comprehensive income

EUR’000                                     Q4 2016  Q4 2015      2016      2015
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                      49,759   31,962   183,329   145,515
Cost of sales                               -47,371  -29,232  -172,350  -136,484
Gross profit                                  2,388    2,730    10,979     9,031
                                                                                
Marketing and distribution expenses            -134     -138      -413      -412
Administrative expenses                      -1,477   -1,608    -6,106    -5,026
Other operating income                          214      175       362       464
Other operating expenses                        -75      -41      -614      -124
Operating profit                                916    1,118     4,208     3,933
                                                                                
Finance income                                  127      164       463       655
Finance costs                                  -303   -3,418    -1,088    -4,383
Net finance costs                              -176   -3,254      -625    -3,728
                                                                                
Share of loss/profit of equity-accounted       -108       -8       609       226
 investees                                                                      
                                                                                
Profit/loss before income tax                   632   -2,144     4,192       431
Income tax expense                              -14        0      -259      -257
Profit/loss for the period                      618   -2,144     3,933       174
                                                                                
Other comprehensive income                                                      
Items that may be reclassified                                                  
 subsequently to profit or loss                                                 
Exchange differences on translating             -51      197       191       587
 foreign operations                                                             
Total other comprehensive expense/income        -51      197       191       587
TOTAL COMPREHENSIVE INCOME/EXPENSE              567   -1,947     4,124       761
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                          607   -2,315     3,044       179
- Non-controlling interests                      11      171       889        -5
Profit/loss for the period                      618   -2,144     3,933       174
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                          556   -2,118     3,235       766
- Non-controlling interests                      11      171       889        -5
Total comprehensive income/expense for the      567   -1,947     4,124       761
 period                                                                         
                                                                                
Earnings per share attributable to owners                                       
 of the parent:                                                                 
Basic earnings per share (EUR)                 0.02    -0.08      0.10      0.01
Diluted earnings per share (EUR)               0.02    -0.08      0.10      0.01



Condensed consolidated interim statement of cash flows

EUR’000                                                   2016      2015
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash flows from operating activities                                    
Cash receipts from customers1                          214,871   179,119
Cash paid to suppliers2                               -179,312  -151,004
VAT paid                                                -7,217    -5,407
Cash paid to and for employees                         -20,208   -19,921
Income tax paid                                           -197      -103
Net cash from operating activities                       7,937     2,684
                                                                        
Cash flows from investing activities                                    
Paid on acquisition of property, plant and equipment      -148      -480
Paid on acquisition of intangible assets                   -25       -21
Proceeds from sale of property, plant and                  160       337
equipment                                                               
Acquisition of a subsidiary                                -15        -8
Cash acquired on acquisition of a subsidiary                 0         9
Acquisition of an investment in an associate                 0      -355
Disposal of a subsidiary                                     6         0
Loans provided                                             -81      -291
Repayment of loans provided                                 55       124
Dividends received                                         153       108
Interest received                                            2       366
Net cash from/used in investing activities                 107      -220
                                                                        
Cash flows from financing activities                                    
Proceeds from loans received                             2,847     2,099
Repayment of loans received                             -2,262    -3,449
Finance lease principal paid                            -2,478    -1,726
Interest paid                                             -695      -767
Dividends paid                                          -1,068    -1,091
Reduction of share capital                                -923         0
Net cash used in financing activities                   -4,579    -4,934
                                                                        
Net cash flow                                            3,465    -2,470
                                                                        
Cash and cash equivalents at beginning of year           6,332     8,802
Effect of movements in foreign exchange rates              -11         0
Increase/decrease in cash and cash equivalents           3,465    -2,470
Cash and cash equivalents at end of year                 9,786     6,332


