Market announcement

Title

2018 6 months and II quarter consolidated unaudited interim report

Message

COMMENTARY FROM MANAGEMENT

Merko  Ehitus increased  revenue and  net profit  figures in  Q2 as  well as six
months.  The group's revenue in Q2 was  EUR 103.3 million and in first half-year
EUR  183.7 million; Q2 net profit was EUR 5.6 million and 6-month net profit EUR
6.7 million.  The group  earned over  half of  its 6-month sales revenue outside
Estonia.

The growth of revenue, which continued in Q2, was expected, based on the volume
of construction contracts concluded in the last few years. The volumes of
construction works grew the most in Latvia. In both the first and second
quarter, the group companies' volume of work performed outside Estonia exceeded
the amount performed in Estonia. Due to a rise in the construction input prices
and tight competition on the general contracting market, it is not a goal unto
itself to grow construction volumes - we are focusing on the quality of
construction services and improving profitability. In the second quarter, the
group's profitability increased above all thanks to improved profitability of
construction service, and the growth of net profitability was supported by the
fact that income tax expenses were lower by EUR 0.9 million compared to last
year.

The volume of Merko Ehitus group new construction contracts in the first half-
year was lower than the volume of works performed, and the secured construction
order book shrank. As many commercial real estate projects have been launched in
the Baltics in recent years and construction has become more expensive,
customers have become more cautious about new business projects. We still have
not had particular success in public procurements and it is very difficult to
forecast the volume of new contracts here as the preparation of projects spans a
very long period, often construction tenders exceed the financial means of the
customer, as a result of which procurements are cancelled or postponed. This
will definitely affect the volumes of construction services offered to our
customers in 2019.

In the second quarter, no major changes took place on the apartment market in
the Baltic states' capitals: new development projects continue to be launched in
quite a large volume in Tallinn and Vilnius. Also, in Riga the apartment market
is showing signs of becoming more active, but more so in a cheaper price
segment. Apartment development continues to be our central business area, which
we invest in. In the first six months of 2018, Merko Ehitus sold 168 apartments
with a total price of EUR 16.3 million (excluding VAT), including 117 apartments
in Q2 with a total price of EUR 12.0 million (excluding VAT). This year, Merko
has launched the construction of six development projects with a total of 349
apartments and invested EUR 13.6 million into development projects launched this
year and already in progress.

In Q2 of 2018, Merko Ehitus posted revenue of EUR 103.3 million (Q2 2017: EUR
70.7 million), and a six-month revenue of EUR 183.7 million (H1 2017: EUR 128.8
million, growth of 42.6%). The share of revenue from outside Estonia for six
months was 52.6% (H1 2017: 30.9%). In Q2 of 2018, Merko Ehitus posted a net
profit of EUR 5.6 million (Q2 2017: EUR 2.2 million), and a six-month figure of
EUR 6.7 million (H1 2017: EUR 3.2 million, growth of 107.7%). Q2 EBITDA for the
group was EUR 6.4 million, and H1 EBITDA was EUR 8.2 million. Q2 profit before
tax was EUR 5.8 million and the same for H1 was EUR 7.1 million. In the first
six months of 2018, the group entered into a total of EUR 67.5 million in new
contracts, including construction works on Hundipea port, Tsirguliina substation
and phase II of the Tallink office building. As of 30 June 2018, the Merko
Ehitus Group's secured order book amounted to EUR 247 million.

Among major projects in progress in Q2 in Estonia were the construction of T1
Mall of Tallinn shopping centre, Maakri Kvartal, Öpiku Maja's building B,
Tallink office building, residence of the Embassy of the People's Republic of
China, expansion of Wendre production facility, Viimsi State Gymnasium,
apartment building at Toom-Kuninga 21, phase I of Tartu mnt 80 office building,
and central square in Kuressaare, as well as renovation work on Tsirguliina 330
kV substation, cleanup of residual pollution at Maadevahe and Priimetsa asphalt-
concrete plant and renovation and dredging at Hundipea port. The largest
projects under construction in Q2 in Latvia were Akropole multifunctional
centre, Alfa shopping centre and Z-Towers complex in Riga and Ventspils Music
School and Concert Hall. In Vilnius, the largest projects were the expansion of
Radisson Blu Hotel Lietuva, Hotel Neringa and apartment building complex in the
Shaltiniu Namai quarter; and, in Klaipeda, the reconstruction and expansion of
Philip Morris plant.



