Market announcement

Title

2018 II quarter and 6 months consolidated interim report (unaudited)

Message

This  announcement includes Nordecon AS's  consolidated financial statements for
the  second  quarter  and  six  months  of 2018 (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
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                                         30 June 2018 31 December 2017
-------------------------------------------------------------------------------
 ASSETS

 Current assets

 Cash and cash equivalents                               7,985            8,915

 Trade and other receivables                            46,646           35,193

 Prepayments                                             2,901            1,641

 Inventories                                            23,870           23,230

 Total current assets                                   81,402           68,980


 Non-current assets

 Investments in equity-accounted investees               1,883            1,888

 Other investments                                          26               26

 Trade and other receivables                             9,093            8,950

 Investment property                                     3,549            4,929

 Property plant and equipment                           12,951           12,566

 Intangible assets                                      14,654           14,639

 Total non-current assets                               42,156           42,998

 TOTAL ASSETS                                          123,558          111,978



 LIABILITIES

 Current liabilities

 Borrowings                                             21,441           16,197

 Trade payables                                         47,212           35,926

 Other payables                                          8,532            5,654

 Deferred income                                         5,127            3,651

 Provisions                                                619              664

 Total current liabilities                              82,931           62,092


 Non-current liabilities

 Borrowings                                              7,947           13,955

 Trade payables                                             98               98

 Other payables                                             71               71

 Provisions                                              1,162            1,273

 Total non-current liabilities                           9,278           15,397

 TOTAL LIABILITIES                                      92,209           77,489



 EQUITY

 Share capital                                          18,263           18,263

 Own (treasury) shares                                  -1,278           -1,349

 Share premium                                             589              589

 Statutory capital reserve                               2,554            2,554

 Translation reserve                                     1,932            1,992

 Retained earnings                                       8,698           11,089

 Total equity attributable to owners of the
 parent                                                 30,758           33,138

 Non-controlling interests                                 591            1,351

 TOTAL EQUITY                                           31,349           34,489

 TOTAL LIABILITIES AND EQUITY                          123,558          111,978

Condensed consolidated interim statement of comprehensive income

 EUR '000                             H1 2018 Q2 2018  H1 2017 Q2 2017     2017
-------------------------------------------------------------------------------

 Revenue                              105,658  61,996  103,501  61,897  231,387

 Cost of sales                       -102,459 -59,250 -100,362 -59,382 -222,692

 Gross profit                           3,199   2,746    3,139   2,515    8,695



 Marketing and distribution
 expenses                                -331    -158     -334    -221     -623

 Administrative expenses               -3,386  -1,715   -3,078  -1,621   -6,936

 Other operating income                   219     202       54      12      107

 Other operating expenses                 -76       1     -107     -19     -141

 Operating loss/profit                   -375   1,076     -326     666    1,102



 Finance income                           385     250      204     101    2,901

 Finance costs                           -586    -282     -428    -259   -1,570

 Net finance costs/income                -201     -32     -224    -158    1,331



 Share of profit of equity-
 accounted investees                      452     515      193     146      485



 Loss/profit before income tax           -124   1,559     -357     654    2,918

 Income tax expense                      -400    -200     -540    -465   -1,193

 Loss/profit for the period              -524   1,359     -897     189    1,725



 Other comprehensive income
 Items that may be reclassified
 subsequently to profit or loss

 Exchange differences on
 translating foreign operations           -60    -128      126      75      446

 Total other comprehensive
 expense/income                           -60    -128      126      75      446

 TOTAL COMPREHENSIVE
 EXPENSE/INCOME                          -584   1,231     -771     264    2,171



 Loss/profit attributable to:

 - Owners of the parent                  -532   1,274     -890     197    1,388

 - Non-controlling interests                8      85       -7      -8      337

 Loss/profit for the period              -524   1,359     -897     189    1,725



 Total comprehensive
 expense/income attributable to:

 - Owners of the parent                  -592   1,146     -764     272    1,834

 - Non-controlling interests                8      85       -7      -8      337

 Total comprehensive
 expense/income
 for the period                          -584   1,231     -771     264    2,171



 Earnings per share attributable
 to owners of the parent:

 Basic earnings per share (EUR)         -0.02    0.04    -0.03    0.01     0.04

 Diluted earnings per share (EUR)       -0.02    0.04    -0.03    0.01     0.04

Condensed consolidated interim statement of cash flows

  EUR '000                                                H1 2018    H1 2017
-----------------------------------------------------------------------------
  Cash flows from operating activities

  Cash receipts from customers(1)                         115,243    111,059

  Cash paid to suppliers(2)                              -100,279   -102,900

  VAT paid                                                 -2,874     -2,029

  Cash paid to and for employees                          -10,480    -10,997

  Income tax paid                                            -305       -200

  Net cash from/used in operating activities                1,305     -5,067



  Cash flows from investing activities

  Paid on acquisition of property, plant and equipment       -252       -147

  Paid on acquisition of intangible assets                      0         -3

  Proceeds from sale of property, plant and
  equipment                                                    22          0