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 2016 with a gross profit of 10,979 thousand euros (2015:
9,031 thousand euros) and a gross margin of 6.0% (2015: 6.2%). Due to
increasingly stiffer competition, the Group’s gross margin decreased slightly
year on year. The margin weakened due to a sharp fall in the gross margin of
the Infrastructure segment which could not be offset by a rise in the gross
margin delivered by the Buildings segment. In 2016, the gross margin of the
Infrastructure segment was 3.6% and that of the Buildings segment 7.5%. The
respective figures for 2015 were 8.6% and 6.7%. Although we anticipated a
downtrend in the margins of the Infrastructure segment already in the middle of
the financial year, the result is far from satisfactory. The key reasons for
the margin decline are the facts that during the winter season there is a lack
of demand for the segment’s services (major earthworks, etc.) and that due to
its business logic the share of the segment’s fixed costs is large. Another
factor, which had an impact, was the wintry weather in November and December
which caused quite a large volume of work which originally should have been
completed in 2016 to be postponed to 2017. In response to continuously fierce
competition (and bleaker prospects) in the infrastructure market, we decided to
restructure our operations: at the end of 2016 and the beginning of 2017 we
merged Hiiu Teed OÜ, Järva Teed AS and Nordecon AS’s road maintenance and
machinery division to improve the Infrastructure segment’s operating efficiency
and the Group’s overall competitiveness. 

Administrative expenses for 2016 totalled 6,106 thousand euros. Compared with
the year before, administrative expenses grew (2015: 5,026 thousand euros) but
the ratio of administrative expenses to revenue was 3.3% (2015: 3.5%),
remaining below the target ceiling of 4% of revenue. The rise in administrative
expenses is mainly attributable to Nordecon’s expansion to the Swedish market 

Operating profit for the period was influenced by the write-down of other
receivables by 409 thousand euros (see note 12) due to the entry into force of
the final judgement on the Group’s dispute with Teede REV-2 AS over the
performance of the Koidula border crossing point contract in 2010 when our then
venture partner ceased to fulfil its obligations and we had to complete the
contract on our own. Although in essence the outcome of the litigation which
ended in June was positive for Nordecon, some of our claims were dismissed. We
ended the year with an operating profit of 4,208 thousand euros (2015: 3,933
thousand euros), which is an improvement on 2015 but below the strategic target
for the year. EBITDA for 2016 amounted to 6,017 thousand euros (2015: 5,769
thousand euros). 

Although in 2016 exchange losses recognised due to adverse movements in the
euro/Ukrainian hryvnia exchange rate were smaller than a year earlier, their
impact on our net profit was still noticeable. During the period, the Ukrainian
currency weakened by around 8%, 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 195 thousand
euros (2015: 574 thousand euros). The same movements in the exchange rate
increased the translation reserve in equity by 191 thousand euros (2015: 587 
thousand euros) and the net effect of the exchange differences on the Group’s
net assets was a loss of 4 thousand euros (2015: a gain of 13 thousand euros). 

Thus, the Group’s net profit amounted to 3,933 thousand euros (2015: 174
thousand euros), of which net profit attributable to owners of the parent,
Nordecon AS, was 3,044 thousand euros (2015: 179 thousand euros). 

Cash flows

In 2016, our operating activities generated a net cash inflow of 7,937 thousand
euros (2015:  an inflow of 2,684 thousand euros). The factors which have the
strongest impact on our operating cash flow are a mismatch between the
settlement terms agreed with customers and subcontractors and the fact that
neither public nor private sector customers are required to make advance
payments while we have to make prepayments to subcontractors, materials
suppliers, etc. We deal actively with equalising the settlement terms agreed
with customers and suppliers, mostly through factoring. In addition to
factoring accounts receivable, we have concluded a frame agreement for
factoring accounts payable, which also enables our subcontractors who do not
have sufficient credit standing to obtain a factoring limit from a financing
institution to use our factoring facility. 

Investing activities produced a net cash inflow of 107 thousand euros (2015: an
outflow of 220 thousand euros). The largest items were payments for property,
plant and equipment and intangible assets of 173 thousand euros (2015: 501
thousand euros) and proceeds from sale of property, plant and equipment of 160
thousand euros (2015: 337 thousand euros). Dividends received amounted to 153
thousand euros (2015: 108 thousand euros). 

