Börsiteade

Pealkiri

2009 12 months and IV quarter consolidated unaudited interim report

Teade

MANAGEMENT REPORT


General information

AS Merko Ehitus operates in Estonia, Latvia and Lithuania as a construction
group providing integrated construction solutions. Largest companies of the
Group are SIA Merks (100%), UAB Merko Statyba (100%), Tallinna Teede AS
(100%), AS Gustaf (75%), OÜ Gustaf Tallinn (80%), AS Merko Tartu (66%),
OÜ Woody (100%) and AS Tartu Maja Betoontooted (25%).

On 2 April 2009, AS Merko Ehitus and its 100% subsidiary OÜ Rae Tehnopark
made a merger agreement with a view of ensuring better transparency of
AS Merko Ehitus group and facilitating reporting
(http://www.nasdaqomxbaltic.com/market/?pg=news&news_id=234355).

At 3 April 2009, a suspicion was elaborated which was earlier submitted
against AS Merko Ehitus in relation to the giving of a bribe to Ivo Parbus.
While the suspicion submitted at 17 December 2008 stated that the bribe was
given for the purpose of accelerating the proceedings with the plans of
seven properties, then according to the elaboration of 3 April, the number
of properties decreased to three. Concerning the plans for the remaining
four properties, a suspicion on the same bribe object was submitted against
OÜ Woody, OÜ Metsailu and OÜ Constancia that are subsidiaries of AS Merko
Ehitus. In addition to Estravel's gift coupon of EEK 25 thousand, the
suspected bribe of AS Merko Ehitus also includes book "Eesti Talurahva
Arhitektuur" costing EEK 410. The suspicion submitted against the
subsidiaries mentions Estravel's gift coupon of EEK 25 thousand, a book
costing EEK 410 and Estravel's gift coupon of EEK 15 thousand as the bribe.
The suspects consider the suspicions to be unfounded
(http://www.nasdaqomxbaltic.com/market/?pg=news&news_id=232461).

On 28 September 2009, the Supervisory Board of AS Merko Ehitus approved the
proposal of the Management Board for affording up to EEK 300 million of the
company's funds to clients in co-financing of new construction contracts as
well as financing the purchase of new real property, within the next 12 months. 

The Management Board of Merko Ehitus must adhere to the following priorities
in the investment activities: 
1) Participation in public sector PPP projects;
2) Provision of co-financing for public sector construction projects funded
   by the EU; 
3) Co-financing of development projects with good potential, by providing
   up to 30% of the project cost, on the condition that the project has an
   effective business plan and that external financing has been secured;
4) Acquisition of residential properties with good potential in larger
   cities. Preferred properties: those with a moderate work volume and a
   valid detailed plan, located in a developed residential environment.

Capitalisation and good liquidity are competitive advantages of Merko Ehitus
upon judgement of the Supervisory Board and that should be used daringly to
achieve commercial aims.

On 2 December 2009, Tallinna Teede AS, a wholly owned subsidiary of AS Merko
Ehitus, acquired the 100-percent holding in the company AS Vooremaa Teed
from the Republic of Estonia. The purchase price of the company was
EEK 47 989 570. The principal activity of AS Vooremaa Teed is road
construction and maintenance in Jõgeva County. Pursuant to the development
plan of Tallinna Teede AS, the company was acquired in order to facilitate
expansion into the road maintenance market and to establish a road
construction division in central Estonia. The acquisition of AS Vooremaa
Teed also allows the better utilisation of the existing resources of
Tallinna Teede AS, and creates synergy for portfolio expansion
(http://www.nasdaqomxbaltic.com/market/?pg=details&instrument=EE3100098328&list=
2&tab=news&news_id=238295). 

On 18 December 2009, AS Merko Ehitus acquired the 100% holding in the
company OÜ Tähelinna Kinnisvara (registry code 10723293) from AS E.L.L.
Kinnisvara. The purchase price of the company was EEK 51.9 million. The
company OÜ Tähelinna Kinnisvara was established in 2001. The principal
activity of the company is property development and investments. The
company owns a six-storey office building Järvevana tee 9G, Tallinn;
the building was completed in 2003 and houses the headquarters of
AS Merko Ehitus
(http://www.nasdaqomxbaltic.com/market/?pg=details&instrument=EE3100098328&list=
2&tab=news&news_id=238554). 