  Loans provided                                              -17        -34

  Repayment of loans provided                                   7         20

  Dividends received                                          249        147

  Interest received                                             5         27

  Net cash from investing activities                           14         10



  Cash flows from financing activities

  Proceeds from loans received                              1,411      7,399

  Repayment of loans received                                -168       -496

  Finance lease principal paid                               -888     -1,149

  Interest paid                                              -366       -376

  Dividends paid                                           -2,243     -2,007

  Net cash used in/from financing activities               -2,254      3,371



  Net cash flow                                              -935     -1,686



  Cash and cash equivalents at beginning of period          8,916      9,786

  Effect of movements in foreign exchange rates                 4          1

  Decrease in cash and cash equivalents                      -935     -1,686

  Cash and cash equivalents at end of period                7,985      8,101

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

(2 )Line item Cash paid to suppliers includes VAT paid.

Financial review
Financial performance
Nordecon  Group  ended  the  first  half  of  2018 with a gross profit of 3,199
thousand  euros (H1  2017: 3,139 thousand euros)  and a  gross margin  of 3% (H1
2017: 3%). In  an  environment  of  continuously  stiff competition, the Group's
gross  margin for the first six months remained at the same level as in the same
period  last year.  However, the  gross margin  for the second quarter improved,
rising  to 4.4% (Q2 2017: 4.1%). We are satisfied  with the profitability of the
Infrastructure segment, which has improved considerably compared with last year:
its  gross margins for the  first half and second  quarter of 2018 were 3.7% and
8.5% respectively  while the corresponding figures for 2017 were 0.5% and 5.4%.
However,  we would  like to  see better  results in  the Buildings segment whose
gross  margin has  dropped from  4.1% for the  first half  and second quarter of
2017 to 3.3% for the first half and second quarter of 2018. The profitability of
the  Buildings segment  continues to  be influenced  by the  fact that the Group
earns  a large share of its revenue from the construction of apartment buildings
where  the ongoing rise in subcontracting prices, particularly labour costs, has
the  most  tangible  effect.  We  closely  monitor  the proportions of different
segments  in the Group's portfolio in order to better manage the risks resulting
from changes in input prices.
The  Group's  administrative  expenses  for  the  first half of 2018 amounted to
3,386 thousand  euros.  Compared  with  the  same period in 2017, administrative
expenses  grew by  around 10% (H1  2017: 3,078 thousand euros)  but the ratio of
administrative  expenses to revenue (12 months rolling) remained practically the
same,  amounting to 3.1% (H1 2017: 3.0%). Expenses  increased in connection with
changes  made to the Group's management  and the payment of termination benefits
to  a member  of the  parent company's  board (see  also the chapter Employees).
However,  our cost-control measures continue to produce good results and we have
been  able to  keep administrative  expenses below  the target  ceiling of 4% of
revenue.
The  Group's operating loss for the  first half of 2018 amounted to 375 thousand
euros  (H1  2017: a  loss  of  326 thousand  euros). EBITDA was positive at 606
thousand euros (H1 2017: positive at 664 thousand euros).
Finance  income and costs for the period  continued to be influenced by exchange
rate fluctuations in the Group's foreign markets. Although the Ukrainian hryvnia
strengthened  against the euro by 9.6% and the Group recognised an exchange gain
of  243 thousand euros (H1 2017: an exchange  loss of 121 thousand euros) on the
translation  of a loan provided to a  Ukrainian subsidiary in euros, the Swedish
krona  weakened  against  the  euro  by  around  6% and  the Group recognised an
exchange loss of 154 thousand euros (H1 2017: nil euros) on the translation of a
loan provided to the Swedish subsidiary in euros.
The Group's net loss amounted to 524 thousand euros (H1 2017: a net loss of 897
thousand  euros), of which  the net loss  attributable to owners  of the parent,
Nordecon AS, was 532 thousand euros (H1 2017: a net loss of 890 thousand euros).
Cash flows
In  the first half of  2018, operating activities produced a  net cash inflow of
1,305 thousand euros (H1 2017: an outflow of 5,067 thousand euros). Positive net
operating  cash flow is attributable to growth  in the volume of the Group's own
development  operations and the collection of the contractual retentions (5-10%
of the contract price) of major construction projects which have been completed.
Although  the Group's personnel expenses grew,  cash paid to employees decreased
year  on year because the results of the previous financial year were modest and
the  performance bonuses paid in the first half of 2018 were smaller than in the
comparative period.
Operating  cash flow continues  to be strongly  influenced by the  fact that the
contracts signed with public and private sector customers do not require them to
make  advance  payments  while  we  have  to make prepayments to subcontractors,
materials suppliers, etc. Cash inflow is also lowered by contractual retentions,
which  extend from 5 to 10% of the contract price and are released at the end of
the construction period only.
Investing  activities of the first  half-year produced a net  cash inflow of 14
thousand euros (H1 2017: an inflow of 10 thousand euros). The largest items were
payments  for property, plant and equipment of 252 thousand euros (H1 2017: 147
thousand  euros)  and  dividends  received  of 249 thousand euros (H1 2017: 147
thousand euros).
Financing  activities generated a  net cash outflow  of 2,254 thousand euros (H1
2017: an  inflow of 3,371 thousand euros). The  largest items were loan, finance
lease  and dividend  payments. Proceeds  from loans  received amounted to 1,411
thousand  euros, consisting of  development loans and  overdraft facilities used
(H1 2017: 7,399 thousand euros). Loan repayments totalled 168 thousand euros (H1
2017: 496 thousand  euros)  consisting  of  scheduled  repayments  of  long-term
investment  and  development  loans.  Finance  lease  payments  amounted to 888
thousand euros (H1 2017: 1,149 thousand euros). Dividends paid in the first half
of 2018 totalled 2,243 thousand euros (H1 2017: 2,007 thousand euros).
At  30 June 2018, the Group's cash  and cash equivalents totalled 7,985 thousand
euros (30 June 2017: 8,101 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    for
   the period                  H1 2018      H1 2017      H1 2016           2017
  -----------------------------------------------------------------------------
   Revenue (EUR '000)          105,658      103,501       73,829        231,387