Financing activities generated a net cash outflow of 4,579 thousand euros
(2015: an outflow of 4,934 thousand euros). Our financing cash flow is strongly
influenced by loan and lease transactions. Proceeds from loans received
amounted to 2,847 thousand euros, consisting of use of overdraft facilities and
development loans (2015: 2,099 thousand euros). Loan repayments totalled 2,262
thousand euros, consisting of scheduled repayments of long-term investment and
development loans (2015: 3,449 thousand euros). Investments in road
construction equipment and a new asphalt concrete plant increased finance lease
payments which totalled 2,478 thousand euros (2015: 1,726 thousand euros).
Dividends paid amounted to 1,068 thousand euros (2015: 1,091 thousand euros)
and in connection with the reduction of Nordecon AS’s share capital
shareholders were distributed a total of 923 thousand euros. 

At 31 December 2016, the Group’s cash and cash equivalents totalled 9,786
thousand euros (31 December 2015: 6,332 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                                        2016        2015        2014
--------------------------------------------------------------------------------
Revenue (EUR ’000)                               183,329     145,515     161,289
Revenue change                                     26.0%       -9.8%       -7.1%
Net profit (EUR ’000)                              3,933         174       2,298
Net profit attributable to owners of the           3,044         179       1,956
 parent (EUR ’000)                                                              
Weighted average number of shares             30,756,728  30,756,728  30,756,728
Earnings per share (EUR)                            0.10        0.01        0.06
                                                                                
Administrative expenses to revenue                  3.3%        3.5%        3.5%
                                                                                
EBITDA (EUR ’000)                                  6,017       5,769       5,585
EBITDA margin                                       3.3%        4.0%        3.5%
Gross margin                                        6.0%        6.2%        6.1%
Operating margin                                    2.3%        2.7%        2.5%
Operating margin excluding gain on asset            2.2%        2.4%        2.3%
 sales                                                                          
Net margin                                          2.1%        0.1%        1.4%
Return on invested capital                          8.5%        2.1%        5.8%
Return on equity                                   10.6%        0.5%        6.4%
Equity ratio                                       38.6%       40.1%       37.3%
Return on assets                                    4.2%        0.2%        2.3%
Gearing                                            16.7%       25.5%       24.8%
Current ratio                                       1.20        1.03        1.02
                                                                                
As at 31 December                                   2016        2015        2014
--------------------------------------------------------------------------------
Order book (EUR ’000)                            131,335     125,698      83,544
--------------------------------------------------------------------------------


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



Performance by geographical market

In 2016, Nordecon earned around 7% of its revenue outside Estonia compared with
4% the year before. The contribution of foreign markets has increased through
revenue generated in Sweden. The contribution of the Ukrainian market has
remained relatively stable. Finnish revenues resulted from concrete works in
the building construction segment. 

         2016  2015  2014
-------------------------
-------------------------
Estonia   93%   96%   94%
Sweden     4%    0%    0%
Ukraine    2%    3%    2%
Finland    1%    1%    4%

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 some of 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 the operating volumes of some sub-segments may fall
sharply. 

Nordecon’s revenue for 2016 amounted to 183,329 thousand euros, a roughly 26%
increase on the 145,515 thousand euros generated in 2015. The shrinkage of the
infrastructure construction market also affected our revenue structure. As
anticipated, the Buildings segment improved its revenue, posting growth of
around 43%, primarily thanks contracts secured in the apartment buildings and
the public buildings sub-segments. The revenue of the Infrastructure segment,
which was mostly earned in the road construction and maintenance sub-segment,
decreased by around 13% year on year.  The decline resulted from a lack of
large-scale road construction projects with a reasonable estimated profit
margin. In the comparative period, we had two major road construction projects
which 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). However, mostly thanks to a new asphalt
concrete plant acquired at the beginning of the year, we were able to more than
double our asphalt concrete sales. Revenue from the sale of asphalt concrete
grew to 2,062 thousand euros (2015: 899 thousand euros). 

