Market announcement

Title

2019 6 months and II quarter consolidated unaudited interim report

Message

COMMENTARY FROM MANAGEMENT

The  decrease  in  revenue  that  continued  in  Q2 2019 for Merko Ehitus was an
expected development due to the completion of major projects that had been under
construction  at the group's subsidiaries, the  general market situation and the
decline  in the secured order  book. Revenue for the  second quarter was EUR 77
million and for the first half-year, EUR 154 million, representing a decrease of
16% compared  to the year  before. Sales revenue  for six months decreased year-
over-year in Estonia and Latvia, but increased in Lithuania and Norway.

The  group's profit  before taxes  in Q2  was EUR  4.5 million and for the first
half-year EUR 7.5 million - an increase of 6.7% from the year before. Net profit
in Q2 was impacted by income tax expenses on dividends paid in the amount of EUR
2.7 million.  Profitability in Q2  was also influenced  by the fact  that due to
timing  of project completion, the subsidiaries  of the group sold significantly
fewer  apartments compared to Q2 last year.  At the same time, preliminary sales
of  apartments are going  according to plan  and the number  of apartments to be
handed  over to buyers in the second  half-year on the basis of preliminary sale
contracts is growing. Net profit attributable to equity holders of the parent in
Q2 was EUR 1.7 million and for the first half-year EUR 4.5 million.

With  construction  orders  generally  declining,  very  strong  competition and
pressure  on prices  persist on  the main  contractors' market.  In this type of
market  situation, the group's  subsidiaries are focusing  first and foremost on
projects where it is possible to create value added for the customer in terms of
quality  of project management, where pricing  is fair and contractual risks are
distributed in a reasonable manner. Considering the rapid growth of input prices
that  has  taken  place  in  recent  years,  especially  in terms of the cost of
workforce,  it  is  extremely  important  for  the  normal  development  of  the
construction  market that there is a good cooperation between the parties of the
construction process, and that liability and risk are balanced appropriately.

The  group's secured order book balance decreased by the end of June 2019 to EUR
172 million,  decreasing 30% compared to the level  in the same period last year
(EUR 247 million). At the same time, EUR 86 million in new contracts were signed
in  the first half-year, this  being 27% more than in  the same period last year
(EUR 68  million). The largest  contracts signed were  for the renovation of the
Aaspere-Haljala  road section as  well as construction  of Türi Basic School and
Laima chocolate factory. In addition to the abovementioned, the largest projects
in  progress  were  construction  works  of  water supply and sewerage piping in
Metsanurme,  Kasemetsa and Üksnurme  area, the commercial  building at Pärnu mnt
186, construction  of undersea electric power cables of Suur Väin and Väike Väin
straits,  the student home for Rakvere  Vocational School and the reconstruction
and  dredging of the  Port of Hundipea;  in Latvia, Lidl's  logistics centre and
Alfa  shopping centre; in Lithuania, Neringa hotel, Quadrum office building, and
a  private school; and in Norway, the Tesla service centre and the renovation of
the office building at Møllergata 23-25.

Strategically, Merko Ehitus is increasingly focused on the apartment development
business  area. Investments into apartment  development have grown significantly
and  in the  first half-year,  the group  invested close  to EUR 40 million into
projects in progress. In addition, in Q2 the group purchased a large development
area in Vilnius for EUR 13 million. The planned total investment volume for this
year  in apartment developments is on the  order of EUR 100 million. In Estonia,
Latvia  and  Lithuania,  the  group  currently  has  a total of more than 1,000
apartments  in development. The biggest projects in Tallinn are the Uus-Veerenni
and  Pikaliiva  residential  projects,  in  Riga, the Gai?ezers and Viesturd?rzs
development  projects, and, in Vilnius, the  Vilneles slenis and Rinktin?s Urban
developments.

In  Q2, the group sold 37 apartments compared to 117 in Q2 last year. The reason
for  the lower number is the fact that previous larger development projects have
been  completed and the apartments  largely sold. At the  end of the first half-
year,  there were  about one  hundred apartments  in the  three Baltic states in
total  that were ready to be sold  and not covered by preliminary contracts. New
projects are in the construction phase and Merko will start selling some of them
as  they are finished  at the end  of this year  and most of  them next year, in
2020.

The  apartment markets in  Tallinn and Vilnius  continue to favour well-prepared
projects  with high-quality execution, which offer integral living environments.
Riga's  apartment market  continues to  be less  active with the sales potential
being   higher   for  projects  that  are  more  precisely  targeted  to  market
expectations.  For the real estate market as a whole, the question remains about
the  current and future developments in the Baltic banking sector. This pertains
to  both  the  sufficiency  of  competition  between  banks, regulations and the
rigidity of their interpretations in selecting customers, as well as the general
risk  appetite of banks when it comes  to financing both the developers and home
buyers.  In  case  of  unfavourable  developments,  banking activities may start
curtailing  the general  economic activity  of the  Baltic states, including the
normal functioning of the real estate market.