   Revenue change                   2%          40%           7%          26.2%

   Net profit/loss
   (EUR '000)                     -524         -897          798          1,725

   Net profit/loss
   attributable to
   owners of the
   parent
   (EUR '000)                     -532         -890          426          1,388

   Weighted average
   number of shares         30,986,585   30,756,728   30,756,728     30,913,031

   Earnings per share
   (EUR)                         -0.02        -0.03         0.01           0.04

   Administrative
   expenses to revenue            3.2%         3.0%         3.8%           3.0%

   Administrative
   expenses to revenue
   (rolling)                      3.1%         3.0%         3.7%           3.0%

   EBITDA (EUR '000)               606          664        1,714          3,123

   EBITDA margin                  0.6%         0.6%         2.3%           1.3%

   Gross margin                   3.0%         3.0%         5.6%           3.8%

   Operating margin              -0.4%        -0.3%         1.1%           0.5%

   Operating margin
   excluding gain on
   asset sales                   -0.4%        -0.3%         1.0%           0.5%

   Net margin                    -0.5%        -0.9%         1.1%           0.7%

   Return on invested
   capital                        0.5%        -0.1%         2.3%           5.9%

   Return on equity              -1.6%        -2.4%         2.2%           4.8%

   Equity ratio                  25.4%        29.0%        34.5%          30.8%

   Return on assets              -0.4%        -0.8%         0.8%           1.6%

   Gearing                       35.2%        32.5%        33.2%          32.7%

   Current ratio                  0.98         1.02         1.05           1.11

   As at                  30 June 2018 30 June 2017 30 June 2016    31 Dec 2017
  -----------------------------------------------------------------------------
   Order book (EUR '000)       131,552      130,601      131,363        144,122
+----------------------------+----------------------------------------+--------
|Revenue  change  =  (revenue|                                        |
|for  the reporting  period /|                                        |
|revenue   for  the  previous|                                        |
|period) - 1 * 100           |                                        |
|                            |                                        |
|Earnings  per share  (EPS) =|                                        |
|net     profit    or    loss|Operating margin excluding gain on asset|
|attributable  to  owners  of|sales  =  ((operating  profit  or loss -|
|the    parent   /   weighted|gain  on sales  of non-current  assets -|
|average   number  of  shares|gain on sales of real estate) / revenue)|
|outstanding                 |* 100                                   |
|                            |                                        |
|Administrative  expenses  to|Net margin = (net profit or loss for the|
|revenue   =  (administrative|period / revenue) * 100                 |
|expenses / revenue) * 100   |                                        |
|                            |Return on invested capital = ((profit or|
|Administrative  expenses  to|loss  before  tax  + interest expense) /|
|revenue  (rolling)  =  (past|the  period's  average (interest-bearing|
|four               quarters'|liabilities + equity)) * 100            |
|administrative   expenses  /|                                        |
|past four quarters' revenue)|Return  on equity =  (net profit or loss|
|* 100                       |for  the period  / the  period's average|
|                            |total equity) * 100                     |
|EBITDA = operating profit or|                                        |
|loss   +   depreciation  and|Equity  ratio  =  (total  equity / total|
|amortisation   +  impairment|liabilities and equity) * 100           |
|losses on goodwill          |Return  on assets =  (net profit or loss|
|EBITDA  margin  =  (EBITDA /|for  the period  / the  period's average|
|revenue) * 100              |total assets) * 100                     |
|                            |Gearing = ((interest-bearing liabilities|
|Gross margin = (gross profit|-    cash    and   cash   equivalents) /|
|or loss / revenue) * 100    |(interest-bearing liabilities + equity))|
|Operating      margin      =|* 100                                   |
|(operating  profit or loss /|Current  ratio = total  current assets /|
|revenue) * 100              |total current liabilities               |
+----------------------------+----------------------------------------+


Performance by geographical market
The  contribution of the Group's foreign markets has remained stable in the past
three years. In the first half of 2018, revenue earned outside Estonia accounted
for 7% of our total revenue.