In 2016, the Buildings segment and the Infrastructure segment generated revenue
of 134,555 thousand euros and 41,447 thousand euros respectively. The
corresponding figures for 2015 were 94,341 thousand euros and 47,628 thousand
euros (see note 8). Our order book has a similar structure: at the year-end 76%
of contracts secured but not yet performed was attributable to the Buildings
segment (2015: 72%). Nordecon’s revenue structure reflects quite fairly the
overall situation in the Estonian construction market. 

Operating segments*  2016  2015  2014
-------------------------------------
-------------------------------------
Buildings             73%   64%   65%
Infrastructure        27%   36%   35%

* 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 the year before, the revenue structure of the Buildings segment 
changed considerably. In 2016, the segment’s strongest revenue contributors
were the apartment buildings and the public buildings sub-segments. 

Most of our apartment building revenue results from general contracting. In
Estonia, a substantial share of our apartment building projects is located in
Tallinn. In 2016, the main revenue contributors were the three phases of the
Pikksilma homes in Kadriorg and the Meerhof 2.0 apartment complex at Pirita tee
20a. The contributions of foreign markets sustain growth. In Ukraine, we
continued to build the Lepse residential quarter in Kiev, which is close to
completion, and a residential quarter in the city of Brovary in the Kiev
region. In Sweden, we were building two apartment buildings in Stockholm. 

The contribution of our own development projects in Tartu and Tallinn (reported
in the apartment buildings sub-segment) continues to increase slowly but
surely. In 2016, our development projects generated revenue of 5,216 thousand
euros (2015: 4,216 thousand euros). We have completed 5 apartment buildings in
the first four development phases of our Tammelinn project in Tartu and sales
have been excellent. By the reporting date, only 2 completed apartments were
still for sale. At the beginning of 2017, we began building phase V which
comprises a four-floor apartment building with 24 apartments
(www.tammelinn.ee). By the year-end, we had also sold 16 of the 20 apartments
in the first three phases of our Magasini 29 development project in Tallinn, 5
of them in 2016 (www.magasini.ee). We continue to build the development’s fifth
and last terraced house. In September 2016, we began building two apartment
buildings with a total of 30 apartments in Hane street in Tallinn. 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 a relative price increase with due care. 

The key factor which influenced the performance of the public buildings
sub-segment was growth in the state’s investment in national defence. In 2016,
we completed the construction of the Piusa border guard station, a barracks at
the Tapa military base, and a building complex at the Ämari air base. In
addition, we delivered to the customer the new building of Järveküla school. We
continue the design and construction of the Lintsi warehouse complex and the
reconstruction of Ugala Theatre in Viljandi. 

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 2015. In 2016, we completed and delivered
on time the Veerenni office building and the retail and leisure complex
Arsenali Keskus in Tallinn. We continue to build the office and retail complex
Viimsi Äritare and renovate the machinery hall building of the historical
Luther furniture factory and have started to build an office building at Lõõtsa
12 in Ülemiste City. Based on our order book, we expect the commercial
buildings sub-segment to deliver certain revenue growth in 2017. 

Our industrial and warehouse facilities revenues grew year on year. Private
investment in industrial and warehouse buildings increased. During the period,
our largest projects were the construction of a warehouse for Riigiressursside
Keskus (the state resource centre) in Tallinn, a production facility for Vecta
Design in Pärnu, KEVILI South Terminal (a cereals storage and handling complex)
and an extension to the Smarten warehouse. We continue to build production and
warehouse facilities for Harmet at Kumna, near Tallinn. 