OVERVIEW OF THE II QUARTER AND 6 MONTHS RESULTS

PROFITABILITY

Q2 2018 net profit was EUR 5.6 million (Q2 2017: EUR 2.2 million) and net profit
margin 5.4% (Q2 2017: 3.1%). Net profit in 6 months 2018 was EUR 6.7 million (6M
2017: EUR  3.2 million), having increased by  107.7% compared to the same period
last  year. Net profit margin increased to 3.6% (6M 2017: 2.5%). Increase in net
profitability was influenced by the fact that, in 2017, AS Merko Ehitus incurred
income  tax costs of EUR 0.9 million in connection with dividend payments, while
in  2018, dividend payments did not  carry income tax cost  - the dividends were
paid out from dividends paid to the parent company by foreign subsidiaries.
Q2  2018 Profit before  tax was  EUR 5.8 million  (Q2 2017: EUR 3.3 million) and
6M 2018 profit  before tax was EUR 7.1 million (6M 2017: EUR 4.4 million), which
brought the profit before tax margin to 3.8% (6M 2017: 3.4%).

REVENUE

Q2  2018 revenue was EUR 103.3 million  (Q2 2017: EUR 70.7 million) and 6M 2018
revenue  was  EUR  183.7 million  (6M  2017: EUR  128.8 million). 6M revenue has
increased  by  42.6% compared  to  same  period  last year. The share of revenue
earned outside Estonia in 6M 2018 was 52.6% (6M 2017: 30.9%).

SECURED ORDER BOOK

As  at 30 June  2018, the group's  secured order  book was EUR 247.0 million (30
June  2017: EUR 387.5 million). In 6M 2018, group companies signed new contracts
in  the amount of EUR 67.5 million (6M 2017: EUR 216.6 million). In Q2 2018, new
contracts  were signed  in the  amount of  EUR 45.3 million (Q2 2017: EUR 158.0
million).

REAL ESTATE DEVELOPMENT

The  group  sold  a  total  of  168 apartments  (incl.  34 apartments in a joint
venture)  in 6 months  of 2018 at  a total  value of EUR 16.3 million (excluding
VAT).  During  6 months  of  2017, 239 apartments  (incl. 1 apartment in a joint
venture)  were sold at a total value of  EUR 26.9 million. In Q2 of 2018 a total
of  117 apartments (incl. 9 apartment in  a joint venture) were  sold at a total
value  of EUR 12.0 million (excluding VAT)  compared to Q2 2017 of 98 apartments
and EUR 10.5 million.

CASH POSITION

At  the end of the reporting period, the  group had EUR 27.2 million in cash and
cash  equivalents,  and  equity  EUR  119.1 million  (42.8%  of  total  assets).
Comparable  figures  as  at  30 June  2017 were  EUR 25.9 million and EUR 118.7
million (49.3% of total assets), respectively. As at 30 June 2018, the group had
net debt of EUR 26.9 million (30 June 2017: EUR 19.4 million).



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

unaudited
in thousand euros

                               2018      2017        2018        2017      2017
                           6 months  6 months  II quarter  II quarter 12 months
-------------------------------------------------------------------------------
 Revenue                    183,650   128,807     103,340      70,660   317,598
-------------------------------------------------------------------------------
 Cost of goods sold       (170,621) (118,627)    (94,394)    (64,601) (286,747)
-------------------------------------------------------------------------------
 Gross profit                13,029    10,180       8,946       6,059    30,851
-------------------------------------------------------------------------------
 Marketing expenses         (1,729)   (1,638)       (923)       (778)   (3,215)
-------------------------------------------------------------------------------
 General and
 administrative expenses    (5,664)   (4,918)     (2,845)     (2,400)  (11,289)
-------------------------------------------------------------------------------
 Other operating income       1,695     1,226         843         659     3,793
-------------------------------------------------------------------------------
 Other operating expenses     (105)     (133)        (73)        (76)     (601)
-------------------------------------------------------------------------------
 Operating profit             7,226     4,717       5,948       3,464    19,539
-------------------------------------------------------------------------------
 Finance income/costs         (171)     (362)       (145)       (206)     (767)
-------------------------------------------------------------------------------
 incl. finance
 income/costs from sale
 of subsidiary                 (59)         -        (59)           -        14
-------------------------------------------------------------------------------
 finance income/costs
 from joint ventures            226       (2)          90        (30)        64
-------------------------------------------------------------------------------
 finance income/costs
 from other long-term
 investments                      -         -           -           -         2
-------------------------------------------------------------------------------
 interest expense             (309)     (347)       (156)       (174)     (745)
-------------------------------------------------------------------------------
 foreign exchange gain
 (loss)                         (1)       (1)           -         (3)       (1)
-------------------------------------------------------------------------------
 other financial income
 (expenses)                    (28)      (12)        (20)           1     (101)
-------------------------------------------------------------------------------
 Profit before tax            7,055     4,355       5,803       3,258    18,772
-------------------------------------------------------------------------------
 Corporate income tax
 expense                      (201)   (1,113)       (111)       (995)   (3,020)
-------------------------------------------------------------------------------
 Net profit for financial
 year                         6,854     3,242       5,692       2,263    15,752
-------------------------------------------------------------------------------
 incl. net profit
 attributable to equity
 holders of the parent        6,669     3,211       5,565       2,182    14,694
-------------------------------------------------------------------------------
 net profit attributable
 to non-controlling
 interest                       185        31         127          81     1,058
-------------------------------------------------------------------------------
 Other comprehensive
 income, which can
 subsequently be
 classified in the income
 statement
-------------------------------------------------------------------------------
 Currency translation
 differences of foreign
 entities                        28      (30)          15        (27)      (74)
-------------------------------------------------------------------------------
 Comprehensive income for
 the period                   6,882     3,212       5,707       2,236    15,678
-------------------------------------------------------------------------------
 incl. net profit
 attributable to equity
 holders of the parent        6,696     3,182       5,579       2,157    14,637
-------------------------------------------------------------------------------
 net profit attributable
 to non-controlling
 interest                       186        30         128          79     1,041
-------------------------------------------------------------------------------
 Earnings per share for
 profit attributable to
 equity holders of the
 parent (basic and
 diluted, in EUR)              0.38      0.18        0.31        0.12      0.83
-------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION

unaudited
in thousand euros

                                               30.06.2018 30.06.2017 31.12.2017
-------------------------------------------------------------------------------
 ASSETS
-------------------------------------------------------------------------------
 Current assets
-------------------------------------------------------------------------------
 Cash and cash equivalents                         27,230     25,864     39,210
-------------------------------------------------------------------------------
 Trade and other receivables                       91,541     63,775     75,844
-------------------------------------------------------------------------------
 Prepaid corporate income tax                         163        625        492
-------------------------------------------------------------------------------
 Inventories                                      120,467    120,256    118,421
-------------------------------------------------------------------------------
                                                  239,401    210,520    233,967
-------------------------------------------------------------------------------
 Non-current assets
-------------------------------------------------------------------------------
 Long-term financial assets                        15,167     12,881     17,242
-------------------------------------------------------------------------------
 Deferred income tax assets                             5      1,325          5
-------------------------------------------------------------------------------
 Investment property                               13,748      3,979     15,719
-------------------------------------------------------------------------------
 Property, plant and equipment                      9,454     11,715      9,665
-------------------------------------------------------------------------------
 Intangible assets                                    574        571        497
-------------------------------------------------------------------------------
                                                   38,948     30,471     43,128
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL ASSETS                                     278,349    240,991    277,095
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 LIABILITIES
-------------------------------------------------------------------------------
 Current liabilities
-------------------------------------------------------------------------------
 Borrowings                                        16,202      4,067     24,218
-------------------------------------------------------------------------------
 Payables and prepayments                          92,638     66,079     74,972
-------------------------------------------------------------------------------
 Income tax liability                                 375        161        413
-------------------------------------------------------------------------------
 Short-term provisions                              4,487      3,885      4,569
-------------------------------------------------------------------------------
                                                  113,702     74,192    104,172
-------------------------------------------------------------------------------
 Non-current liabilities
-------------------------------------------------------------------------------
 Long-term borrowings                              37,894     41,158     35,138
-------------------------------------------------------------------------------
 Deferred income tax liability                      1,335      1,165      1,259
-------------------------------------------------------------------------------
 Other long-term payables                           1,500      2,039      1,789
-------------------------------------------------------------------------------
                                                   40,729     44,362     38,186
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL LIABILITIES                                154,431    118,554    142,358
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 EQUITY
-------------------------------------------------------------------------------
 Non-controlling interests                          4,789      3,722      4,567
-------------------------------------------------------------------------------
 Equity attributable to equity holders of the
 parent
-------------------------------------------------------------------------------
 Share capital                                      7,929      7,929      7,929
-------------------------------------------------------------------------------
 Statutory reserve capital                            793        793        793
-------------------------------------------------------------------------------
 Currency translation differences                   (675)      (674)      (702)
-------------------------------------------------------------------------------
 Retained earnings                                111,082    110,667    122,150
-------------------------------------------------------------------------------
                                                  119,129    118,715    130,170
-------------------------------------------------------------------------------
 TOTAL EQUITY                                     123,918    122,437    134,737
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL LIABILITIES AND EQUITY                     278,349    240,991    277,095
-------------------------------------------------------------------------------

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
(http://group.merko.ee/en/)).

Priit Roosimägi
Head of Group Finance Unit
AS Merko Ehitus
+372 650 1250
[email protected] (mailto:[email protected])

AS Merko Ehitus (group.merko.ee (http://group.merko.ee/en/)) 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, Peritus Entreprenør AS construction company in Norway and the real
estate development business unit along with real estate holding companies. As at
the end of 2017, the group employed 757 people and the company's 2017 revenue
was EUR 317.6 million.

Attachments

  * Merko_Ehitus_2018_6M_interim_report (https://prlibrary-
    eu.nasdaq.com/Resource/Download/1952ea2a-ce0e-4c5f-ad24-259e9ec7864a)
  * Merko_Ehitus_2018_6M_presentation (https://prlibrary-
    eu.nasdaq.com/Resource/Download/44df9905-ff72-46e5-af31-c1cb4cbc1ff6)