Market announcement

Title

2019 9 months and III quarter consolidated unaudited interim report

Message

COMMENTARY FROM MANAGEMENT

Merko  Ehitus posted revenue of EUR 73 million in Q3 and EUR 228 million for the
first  nine months of  2019. Sales revenue for  nine months decreased year-over-
year in Estonia and Latvia, increased significantly in Norway and stayed more or
less  the same in Lithuania.  The profit before taxes  in Q3 was EUR 2.8 million
and  for  the  first  nine  months  EUR  10.3 million.  The  group's  net profit
attributable  to equity holders of the parent in Q3 was EUR 2.5 million, and the
nine-month net profit was EUR 7 million.

Due  to the completion of major construction  projects in progress over the last
two  years, the  cooling off  of the  construction market  and the fact that the
group  is  placing  its  strategic  focus  more firmly on apartment development,
revenue decreased by 24% compared to last year; while pre-tax earnings decreased
by  18%. Considering  the  declining  trend  in  the  portfolio  of construction
contracts in the last 1.5 years, a drop in volumes was to be expected this year.
Yet  the  civil  engineering  services  area  has  fallen  short  of  management
expectations this year. The group has taken a clearer direction toward apartment
development and providing main contracting services for construction on projects
where  the group's subsidiaries have competitive advantages, such as in the form
of  engineering and technical knowhow, construction and financial capability and
long-term  cooperative relations. Ensuring higher  construction volumes is not a
goal  in its own  right if it  should come at  the expense of larger contractual
risks  (unrealistic deadlines, contractual penalties,  lack of clarity regarding
the  scope of  contracting) or  customer insolvency.  Public-private partnership
(PPP) projects also continue to be in the group's focus, and the greatest market
activity in this area has thus far been seen in Lithuania.

Based  on developments in the economy and  the real estate market, the volume of
construction  orders in  the Baltics  is seeing  an overall declining trend. The
greater caution exercised by banks as to selection of customers and projects for
financing and the growth in loan margins are also having an increasing impact on
the  construction market. The orders from the  public sector have not managed to
compensate  for the decrease  in the activity  of private sector customers. This
places  main contractors in an  increasingly difficult competitive situation and
increases pressure on them to reduce costs. The decreasing level of construction
activity  may at  some point  also mean  concessions in  terms of  input prices,
though  this has not yet  occurred. Thus, general contractors  are working in an
environment  where on the  one hand they  face pressure from customers (contract
conditions) and on the other hand from subcontractors (expenses).

The  group has continued  investments in residential  real estate development as
planned.  During 2019, Merko  Ehitus has  invested EUR  83 million into the real
estate  development  business  segment,  of  which  close to EUR 65 million into
building  apartments  and  nearly  EUR  19 million  into  acquiring new land for
development  in Lithuania and Estonia to  ensure development capability in years
to  come. In Estonia, Latvia  and Lithuania, the group  currently has a total of
more  than 1,100 apartments in development. Considering the cycle for completion
of  apartment development projects, investments will start yielding results to a
greater  extent in the form  of apartment sales starting  in Q4 of this year and
even more so next year. Sales and pre-sales of apartments are going according to
plan.  We see the  new apartment markets  remaining active at  current levels in
Tallinn  and Vilnius, while in Riga, general activity continues to be lower. The
group  will continue focusing on the real estate development business segment on
all three markets.

The  biggest projects in  Tallinn are the  Uus-Veerenni, Lahekalda and Pikaliiva
residential projects; in Riga, the Gai?ezers and Viesturd?rzs developments; and,
in  Vilnius, the  Vilneles slenis  and Rinktin?s  Urban developments. In Q3, the
group  sold 106 apartments compared to 87 in the third quarter last year. At the
end  of September,  there were  a total  of 123 apartments  in the  three Baltic
states ready to be sold and not covered by pre-sale agreements.

The  group's secured order book  decreased by end of  September 2019 to EUR 152
million,  decreasing 36% compared to the  level at the same  time last year (EUR
239 million).  EUR 128 million  in new  contracts were  signed in the first nine
months, this being 19% less than in the same period last year (EUR 157 million).
The  largest contracts in Q3  were signed, in Latvia,  for the reconstruction of
the  Riga  Technical  University  Civil  Engineering  Faculty  building  and the
construction  of college building and dormitory in Babites county in Pinki, and,
in  Tallinn,  the  construction  of  Terminal  D  parking  house  at the Tallinn
passenger  port. In addition to the abovementioned ones, the largest projects in
progress  were, in Estonia, reconstruction  of the Aaspere-Haljala road section,
construction of Türi Basic School, establishing water supply and sewerage piping
for  the 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,  student  home  for  Rakvere Vocational School, as well as
reconstruction  and dredging of the Port of Hundipea; in Latvia, construction of
Lidl's  logistics centre, Alfa shopping centre  and Laima chocolate factory; and
in  Lithuania, Neringa Hotel,  Quadrum office building,  and a private school in
Vilnius.