Revenue breakdown in Buildings segment  2016  2015  2014
--------------------------------------------------------
Apartment buildings                      34%   22%   18%
Public buildings                         30%   16%    7%
Industrial and warehouse facilities      20%   12%   33%
Commercial buildings                     16%   50%   42%

Similarly to previous years, in 2016 the main revenue source in the
Infrastructure segment was road construction where we had mostly medium-sized
and small projects. The largest road construction projects were the
reconstruction of the Meoma-Alatskivi and the Rannamõisa-Kloogaranna road
sections and the reconstruction of Majaka and Logi streets in Tallinn. Work on
the latter will continue in 2017.  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. We also provided the State Forest Management Centre with forest road
improvement services. We believe that road construction will remain the main
revenue source in the Infrastructure segment also in 2017 but it is unlikely
that the sub-segment’s revenue would grow substantially compared to 2016. 

The contracts secured by our environmental engineering and other engineering
(utility network construction) sub-segments are small and growth of the
sub-segments is unlikely. At present, there is no sign of any major hydraulic
engineering projects to be announced in the specialist engineering sub-segment
and demand for other complex engineering work also tends to be irregular. 

Revenue breakdown in Infrastructure segment               2016  2015  2014
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Road construction and maintenance                          86%   81%   72%
Other engineering                                           9%   14%   19%
Environmental engineering                                   5%    4%    7%
Specialist engineering (including hydraulic engineering)    0%    1%    2%



Order book

At 31 December 2016, the Group’s order book (backlog of contracts signed but
not yet performed) stood at 131,335 thousand euros, a 4% increase year on year.
Altogether, in 2016 the Group secured new contracts of 158,152 thousand euros. 

As at 31 December         2016     2015    2014
-----------------------------------------------
Order book (EUR ’000)  131,335  125,698  83,544

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 76% and 24% of the Group’s order book
respectively (31 December 2015: 72% and 28% respectively). 

Compared with 2015, the order book of the Buildings segment has grown by around
9%. The order book of the commercial buildings sub-segment has increased and
the order book of the industrial and warehouse facilities sub-segment has
decreased. The order books of the apartment buildings and the public buildings
sub-segments have remained stable. The order book is the largest in the
apartment buildings sub-segment where work secured but not yet performed
includes not only Estonian projects but also projects secured in Ukraine and
Sweden. We continue to build five apartment buildings in the city of Brovary in
the Kiev region in Ukraine and two apartment buildings in Sweden. In Tallinn we
continue to build the apartment buildings at Pirita tee 20a (phases I and II)
and Virbi 10 and in the fourth quarter we secured a contract for the
construction of phase I of an apartment complex at Sõjakooli 12. After some
decline, the order book of the commercial buildings sub-segment has started to
grow. During the year, we signed large-scale contracts for the construction of
Viimsi Äritare, the renovation of the machinery hall building of the historical
Luther furniture factory at Vana-Lõuna 39 and the construction of a commercial
building in the Rotermann quarter in Tallinn. In the fourth quarter, we signed
contracts for the construction of the Martens building in the centre of Pärnu
and an office building at Lõõtsa 12 in Ülemiste City in Tallinn. A large share
of the order book of the public buildings sub-segment is made up of the
construction of a depot, armoured vehicle infrastructure, a canteen and a
barracks at the Tapa military base and the reconstruction of Ugala Theatre in
Viljandi.  The largest project in the order book of the industrial and
warehouse facilities sub-segment is the construction of production and
warehouse facilities for Harmet. 

Compared with 2015, the order book of the Infrastructure segment has decreased
by 8%. 90% of the segment’s order book is made up of work secured by the road
construction and maintenance sub-segment whose order book has remained more or
less stable compared with the year before. A significant project in the road
construction portfolio is the contract signed for building a 2+1 road (a road
with passing lanes) on the Ääsmäe-Kohatu section of the Tallinn-Pärnu-Ikla road
which was secured in the fourth quarter. We continue to provide road
maintenance services in four road maintenance areas: Keila, Järva, Hiiu, and
Kose. According to our estimates, in 2017 the volume of public investments will
not increase substantially, compared with 2016. Thus, we expect that in 2017
the revenue of the Infrastructure segment will remain more or less at the same
level as in 2016 (for further information, see the Business risks section of
the chapter Description of the main risks). 