OVERVIEW OF THE II QUARTER AND 6 MONTHS RESULTS

PROFITABILITY
2019 6 months  profit before  tax was  EUR 7.5 million  and Q2 2019 was EUR 4.5
million  (6M 2018: EUR 7.1 million and  Q2 2018: EUR 5.8 million), which brought
the profit before tax margin to 4.9% (6M 2018: 3.8%).

Net profit attributable to equity holders of the parent in 6 months 2019 was EUR
4.5 million  (6M 2018: EUR 6.7 million)  and Q2 2019 net  profit attributable to
equity  holders of the parent was EUR 1.7 million (Q2 2018: EUR 5.6 million). 6
months  net  profit  margin  was  2.9% (6M  2018: 3.6%). Net  profitability  was
influenced by, among other things, a significantly increased income tax expense:
in  Q2, the  group's income  tax expense  on paid  dividends was EUR 2.7 million
greater  than the year before. There was  no income tax expense on the dividends
paid  in 2018 -  the dividends  were distributed  from dividends paid by foreign
subsidiaries to the parent.

REVENUE
Q2  2019 revenue was EUR 77.4 million  (Q2 2018: EUR 103.3 million) and 6 months
revenue was EUR 154.2 million (6M 2018: EUR 183.7 million). 6 months revenue has
decreased  by  16.0% compared  to  same  period  last year. The share of revenue
earned outside Estonia in 6 months 2019 was 57.0% (6M 2018: 52.6%).

SECURED ORDER BOOK
As  at 30 June  2019, the group's  secured order  book was EUR 172.1 million (30
June  2018: EUR  247.0 million).  In  6 months  2019, group companies signed new
contracts  in the amount of EUR  86.0 million (6M 2018: EUR 67.5 million). In Q2
2019, new  contracts were signed in the amount of EUR 53.8 million (Q2 2018: EUR
45.3 million).

REAL ESTATE DEVELOPMENT
In  6 months 2019, the group sold a total of 100 apartments (incl. 33 apartments
in  a joint venture); in 6 months 2018, the group sold 168 apartments (incl. 34
apartments  in a joint venture).  The group earned a  revenue of EUR 9.2 million
from  sale of own developed apartments  in 6 months 2019 and EUR 16.3 million in
6 months  2018. In Q2 of  2019 a total of  37 apartments (incl. 4 apartment in a
joint  venture) were  sold. compared  to 117 apartments  (incl. 9 apartment in a
joint  venture) in Q2 2018, and earned a revenue of EUR 4.7 million from sale of
own developed apartments (Q2 2018: EUR 12.0 million).

CASH POSITION
At  the end of the reporting period, the  group had EUR 14.0 million in cash and
cash  equivalents,  and  equity  of  EUR  118.5 million (41.2% of total assets).
Comparable  figures  as  at  30 June  2018 were  EUR 27.2 million and EUR 119.1
million (42.8% of total assets), respectively. As at 30 June 2019, the group had
net debt of EUR 48.7 million (30 June 2018: EUR 26.9 million).

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros

                               2019      2018        2019        2018      2018
                           6 months  6 months  II quarter  II quarter 12 months
-------------------------------------------------------------------------------
 Revenue                    154,202   183,650      77,357     103,340   418,011
-------------------------------------------------------------------------------
 Cost of goods sold       (139,532) (170,621)    (68,893)    (94,394) (384,962)
-------------------------------------------------------------------------------
 Gross profit                14,670    13,029       8,464       8,946    33,049
-------------------------------------------------------------------------------
 Marketing expenses         (1,784)   (1,729)       (933)       (923)   (3,285)
-------------------------------------------------------------------------------
 General and
 administrative expenses    (6,241)   (5,664)     (3,117)     (2,845)  (12,304)
-------------------------------------------------------------------------------
 Other operating income       1,230     1,695         529         843     3,527
-------------------------------------------------------------------------------
 Other operating expenses     (253)     (105)       (218)        (73)   (1,115)
-------------------------------------------------------------------------------
 Operating profit             7,622     7,226       4,725       5,948    19,872
-------------------------------------------------------------------------------
 Finance income/costs          (97)     (171)       (180)       (145)      (97)
-------------------------------------------------------------------------------
 incl. finance
 income/costs from sale
 of subsidiary and
 liquidation                      -      (59)           -        (59)      (62)
-------------------------------------------------------------------------------
 finance income/costs
 from joint venture             203       226        (19)          90       653
-------------------------------------------------------------------------------
 interest expense             (286)     (309)       (151)       (156)     (652)
-------------------------------------------------------------------------------
 foreign exchange gain
 (loss)                         (4)       (1)         (4)           -         5
-------------------------------------------------------------------------------
 other financial income
 (expenses)                    (10)      (28)         (6)        (20)      (41)
-------------------------------------------------------------------------------
 Profit before tax            7,525     7,055       4,545       5,803    19,775
-------------------------------------------------------------------------------
 Corporate income tax
 expense                    (2,888)     (201)     (2,813)       (111)     (375)
-------------------------------------------------------------------------------
 Net profit for financial
 year                         4,637     6,854       1,732       5,692    19,400
-------------------------------------------------------------------------------
 incl. net profit
 attributable to equity
 holders of the parent        4,453     6,669       1,675       5,565    19,343
-------------------------------------------------------------------------------
 net profit attributable
 to non-controlling
 interest                       184       185          57         127        57
-------------------------------------------------------------------------------
 Other comprehensive
 income, which can
 subsequently be
 classified in the income
 statement
-------------------------------------------------------------------------------
 Currency translation
 differences of foreign
 entities                        29        28         (3)          15       (6)
-------------------------------------------------------------------------------
 Comprehensive income for
 the period                   4,666     6,882       1,729       5,707    19,394
-------------------------------------------------------------------------------
 incl. net profit
 attributable to equity
 holders of the parent        4,480     6,696       1,672       5,579    19,324
-------------------------------------------------------------------------------
 net profit attributable
 to non-controlling
 interest                       186       186          57         128        70
-------------------------------------------------------------------------------
 Earnings per share for
 profit attributable to
 equity holders of the
 parent (basic and
 diluted, in EUR)              0.25      0.38        0.09        0.31      1.09
-------------------------------------------------------------------------------