Operating results

Group's revenue for the year 2009 was EEK 3181.2 million. 68.6% of the sales
originated from Estonia, 29.1% from Latvia and 2.3% from Lithuania. As compared
to with the year 2008, company's sales increased in Latvia by 2.3% and decreased
in Lithuania by 91.3% and in Estonia by 24.6%. 

Group's revenue for the IV quarter 2009 was EEK 847.8 million, which constitutes
an annual decrease of EEK 253.7 million.

The fall in revenue in this period was caused by the reduced unit prices in
construction and the continued decrease in demand in the construction sector,
caused by the overall recession. 

In 2009, the Group sold 280 apartments in total cost of EEK 338.5 million
(without VAT). As of 31.12.2009 Group held in inventories unsold 187 completed
apartments in total cost EEK 224.4 million and 441 apartments in the
construction stage in total cost EEK 210.8 million. In Q4, Merko Ehitus began
the construction of three new apartment buildings in Tallinn (with 109 flats
in total). 

As at 31 December 2009, the group's backlog of construction contracts in
progress amounted to EEK 1.3 billion. 

Companies of the Group 12M 2009 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):

                                             12M 2009            12M 2008
                                            EEK      EUR        EEK       EUR
Estonian companies
   AS Merko Ehitus (parent company)      1 689 327  107 968  1 861 553   118 975
   AS Gustaf (75% partnership)              44 131    2 820    142 558     9 111
   OÜ Gustaf Tallinn (80% partnership)      61 126    3 907    140 930     9 007
   AS Merko Tartu (66% partnership)         72 073    4 606    308 732    19 732
   Tallinna Teede AS (100% partnership)    275 423   17 603    432 273    27 627
   OÜ Woody (100% partnership)              25 000    1 598     79 803     5 100
Latvian company				
   SIA Merks (100% partnership)            925 985   59 181    878 295    56 133
Lithuanian company				
   UAB Merko Statyba (100% partnership)     70 915    4 532    797 902    50 995

In one year, the Group's cost of goods sold decreased by 29.9% and marketing and
general administrative expenses by 18.5%. The economizing measures taken to
reduce costs helped to decrease marketing and administrative expenses, with the
EEK 9.8 million decrease in labour costs, EEK 12.0 million decrease in
consultation/legal aid, EEK 9.0 million decrease in advertising and sponsoring
and EEK 14.8 million decrease in other costs were the most significant factors.
Despite the vigorous measures, the group's cost-cutting rate failed to keep up
with the fall in revenue - thus, the cost of goods sold in the period increased
to 89.1% and marketing and administrative costs to 6.3%.

The group's earnings before taxes in 2009 were EEK 119.9 million, which means
a decrease by EEK 212.9 million compared to 2008. The net profit in the period
was EEK 116.2 million; representing an EEK 183.0 million or 61.2% decrease.
The fall in earnings was affected by revenue, the reduced profitability of the
construction and property development sectors, and the extraordinary expenses
resulting from changes in the economic conditions. In 2009, the group suffered
an 90.7 million loss due to the depreciation of development projects (incl.
properties for sale by EEK 66.9 million; work in progress by EEK 3.7 million,
and finished goods by EEK 20.1 million); and a further EEK 8.0 million due to
the depreciation of non-current assets and EEK 13.8 million loss from the
write-off of uncollectible accounts. The Group's earnings before taxes were
EEK 232.4 million before extraordinary write-offs. The seasonality of the
construction field and the cyclic nature of property development did not have
a significant impact on the financial performance.