            H1 2018   H1 2017   H1 2016   2017
-----------------------------------------------
  Estonia       93%       93%       93%    94%

  Ukraine        4%        1%        2%     2%

  Sweden         2%        3%        4%     3%

  Finland        1%        2%        1%     1%

The  share of  the Group's  Ukrainian revenues  has grown substantially compared
with   the  same  period  last  year.  In  Ukraine,  we  are  providing  general
contractor's  services under  one infrastructure  and two  building construction
contracts and the share of concrete works performed in the building construction
segment  has also  increased significantly.  The share  of Swedish  revenues has
decreased  year  on  year.  During  the  period,  we provided services under one
construction  contract  secured  as  a  general contractor. Our Finnish revenues
result from concrete works in the building construction segment.
Geographical  diversification  of  the  revenue  base  is a consciously deployed
strategy by which we mitigate the risks resulting from excessive reliance on one
market.  However,  conditions  in  some  of  our chosen foreign markets are also
volatile  and affect our current results. Increasing the contribution of foreign
markets  is  one  of  Nordecon's  strategic  targets.  Our vision of the Group's
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)  as balanced as possible because  this helps diversify risks and
provides  better opportunities  for continuing  construction operations  in more
challenging  market conditions where the volumes  of one or several sub-segments
decline substantially.
Nordecon's  revenues for the first half of 2018 totalled 105,658 thousand euros,
a  roughly 2% increase on the 103,501 thousand euros generated in the first half
of  2017. Revenue growth  resulted from  growth in  the business  volumes of the
Infrastructure  segment. Compared with the same period last year, the revenue of
the  Infrastructure segment  increased by  around 32% while  the revenue  of the
Buildings  segment  decreased  by  4%. Despite  year-on-year revenue growth, the
contribution  of the Infrastructure segment to the Group's total revenue remains
modest.  In the  first half  of 2018, our  Buildings and Infrastructure segments
generated   revenue   of   80,827 thousand   euros   and  24,587 thousand  euros
respectively.  The corresponding figures for the first half of 2017 were 83,834
thousand  euros  and  18,607 thousand  euros  (see  note 8). The current revenue
structure  is  also  reflected  in  our  order  book where building construction
contracts continue to prevail.

  Operating segments*   H1 2018   H1 2017   H1 2016   2017
-----------------------------------------------------------
  Buildings                 76%       81%       79%    74%

  Infrastructure            24%       19%       21%    26%

*  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 consolidated financial statements, allocation
is  based on the  subsidiaries' main field  of activity (as  required by IFRS 8
Operating  Segments). In the consolidated 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
In the Buildings segment, the largest revenue source is the commercial buildings
sub-segment.  In  the  first  half  of  2018, its revenue grew significantly, by
around 38% year on year. The period's largest projects were the Omniva logistics
centre  and the Møller Auto sales and service centre in Rae parish near Tallinn.
In Tallinn, we continued to build a 14-floor commercial and residential building
in the WoHo quarter at Mustamäe tee 3 and a multi-storey car park at Sepise 8 in
Ülemiste  City. During  the period,  we completed  the construction of an office
building  at Lõõtsa 12 in  Ülemiste City in  Tallinn. On the  basis of the order
book,  we expect that in 2018 the  revenue generated by the commercial buildings
sub-segment will increase compared with 2017.
The  volumes of the public buildings sub-segment remained comparable to the same
period  last  year.  The  results  of  the  sub-segment  continue to be strongly
influenced  by  investments  made  in  national  defence.  During the period, we
continued  to build infrastructure for armoured vehicles and two barracks at the
defence  forces' base at  Tapa. Work also  continued on the  Estonian Academy of
Security Sciences building in Tallinn and the Abja Health Centre.
The  proportion  of  revenue  generated  by  the apartment buildings sub-segment
decreased  year  on  year.  In  Estonia,  a  substantial  share of our apartment
building projects is located in Tallinn. In the period under review, the largest
of  them were the  Meerhof 2.0 apartment building  complex at Pirita tee 20a and
apartment  buildings at Sõjakooli  12 (phases II and  III) and Lesta 10. Foreign
markets  continue  to  contribute  a  major  share of the sub-segment's revenue.
During the period, we continued the construction of a residential quarter in the
city of Brovary in the Kiev region in Ukraine and the design and construction of
an eight-floor apartment building in the city of Stockholm in Sweden.
We  continue to carry out our own  housing development projects (reported in the
apartment  buildings sub-segment)  in Tartu  and Tallinn.  During the period, we
completed  phase VII and continued  to build phase VIII  (the last phase) in the
Tammelinn  project  in  Tartu  (www.tammelinn.ee  (http://www.tammelinn.ee)). In
Tallinn,  we began construction work  in a new development  project at Nõmme tee
97 where  we  are  going  to  build  a  four-floor  apartment  building with 21
apartments  (www.nommetee.ee  (http://www.nommetee.ee)).  We  continue  to  sell
apartments  in the above development projects in Tartu and Tallinn as well as in
the    projects    completed    in    2017 at    Magasini    29 (www.magasini.ee
(http://www.magasini.ee))  and Hane  2 and 2a (www.hane.ee (http://www.hane.ee))
in  Tallinn. The  period's housing  development revenues totalled 3,228 thousand
euros  (H1 2017: 1,102 thousand euros). In  carrying out development activities,
we  monitor closely potential risks in  the housing development market that stem
from  rapid growth  in the  supply of  new housing  and relative growth in input
prices.
The largest projects in the industrial and warehouse facilities sub-segment were
the  construction of the Metsä Wood plywood  factory in Pärnu, a robotic farm at
Mätliku and a grain terminal at Lähtru, and the reconstruction (phase IV) of the
fattening unit of the pig farm of Rakvere Farmid AS (EKSEKO).