OVERVIEW OF THE III QUARTER AND 9 MONTHS RESULTS

PROFITABILITY
2019 9 months  profit before tax  was EUR 10.3 million  and Q3 2019 was EUR 2.8
million  (9M 2018: EUR 12.6 million and Q3 2018: EUR 5.6 million), which brought
the profit before tax margin to 4.5% (9M 2018: 4.2%).

Net profit attributable to equity holders of the parent in 9 months 2019 was EUR
7.0 million  (9M 2018: EUR 12.3 million) and  Q3 2019 net profit attributable to
equity  holders of the parent was EUR 2.5 million (Q3 2018: EUR 5.6 million). 9
months  net  profit  margin  was  3.1% (9M  2018: 4.1%). 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
Q3  2019 revenue was EUR 73.4 million  (Q3 2018: EUR 115.1 million) and 9 months
revenue was EUR 227.6 million (9M 2018: EUR 298.8 million). 9 months revenue has
decreased  by  23.8% compared  to  same  period  last year. The share of revenue
earned outside Estonia in 9 months 2019 was 53.2% (9M 2018: 51.5%).

SECURED ORDER BOOK
As  at 30 September 2019, the  group's secured order  book was EUR 152.2 million
(30 September 2018: EUR 239.4 million). In 9 months 2019, group companies signed
new  contracts in the amount of  EUR 127.6 million (9M 2018: EUR 157.0 million).
In  Q3 2019, new  contracts were  signed in  the amount  of EUR 41.6 million (Q3
2018: EUR 89.4 million).

REAL ESTATE DEVELOPMENT
In  9 months 2019, the group sold a total of 206 apartments (incl. 36 apartments
in  a joint venture); in 9 months 2018, the group sold 255 apartments (incl. 47
apartments  in a joint venture). The group  earned a revenue of EUR 20.2 million
from  sale of own developed apartments  in 9 months 2019 and EUR 24.3 million in
9 months  2018. In Q3 of 2019 a total of 106 apartments (incl. 3 apartments in a
joint  venture) were  sold compared  to 87 apartments  (incl. 13 apartments in a
joint venture) in Q3 2018, and earned a revenue of EUR 10.9 million from sale of
own developed apartments (Q3 2018: EUR 8.0 million).

CASH POSITION
At  the end of the reporting period, the  group had EUR 13.4 million in cash and
cash  equivalents,  and  equity  of  EUR  121.1 million (39.4% of total assets).
Comparable  figures as at 30 September 2018 were EUR 23.9 million and EUR 124.8
million  (43.1%  of  total  assets),  respectively. As at 30 September 2019, the
group had net debt of EUR 71.0 million (30 September 2018: EUR 29.8 million).