However, in the light of the size of our order book and developments in our
chosen markets, we are moderately optimistic about our business volumes in
2017. In an environment of stiff competition, we pursue the policy of avoiding
unjustified risks whose realisation in the contract performance phase would
probably 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 (31 December 2016) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 9,851 thousand euros. 



People

Staff and personnel expenses

In 2016, the Group (the parent and the subsidiaries) employed, on average, 684
people including 381 engineers and technical personnel (ETP). The number of ETP
has increased year on year in connection with growth in the Estonian operations
of the Buildings segment and the Group’s expansion to Sweden. The number of
workers has decreased due to shrinkage in the portfolio of self-performed work.
The overall level of staff has remained stable year on year. 

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

               2016  2015  2014
-------------------------------
-------------------------------
ETP             381   356   357
Workers         303   334   375
Total average   684   690   732

Our personnel expenses for 2016 including all taxes totalled 20,401 thousand
euros (2015: 18,248 thousand euros), a roughly 12% increase year on year. The
growth in personnel expenses is attributable to the Group’s expansion to the
Swedish market, selective pay-rises, and performance bonuses. 

The service fees of the members of the council of Nordecon AS for 2016 amounted
to 138 thousand euros and associated social security charges totalled 45
thousand euros (2015: 139 thousand euros and 46 thousand euros respectively).
The provision for the council members’ performance bonuses, made based on the
Group’s performance indicators, amounted to 47 thousand euros and associated
social security charges totalled 16 thousand euros (2015: 37 thousand euros and
12 thousand euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 350
thousand euros and associated social security charges totalled 116 thousand
euros (2015: 322 thousand euros and 106 thousand euros respectively). The
provision for the board members’ performance bonuses, made based on the Group’s
performance indicators, amounted to 243 thousand euros and associated social
security charges totalled 80 thousand euros (2015: 188 thousand euros and 62
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: 

                                                    2016   2015   2014
----------------------------------------------------------------------
----------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR ’000)  267.8  210.9  220.4
Change against the comparative period                27%  -4.3%  -4.0%
                                                                      
Nominal labour cost efficiency (rolling), (EUR)      9.0    8.0    8.0
Change against the comparative period              12.7%  -0.6%  -4.8%


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 and labour cost efficiency increased year on year,
mainly through revenue growth. 



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 2017 public investment is not likely to grow substantially compared with
2016. Thus, builders’ bid prices are under strong competitive pressure while
the prices of construction inputs on the whole have not changed 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. 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, which sometimes results in the sacrifice of quality
to the lowest possible price. 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. In setting our prices in such an environment, we focus on
ensuring a reasonable balance of contract performance risks and tight cost
control. 

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. In the construction sector, the
allocations of the current EU budget period began to have a limited impact in
the second half of 2016 only but in subsequent periods the process is expected
to accelerate. 

In the light of the above factors, we see some opportunities for achieving
year-on-year business growth in 2017: a certain improvement in our Estonian
operations is increasingly supported by positive developments in our chosen
foreign markets. Our action plan foresees using our resources (including some
of the labour released by 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 31 December 2016, the
Group’s warranty provisions (including current and non-current ones) totalled
1,212 thousand euros (31 December 2015: 1,184 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 547 thousand euros of which
138 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

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.2-fold (31 December 2015: 1.03-fold). Although the current ratio
has improved compared with the previous year-end, the Group remains exposed to
higher than usual liquidity risk. The key factor which influences the current
ratio is the classification of the Group’s loans to its Ukrainian associates as
non-current assets. 

Due to the strained political and economic situation in Ukraine, we believe
that the Group’s Ukrainian investment properties cannot be realised in the
short term. Accordingly, as at the reporting date the Group’s loans to its
Ukrainian associates of 8,637 thousand euros are classified as non-current
assets. 