 Revenue breakdown in the Buildings segment H1 2018 H1 2017 H1 2016 2017
------------------------------------------------------------------------
 Commercial buildings                           36%     25%     15%  25%

 Public buildings                               26%     26%     35%  19%

 Apartment buildings                            23%     31%     31%  30%

 Industrial and warehouse facilities            15%     18%     19%  26%

For  a long  time, the  Infrastructure segment  has been  dominated by  the road
construction  and  maintenance  sub-segment  whose  relative importance has been
increasing year by year. During the period, a significant portion of its revenue
resulted  from  major  projects  performed  under contracts secured in 2017: the
reconstruction of the Haabersti intersection in Tallinn, the reconstruction of a
section  of the Tallinn  ring road (km  0.6-2.8) and the construction of passing
lanes    for   a   2+1 road   on   the   Valmaotsa-Kärevere   section   of   the
Tallinn-Tartu-Võru-Luhamaa  road. A  substantial share  of the  period's revenue
also resulted from forest road improvement services provided to the State Forest
Management Centre. We continued to render road maintenance services in Järva and
Hiiu counties and the Kose maintenance area in Harju county. We expect that road
construction will remain by far the largest revenue source in the Infrastructure
segment through 2018.
The  contracts  signed  by  the  environmental engineering and other engineering
(utility  network construction) sub-segments are small and significant growth in
their revenues is unlikely.

 Revenue breakdown in the Infrastructure segment H1 2018 H1 2017 H1 2016 2017
-----------------------------------------------------------------------------
 Road construction and maintenance                   90%     84%     82%  86%

 Other engineering                                    7%     12%     14%   8%

 Environmental engineering                            3%      4%      4%   6%

Order book
At 30 June 2018, the Group's order book (backlog of contracts signed but not yet
performed)  stood at 131,552 thousand euros,  a level similar to  the end of the
first half of 2017.

 As at                 30 June 2018 30 June 2017 30 June 2016 31 Dec 2017
-------------------------------------------------------------------------
 Order book (EUR '000)      131,552      130,601      131,363     144,122

At  the  reporting  date,  contracts  secured  by  the Buildings segment and the
Infrastructure segment accounted for 73% and 27% of the Group's total order book
respectively  (30  June  2017: 72% and  28% respectively). Compared with 30 June
2017, the  order book of the Buildings segment  has increased and the order book
of the Infrastructure segment has decreased by around 2%.
In the Buildings segment, the order book of the commercial buildings sub-segment
has  grown substantially, by around 54% compared with the same period last year.
Above   all,   its  growth  is  driven  large-scale  projects  in  Tallinn:  the
construction  of a 14-floor commercial and  residential building at Mustamäe tee
3 in   the   WoHo  quarter,  the  design  and  construction  of  an  eight-floor
accommodation  building on the property at  Liimi 1B, and the reconstruction and
expansion  of the building of terminal D in the Old City Harbour at Lootsi 13/4
that  was secured  in the  second quarter  of 2018. Growth  in the sub-segment's
order  book is also strongly supported by  a large contract signed in the second
half of 2017 in Ukraine for the construction of a seven-floor office building in
the  Unit City innovation park  in Kiev. The order  book of the public buildings
sub-segment has grown as well. The largest items in its order book are contracts
signed  in the second half of 2017 for  the construction of the Estonian Academy
of  Security  Sciences  building  in  Tallinn  and  infrastructure  for armoured
vehicles  and two barracks at the defence  forces' base at Tapa. The order books
of  the industrial  and warehouse  facilities and  the apartment  buildings sub-
segments have decreased.
The order book of the Infrastructure segment is strongly influenced by contracts
signed  by the road  construction and maintenance  sub-segment which account for
around  88% of the  Infrastructure segment's  order book.  The road construction
order  book comprises the remaining portions of contracts signed in 2017 as well
as two new contracts secured in 2018: one for the reconstruction of two sections
(km  195.6-205.8 and 207.8-209.2) of the Riga-Pskov road (the Tsiiruli-Missoküla
road  section) and the other for the construction of the Veskitammi intersection
on  the  border  of  Tallinn  in  Laagri.  The  Group  continues to provide road
maintenance  services in  three road  maintenance areas:  Järva, Hiiu  and Kose.
Although  according  to  our  projections  in  2018 public  investments will not
increase  substantially, our order  book as at  the reporting date  allows us to
expect that in 2018 the revenue of the Infrastructure segment will grow somewhat
compared  with 2017 (for further information, see  the Business risks section of
the chapter Description of the main risks).
Based on the Group's order book and known developments in our chosen markets, we
expect  that the Group's  revenue for 2018 will  remain at the  same level as in
2017. In  an environment of stiff competition, we avoid taking unjustified risks
whose realisation in the contract performance phase would have an adverse impact
on  our results. Our preferred  policy is to keep  fixed costs under control and
monitor critically market developments.
Between  the  reporting  date  (30  June  2018) and  the date of release of this
report,  Group companies have  secured additional construction  contracts in the
region of 22,873 thousand euros.