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros

                             2019      2018         2019         2018      2018
                         9 months  9 months  III quarter  III quarter 12 months
-------------------------------------------------------------------------------
 Revenue                  227,620   298,768       73,418      115,118   418,011
-------------------------------------------------------------------------------
 Cost of goods sold     (206,723) (276,984)     (67,191)    (106,363) (384,962)
-------------------------------------------------------------------------------
 Gross profit              20,897    21,784        6,227        8,755    33,049
-------------------------------------------------------------------------------
 Marketing expenses       (2,626)   (2,482)        (842)        (753)   (3,285)
-------------------------------------------------------------------------------
 General and
 administrative
 expenses                 (8,841)   (8,583)      (2,600)      (2,919)  (12,304)
-------------------------------------------------------------------------------
 Other operating income     1,740     2,477          510          782     3,527
-------------------------------------------------------------------------------
 Other operating
 expenses                 (1,222)     (277)        (969)        (172)   (1,115)
-------------------------------------------------------------------------------
 Operating profit           9,948    12,919        2,326        5,693    19,872
-------------------------------------------------------------------------------
 Finance income/costs         363     (273)          460        (102)      (97)
-------------------------------------------------------------------------------
 incl. finance
 income/costs from sale
 of subsidiary and
 liquidation                    -      (59)            -            -      (62)
-------------------------------------------------------------------------------
 finance income/costs
 from joint venture           845       274          642           48       653
-------------------------------------------------------------------------------
 interest expense           (471)     (452)        (185)        (143)     (652)
-------------------------------------------------------------------------------
 foreign exchange gain
 (loss)                         -       (1)            4            -         5
-------------------------------------------------------------------------------
 other financial income
 (expenses)                  (11)      (35)          (1)          (7)      (41)
-------------------------------------------------------------------------------
 Profit before tax         10,311    12,646        2,786        5,591    19,775
-------------------------------------------------------------------------------
 Corporate income tax
 expense                  (2,983)     (169)         (95)           32     (375)
-------------------------------------------------------------------------------
 Net profit for
 financial year             7,328    12,477        2,691        5,623    19,400
-------------------------------------------------------------------------------
 incl. net profit
 attributable to equity
 holders of the parent      7,003    12,312        2,550        5,643    19,343
-------------------------------------------------------------------------------
 net profit
 attributable to non-
 controlling interest         325       165          141         (20)        57
-------------------------------------------------------------------------------
 Other comprehensive
 income, which can
 subsequently be
 classified in the
 income statement
-------------------------------------------------------------------------------
 Currency translation
 differences of foreign
 entities                    (10)        31         (39)            3       (6)
-------------------------------------------------------------------------------
 Comprehensive income
 for the period             7,318    12,508        2,652        5,626    19,394
-------------------------------------------------------------------------------
 incl. net profit
 attributable to equity
 holders of the parent      7,002    12,343        2,552        5,647    19,324
-------------------------------------------------------------------------------
 net profit
 attributable to non-
 controlling interest         316       165          130         (21)        70
-------------------------------------------------------------------------------
 Earnings per share for
 profit attributable to
 equity holders of the
 parent (basic and
 diluted, in EUR)            0.40      0.70         0.14         0.32      1.09
-------------------------------------------------------------------------------

CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros

                                               30.09.2019 30.09.2018 31.12.2018
-------------------------------------------------------------------------------
 ASSETS
-------------------------------------------------------------------------------
 Current assets
-------------------------------------------------------------------------------
 Cash and cash equivalents                         13,355     23,868     39,978
-------------------------------------------------------------------------------
 Trade and other receivables                       72,280    114,150     76,183
-------------------------------------------------------------------------------
 Prepaid corporate income tax                          94        163        224
-------------------------------------------------------------------------------
 Inventories                                      183,056    116,601    117,992
-------------------------------------------------------------------------------
                                                  268,785    254,782    234,377
-------------------------------------------------------------------------------
 Non-current assets
-------------------------------------------------------------------------------
 Investments in joint venture                       1,577        353        732
-------------------------------------------------------------------------------
 Other long-term loans and receivables             10,590     10,707     10,391
-------------------------------------------------------------------------------
 Deferred income tax assets                             -          5          -
-------------------------------------------------------------------------------
 Investment property                               14,077     13,785     13,771
-------------------------------------------------------------------------------
 Property, plant and equipment                     11,336      9,443      9,715
-------------------------------------------------------------------------------
 Intangible assets                                    777        593        671
-------------------------------------------------------------------------------
                                                   38,357     34,886     35,280
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL ASSETS                                     307,142    289,668    269,657
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 LIABILITIES
-------------------------------------------------------------------------------
 Current liabilities
-------------------------------------------------------------------------------
 Borrowings                                        41,750     17,758     19,900
-------------------------------------------------------------------------------
 Payables and prepayments                          84,643     95,410     77,016
-------------------------------------------------------------------------------
 Income tax liability                                 309        306        381
-------------------------------------------------------------------------------
 Short-term provisions                              7,675      7,755      8,100
-------------------------------------------------------------------------------
                                                  134,377    121,229    105,397
-------------------------------------------------------------------------------
 Non-current liabilities
-------------------------------------------------------------------------------
 Long-term borrowings                              42,571     35,878     24,266
-------------------------------------------------------------------------------
 Deferred income tax liability                      1,589      1,370      1,481
-------------------------------------------------------------------------------
 Other long-term payables                           2,653      1,647      2,179
-------------------------------------------------------------------------------
                                                   46,813     38,895     27,926
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL LIABILITIES                                181,190    160,124    133,323
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 EQUITY
-------------------------------------------------------------------------------
 Non-controlling interests                          4,893      4,768      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                   (722)      (671)      (721)
-------------------------------------------------------------------------------
 Retained earnings                                113,059    116,725    123,756
-------------------------------------------------------------------------------
                                                  121,059    124,776    131,757
-------------------------------------------------------------------------------
 TOTAL EQUITY                                     125,952    129,544    136,334
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
 TOTAL LIABILITIES AND EQUITY                     307,142    289,668    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.