Group's priorities in 2009 were positive cash flow and liquidity. In 2009
Group's total cash flows amounted to EEK -156.3 million, of which the cash
flows from operating activities totalled EEK +368.4 million, from investment
activities EEK -198,7 million and from financing activities EEK-326.0 million.
The cash flows from operating activities of the reporting period were mostly
affected by change in inventories EEK +338.9 million, change in liabilities
and prepayments related to operating activities EEK -306.3 million and
operating profit EEK +132.0 million. From investment activities cash flows
EEK -138.2 million from purchase of other financial investment, EEK -62.1
million investment in subsidiaries, EEK -20.1 million from balance of
granted/received loans, EEK +32.0 million from received interests and
EEK -13.2 million from purchase of property, plant and equipment. Of the
cash flow from financing activities, EEK -243.9 million was used to repay
loans and EEK -64.7 million was paid as dividends.
As of 31 December 2009, the Group has EEK 760.6 million of funds on the
Group's bank accounts and deposits.

The ratios and calculation methods characterizing the operating activities
of the Group
                            2009 12 months   2008 12 months   2008 12 months

Net profit margin                    3,7 %            6,4 %            9,9 %
Profit before taxes margin           3,8 %            7,1 %           10,7 %
Operating profit margin              4,2 %            7,0 %            9,5 %
Gross profit margin                 10,9 %           16,3 %           14,1 %
EBITDA margin                        5,3 %            7,8 %           10,0 %
Return on equity per annum           5,5 %           14,6 %           30,2 %
Return on assets per annum           3,1 %            7,7 %           15,3 %
Equity ratio                        60,5 %           53,7 %           51,5 %
Current ratio                        2,3              2,8              2,4
Quick ratio                          1,2              1,3              1,0
General expense ratio                6,3 %            5,8 %            4,5 %
Gross remuneration ratio             8,8 %            8,8 %            7,4 %

Net profit margin: Net profit* / Revenue
Profit before taxes margin: Profit before taxes / Revenue
Operating profit margin: Operating profit / Revenue
Gross profit margin: Gross profit / Revenue
EBITDA margin: (Operating profit + Depreciation and impairment charge) / Revenue
Return on equity: Net profit* / Average equity during the period*
Return on assets: Net profit* / Average assets during the period
Equity ratio: Owners equity* / Total assets
Current ratio: Current assets / Current liabilities
Quick ratio: (Current assets - Inventories) / Current liabilities
General expense ratio: General expenses / Revenue
Gross remuneration ratio: Gross remuneration / Revenue

*attributable to equity owners of the parent


Construction market

The year 2009 was a year of full-blown recession. Domestic consumption
decreased, unemployment increased and the budgetary balance of the public
sector was problematic. National statistics offices have published the GDP
figures for Q4 2009 and reported negative economic growth (compared to Q4
2008): -17.7% in Latvia, -13.0% in Lithuania and -9.4% in Estonia. In Estonia,
this recession seems to have bottomed out in Q4 2009, and in Latvia and
Lithuania it will bottom out in the first half of 2010. Although the economy
as a whole may recover in 2010, the construction sector will see the fall
continue in 2010. In 2009, construction volumes fell by 47.7% in Latvia and
by 53.7% in Lithuania compared to 2008. Statistics Estonia will publish this
data on 1 March 2010, but the fall in Estonia is estimated to be around 37 to
40 percent.

The situation on the construction market remains difficult. Due to the decrease
in volumes and the resulting stiffer competition, construction rates have
fallen back to the level of 2005. To win new contracts, companies submit tenders
with prices far below the direct expenses and hope to make up for the difference
as prices fall in the future. This approach is definitely not sustainable. It
means increased business risks for the contractors, execution risks for the
clients and credit risks for potential suppliers. We believe that the fall in
construction rates has now stopped and there is no reserve for a further fall.
With the prices bottoming out and the subsequent potential increase in
construction rates, there are additional risks for long-term (12 months or more)
fixed price building contracts, as the price pressure threatens the
profitability of these projects.