People
Employees and personnel expenses
In the first half of 2018, the Group (the parent and the subsidiaries) employed,
on  average, 694 people  including 426 engineers  and technical personnel (ETP).
The  number of employees, particularly workers,  has decreased by around 6% year
on  year, mostly because the contract for providing road maintenance services in
the Keila maintenance area expired.

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

                  H1 2018   H1 2017   H1 2016   2017
-----------------------------------------------------
  ETP                 426       423       365    426

  Workers             268       314       305    309

  Total average       694       737       670    735

The  Group's personnel expenses for the first half of 2018, including all taxes,
totalled  10,566 thousand euros. In the  same period of 2017, personnel expenses
amounted to 9,945 thousand euros. The roughly 6% growth in personnel expenses is
mainly attributable to pay rises.
The service fees of the members of the council of Nordecon AS for the first half
of  2018 amounted to  94 thousand euros  and associated  social security charges
totalled  31 thousand euros  (H1 2017: 73 thousand  euros and  24 thousand euros
respectively).
The  service fees of  the members of  the board of  Nordecon AS amounted to 390
thousand  euros  and  associated  social  security charges totalled 128 thousand
euros  (H1  2017: 199 thousand  euros  and  66 thousand euros respectively). The
figures  include termination benefits  of 93 thousand euros  paid to a member of
the board and associated social security charges of 31 thousand euros.

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:

                                                  H1 2018 H1 2017 H1 2016  2017
-------------------------------------------------------------------------------
 Nominal labour productivity (rolling), (EUR
 '000)                                              327.4   296.5   222.9 314.9

 Change against the comparative period, %           10.4%   33.0%   -1.3% 17.6%



 Nominal labour cost efficiency (rolling), (EUR)      9.9    10.2     7.8  10.1

 Change against the comparative period, %           -2.1%   30.3%   -6.8% 12.6%


+------------------------------------------------------------------------------+
|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)                                      |
+------------------------------------------------------------------------------+