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros

                                               30.06.2019 30.06.2018 31.12.2018
-------------------------------------------------------------------------------
 ASSETS
-------------------------------------------------------------------------------
 Current assets
-------------------------------------------------------------------------------
 Cash and cash equivalents                         13,980     27,230     39,978
-------------------------------------------------------------------------------
 Trade and other receivables                       72,561     91,541     76,183
-------------------------------------------------------------------------------
 Prepaid corporate income tax                          94        163        224
-------------------------------------------------------------------------------
 Inventories                                      162,829    120,467    117,992
-------------------------------------------------------------------------------
                                                  249,464    239,401    234,377
-------------------------------------------------------------------------------
 Non-current assets
-------------------------------------------------------------------------------
 Investments in joint venture                         935        306        732
-------------------------------------------------------------------------------
 Other long-term loans and receivables             11,418     14,861     10,391
-------------------------------------------------------------------------------
 Deferred income tax assets                             -          5          -
-------------------------------------------------------------------------------
 Investment property                               14,115     13,748     13,771
-------------------------------------------------------------------------------
 Property, plant and equipment                     11,255      9,454      9,715
-------------------------------------------------------------------------------
 Intangible assets                                    727        574        671
-------------------------------------------------------------------------------
                                                   38,450     38,948     35,280
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL ASSETS                                     287,914    278,349    269,657
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 LIABILITIES
-------------------------------------------------------------------------------
 Current liabilities
-------------------------------------------------------------------------------
 Borrowings                                        31,786     16,202     19,900
-------------------------------------------------------------------------------
 Payables and prepayments                          88,748     92,638     77,016
-------------------------------------------------------------------------------
 Income tax liability                               2,854        375        381
-------------------------------------------------------------------------------
 Short-term provisions                              6,276      4,487      8,100
-------------------------------------------------------------------------------
                                                  129,664    113,702    105,397
-------------------------------------------------------------------------------
 Non-current liabilities
-------------------------------------------------------------------------------
 Long-term borrowings                              30,921     37,894     24,266
-------------------------------------------------------------------------------
 Deferred income tax liability                      1,556      1,335      1,481
-------------------------------------------------------------------------------
 Other long-term payables                           2,473      1,500      2,179
-------------------------------------------------------------------------------
                                                   34,950     40,729     27,926
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL LIABILITIES                                164,614    154,431    133,323
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 EQUITY
-------------------------------------------------------------------------------
 Non-controlling interests                          4,763      4,789      4,577
-------------------------------------------------------------------------------
 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                   (694)      (675)      (721)
-------------------------------------------------------------------------------
 Retained earnings                                110,509    111,082    123,756
-------------------------------------------------------------------------------
                                                  118,537    119,129    131,757
-------------------------------------------------------------------------------
 TOTAL EQUITY                                     123,300    123,918    136,334
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL LIABILITIES AND EQUITY                     287,914    278,349    269,657
-------------------------------------------------------------------------------

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 operating on the Lithuanian market,
and the Norwegian construction company Peritus Entreprenør AS. Besides provision
of  construction service as a  main contractor, the group's  other major area of
activity  is apartment  development. As  at the  end of 2018, the group employed
764 people, and the group's revenue for 2018 was EUR 418 million.