For better cash flow management, we use overdraft facilities and factoring by
which we counter the mismatch between the settlement terms agreed with
customers and subcontractors.  Under IFRS EU, borrowings have to be classified
into current and non-current based on contract terms in force at the reporting
date. At 31 December 2016, short-term borrowings totalled 6,297 thousand euros
(31 December 2015: 15,715 thousand euros). The figure consists of overdraft
liabilities of 3,591 thousand euros (31 December 2015: 11,388 thousand euros),
which account for around a half of short-term borrowings, and loans which will
probably be refinanced at maturity. 

At the reporting date, the Group’s cash and cash equivalents totalled 9,786
thousand euros (31 December 2015: 6,332 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 2015,
interest-bearing borrowings declined by 1,414 thousand euros. Loan and
factoring liabilities decreased (by 2,472 thousand euros) while finance lease
liabilities increased (by 1,058 thousand euros). The growth in finance lease
liabilities is mainly attributable to the acquisition of a new asphalt concrete
plant. At 31 December 2016, interest-bearing borrowings totalled 19,399
thousand euros (31 December 2015: 20,813 thousand euros). Interest expense for
2016 amounted to 681 thousand euros (2015: 770 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 2016, the hryvnia weakened
against the euro by around 8%. 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 195 thousand
euros (2015: 574 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 in 2016, translation
of operating receivables and payables resulted in an exchange gain of 18
thousand euros (2015: nil euros). The exchange gain has been recognised in
Other operating income. 

We do not use derivatives to hedge currency risk.



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2017, public investments should grow slightly but 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 the National Road
     Administration) which reach signature of a construction contract in 2017
     will not increase substantially. The Ministry of Defence has been a
     positive exception for builders by carrying out procurements which have
     made a significant contribution to market revival. Hence, the Estonian
     construction market (particularly infrastructure construction segments)
     will remain in relative stagnation. The situation is softened by the
     positive level of private investment 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 general
     contractors (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 general contractors to go slowly out of
     business or shrink in size rather than merge or exit the market. News about
     the difficulties of some construction companies, published at the end of
     2016, show that the problems of weaker market players are escalating.
     According to our assessment, one reason why market consolidation has
     decelerated in recent years is customers’ (particularly public sector
     customers’) increasing desire to loosen tendering requirements to increase
     competition and lower the price even though this increases the 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
     bidders’ 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 also 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. Although new apartments are relatively expensive compared to the
     standard of living and the banks’ lending terms are strict, in 2016 the
     housing market grew rapidly. In the second half of the year, the increase
     in apartment prices decelerated and hopefully the market is going to
     stabilise. Similarly to previous periods, successful projects include those
     which are in an attractive location and fill a specific niche. In Tallinn
     and Tartu, the picture continues to be 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 participation 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 input prices of the construction service have been relatively stable.
     However, in the second half of 2016, particularly in housing development,
     there emerged increasing pressure for a price increase. So far general
     contractors have been able to soften this by making margin concessions but
     their capacity for doing this is decreasing. The construction market
     includes an increasing number of areas where changes in the environment may
     trigger a sharp price increase (e.g. materials producers’ rapid and
     successful entry into foreign markets).
  -- The rise in housing construction has lengthened the supply periods of
     various essential materials and services considerably, making it impossible
     to carry out all processes in the former optimistic timeframes. As a
     result, activities require more extensive planning or may need to be
     postponed.
  -- Persisting shortage of skilled labour (including project and site managers)
     may start restricting companies’ performance capacities, which may affect
     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 category of the 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
2017, we will continue our operations in Ukraine primarily in the Kiev region.
Based on our order book as at the end of 2016, we expect that in 2017 our
operating volumes will remain at a level comparable to 2016. Despite the
military 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 which 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. 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 2015 we signed the first contract
on the construction of a five-floor apartment building in Stockholm (with a
cost of around 8.4 million euros) and in 2016 another, smaller contract. In
January 2017, we signed the third contract of 6.3 million euros. We will
sustain efforts aimed at increasing our operations in Sweden and are currently
moderately optimistic about the developments. 

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 unaudited
revenue of the Group in 2016 was 183.3 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 Tallinn Stock Exchange. 




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