The Group's nominal labour productivity increased year on year, mainly through a
decrease  in  headcount.  Labour  cost  efficiency  declined because the rise in
personnel expenses outpaced 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  2018 public investment is  not expected to  grow substantially compared with
2017. Thus,  builders' bid  prices are  under strong  competitive pressure  in a
situation  where the  prices of  construction inputs  have been trending upwards
moderately  but consistently for several quarters. Bidders for contracts include
not  only  rival  general  contractors  but  also former subcontractors. This is
mainly  attributable  to  the  state  and  local governments' policy to keep the
qualification  requirements of  public procurement  tenders low, which sometimes
results  in the sacrifice  of quality and  adherence to deadlines  to the lowest
possible  price.  We  acknowledge  the  risks  inherent  in  the  performance of
contracts signed in an environment of stiff competition and rising input prices.
Securing  a long-term  construction contract  at an  unreasonably low price in a
situation  where input  prices cannot  be lowered  noticeably 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 between 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. Although the
amount  exceeds  the  figure  of  the  previous financial framework, the amounts
earmarked  for construction work are substantially  smaller than in the previous
budget period.
In  the  light  of  the  above  factors,  we  expect that in 2018 as a whole our
business  volumes will  remain at  the same  level as  in 2017. Our  action plan
foresees flexible resource allocation aimed at finding more profitable contracts
and  performing  them  effectively.  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 construction,  earthworks, 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 different technical solutions that allow working efficiently
also in changeable conditions.
Operational risks
To  manage their daily construction risks, Group companies purchase contractors'
all  risks insurance. Depending on the nature of the project and the requests of
the  customer,  both  general  frame  agreements  and  special, project-specific
insurance  contracts  are  used.  In  addition,  as  a  rule, subcontractors are
required  to  secure  performance  of  their  obligations  with a bank guarantee
provided  to a Group company  or the Group retains  part of the amount due until
the  contract has been completed. To  remedy construction deficiencies which may
be  detected  during  the  warranty  period,  Group  companies  create  warranty
provisions  based on their  historical experience. At  30 June 2018, the Group's
warranty  provisions (including  current and  non-current ones)  totalled 1,007
thousand euros (30 June 2017: 1,051 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, the Group did not incur any credit losses. In the comparative
period  in 2017, credit  losses totalled  30 thousand euros.  The overall credit
risk  exposure of the  portfolio of receivables  is low because  the solvency of
prospective  customers is  evaluated, the  share of  public sector  customers is
large,  and customers' settlement behaviour  is continuously monitored. The main
indicator  of the realisation of credit  risk is settlement default that exceeds
180 days along with no activity on the part of the debtor that would confirm the
intent to settle.
Liquidity risk
The  Group remains exposed to higher than usual liquidity risk. At the reporting
date,  the Group's current assets exceeded its current liabilities 0.98-fold (30
June  2017: 1.02-fold). The key factor which influences the current ratio is the
classification  of the Group's loans to  its Ukrainian associates as non-current
assets   and  the  banks'  general  policy  not  to  refinance  interest-bearing
liabilities (particularly overdrafts) for a period exceeding twelve months.
Because the political and economic situation in Ukraine is still complicated, we
believe  that the Group's Ukrainian investment  properties cannot be realised in
the  short term.  Accordingly, at  the reporting  date the  Group's loans to its
Ukrainian  associates  of  8,642 thousand  euros  were 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 30
June 2018, the Group's short-term borrowings totalled 21,441 thousand euros.
At  the reporting  date, the  Group's cash  and cash equivalents totalled 7,985
thousand euros (30 June 2017: 8,101 thousand euros).
Interest rate risk
The  Group's 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. During the period,
interest-bearing  borrowings grew by 433 thousand  euros year on year. Factoring
liabilities  increased whereas loan and finance lease liabilities decreased (see
also  the section Liquidity risk).  At 30 June 2018, interest-bearing borrowings
totalled  29,388 thousand euros (30  June 2017: 28,955 thousand euros). Interest
expense for the first half of 2018 amounted to 425 thousand euros (H1 2017: 304
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 signed a
derivative  contract to manage the risks  resulting from changes in the interest
rate  of the finance lease contract of  a new asphalt concrete plant acquired in
2016.
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  exchange rate of the hryvnia is unstable 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 the determination of
the national currency's indicative exchange rate. In the first half of 2018, the
hryvnia  strengthened against the euro by around 9.6%. For the Group's Ukrainian
subsidiary  that  has  to  translate  its  euro-denominated loans into the local
currency  this meant additional foreign exchange  gain of 243 thousand euros (H1
2017: an  exchange loss  of 121 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.
Our Ukrainian and non-Ukrainian entities' reciprocal receivables and liabilities
which  are related to  the construction business  and denominated in hryvnias do
not  give rise to any exchange gains or losses. Nor do the loans provided to the
Ukrainian  associates in euros give  rise to any exchange  gains or losses to be
recognised in the Group's accounts.
In the first half of 2018, the Swedish krona weakened against the euro by around
6%. Due to adverse movements in the krona/euro exchange rate, the translation of
operating  receivables and payables resulted in  an exchange loss of 71 thousand
euros  (H1 2017: 1 thousand  euros). The  exchange loss  has been  recognised in
Other  operating expenses.  The translation  of a  loan provided  to the Swedish
subsidiary  in euros into  the local currency  gave rise to  an exchange loss of
154 thousand  euros. The exchange loss has  been recognised in Finance costs. In
the comparative period, there was no exchange loss.
We have not acquired derivatives to hedge our currency risk.
Employee and work environment risks
Finding  permanent labour  is a  serious challenge  for the  entire construction
sector  and one of the main factors  that influences business results. The Group
depends extensively on its subcontractors' ability to ensure the availability of
skilled labour. To strengthen Nordecon's reputation as an employer and make sure
that  we can find employees also in  the future, we collaborate with educational
institutions.
As  a construction  company, we  strive to  minimise the occupational health and
safety  risks of people working on our construction sites including both our own
employees and the teams of our subcontractors. The goal is to make sure that all
measures  required by law are  applied in full. In  addition, the parent company
follows  the  requirements  of  international  occupational  health  and  safety
management standard OHSAS 18001. Subcontractors must ensure that their employees
follow  applicable work  safety requirements;  the Group's  role is to work with
them and create conditions that enable and foster compliance.
Environmental risks
Construction activities change landscapes and the physical environment of cities
and settlements. The Group's goal is to do its work and at the same time protect
the  natural environment  as much  as possible.  Our assets and operations which
have  the strongest  impact on  the environment  and, thus,  involve the highest
environmental   risk   are   asphalt  plants,  quarries  and  road  construction
operations.  To prevent  leaks, spills,  pollution, destruction  of wildlife and
other  damage to the environment, we comply  with legal requirements. All of our
largest construction entities have implemented environmental management standard
ISO 14001.
Corruption and ethical risks
As  one of the leading construction companies  in Estonia, we realise that it is
important  to be aware of the risks involved in the breach of honest and ethical
business  practices  and  to  make  sure  that our entities' management quality,
organisational  culture and internal communication  emphasise zero tolerance for
dishonest, unethical and corrupt behaviour.

Outlooks of the Group's geographical markets
Estonia
Processes and developments characterising the Estonian construction market

  * In 2018, public investment should grow slightly. However, it is still
    unclear for companies in which segments of the construction market and to
    what extent the state will be able to realise its investment plans. 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.
  * In terms of the market in general, investments made by the largest public
    sector customers (e.g. the state-owned real estate company Riigi
    Kinnisvara AS and the National Road Administration) which will reach
    signature of a construction contract in 2018 will not increase
    substantially. The Ministry of Defence has been a positive exception for
    builders as its needs and activity in carrying out new procurement tenders
    and placing orders through a single agency, the centre for defence
    investment, have made a major contribution to market revival. Hence, the
    Estonian construction market as a whole (particularly infrastructure
    construction segments) will remain relatively stable.
  * Competition remains stiff across the construction market, intensifying in
    different segments in line with market developments. A continuously high
    number of bidders for a contract reflects this. It is clear that in an
    environment of rising input prices that has emerged in recent years,
    efficiency is the key to success.
  * In new housing development, the success of a project depends on the
    developer's ability to control the input prices included in its business
    plan and thus set sales prices that are affordable for prospective buyers.
    Despite the market situation it is expected that the housing market, which
    accounts for a somewhat disproportionately large share of the total
    construction market and thus amplifies associated risks, will also sustain
    growth in 2018.
  * There is a growing contrast between the stringent terms of public contracts,
    which require the builder to agree to increasing 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 relatively easy for an
    increasing number of builders to win a contract but have heightened the
    risks taken by customers in terms of funding, deadlines and quality during
    the contract performance phase and the subsequent warranty period.
  * Recent years have brought a rise in the prices of construction inputs,
    particularly in building construction. Initially, general contractors tried
    to absorb the cost increase by making margin concessions but their capacity
    for doing this has been practically exhausted. The construction market
    includes an increasing number of areas where changes in the environment
    (including materials producers' rapid and successful entry into foreign
    markets) may trigger a sharp price increase. The rise in housing
    construction has lengthened the supply terms 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.
  * The persisting shortage of skilled labour (including project and site
    managers) is restricting companies' performance capacities and affecting
    different aspects of the construction process, including quality. Labour
    migration to the Nordic countries remains steady and it is not likely that
    workers who have left will return to the Estonian construction market in
    large numbers. Migrant workers that in turn have started moving to Estonia
    are not able to fill the gap. All of the above factors 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 mainly offer 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 picked
up in recent years. In 2018, we will continue our Ukrainian operations primarily
in the Kiev region. Based on our order book, it is possible that in 2018 our
Ukrainian business volumes will increase compared with 2017. Despite the
military conflict in eastern Ukraine, for Nordecon the market situation has
improved 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.
The Ukrainian government's recent crackdown on cash-in-hand work is definitely a
step in the right direction, which in the long term should improve our position
in the Ukrainian construction market. We assess the situation in the Ukrainian
market regularly and critically and are ready to restructure our operations as
and when necessary. Should the crisis in eastern Ukraine spread (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 work
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
We have been operating in Sweden since July 2015. In the Swedish market, we
offer mainly the construction of residential and non-residential buildings in
the central part of the country. On gaining experience in the new market, we
have prioritised quality and adherence to deadlines over profitability. As
regards our longer-term goals and the plan to build a viable and strong
organisation that would compete successfully in the Swedish market, we are
positive about the developments so far and see potential for further business
growth and earning a profit in a large market when we have been able to
stabilise our order book growth at the desired level.


Nordecon (www.nordecon.com (http://www.nordecon.com)) 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. The
consolidated  revenue  of  the  Group  in  2017 was 231 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] (mailto:[email protected])
www.nordecon.com (http://www.nordecon.com)

Attachments

  * Nordecon_Interim_report_Q2_2018 (https://prlibrary-
    eu.nasdaq.com/Resource/Download/8adbfd3b-ebb7-4847-bb00-181590639aa1)
  * Investor presentation 6m 2018 (https://prlibrary-
    eu.nasdaq.com/Resource/Download/bc7330ca-7bc5-4a91-8eb5-d531b748a5e0)