The absence of financing options, the conservative policies of creditors and
the lack of positive expectations mean that there is virtually no investment
by the local private sector. Expansion plans have been postponed indefinitely
and the private sector is focusing on cost and cash flow management. Since
construction rates are low, there has been some activity on the small-scale
contracting (i.e. repair) market, where external financing is usually not
necessary and projects are mostly financed from savings. We have noticed an
increased interest from foreign investors in investing in this region, but
this is also very theoretical and not yet proved by real transactions. Most
of the new construction projects launched are in the field of infrastructure
and environmental facilities, financed by the public sector and the EU's
structural funds. The decrease in the private sector's revenue and the fall
in consumption have significantly damaged the public sector's revenue base
and financial means.

In Q4 2009, the Estonian residential property market showed first signs of
recovery as there was an increase in the number of transactions as well as
in average prices. Buyers who had postponed purchasing a home to wait for
prices to fall have now realised that the fall in home prices cannot last
forever and that their selection diminishes the longer they wait. The good
price level has once again made the Estonian property market attractive for
foreign capital. As a rule, foreign capital does not depend on the local loan
market, and thus transactions are much more likely to come through. In the
last eighteen months, there has been a great fall in prices (by 40 to 50%)
which levelled out in Q3 2009. This has made the banks much more aggressive.
It is now much safer for banks to finance new residential properties. The
loans granted under the new terms help to improve the banks' revenue base
and compensate the negative effect of bad loans. As a result of the
abovementioned trends, the financing situation has improved in recent months,
especially in terms of the down payment required and the interest margin for
end consumers.

In Q4, several Estonian property developers, including Merko Ehitus,
launched new small-scale development projects. At the same time, the
volume of these projects is insignificant, and therefore it is likely
that the fall in supply will continue.

There is a limited availability of financing for long-term projects; the
cost of credit is high, and the requirements for obtaining credit are
unrealistic. Therefore, we do not expect any new rental projects to emerge.
As for rental projects, the key words are still the same: dealing with the
fall in rental income, the accounts payable, and liquidity issues.
The outlook for the fast recovery of the market is grim.


Employees and remuneration

In 31.12.2009, the number of employees in the Group's service was 702,
including 682 full-time employees. The Group reduced the number of its
personnel by 27.2% or 262 employees in a year. The gross remuneration
paid to employees in 2009 amounted to EEK 278.9 million a decrease of
31.7% compared to previous year. The smaller amount of performance pay,
due to the fall in the group's profitability, and the reduced staff
levels also contributed to the fall in the group's labour costs.


Shares and shareholders

Share information

ISIN                            EE3100098328
Short name of the security      MRK1T
Stock Exchange List             Baltic Main List
Nominal                         10.00 EEK
Total no of securities issued   17 700 000
No of listed securities         17 700 000
Listing date                    11.08.2008 

The shares of Merko Ehitus are listed in the main list of NASDAQ OMX Tallinn
Stock Exchange. In 2009 3862 transactions with the shares of Merko Ehitus
were performed in the course of which 2.8 million shares were traded and the
total monetary value of transactions was EEK 146.8 million. The lowest share
price was EEK 28.95 and the highest price was EEK 90.44 per share. The closing
share price as at 30.12.2009 was EEK 78.55. AS Merko Ehitus market value as at
31.12.2009 was EEK 1.39 billion.


STATEMENT OF COMPREHENSIVE INCOME 12M 2009
consolidated, unaudited, in thousand EEK and EUR

                                           EEK                   EUR
                                  12M 2009    12M 2008   12M 2009   12M 2008

Revenue                          3 181 209   4 653 933    203 316    297 441
Cost of goods sold              (2 835 169) (4 045 306)  (181 200)  (258 542)

GROSS PROFIT                       346 040     608 627     22 116     38 899

Marketing expenses                 (47 094)    (43 921)    (3 009)    (2 807)
Administrative and gen. expenses  (154 000)   (202 820)    (9 842)   (12 963)
Other operating income              14 408       9 529        921        609
Other operating expenses           (27 326)    (43 333)    (1 746)    (2 769)

OPERATING PROFIT                   132 028     328 082      8 440     20 969

Financial income and expenses
from stocks of subsidiaries              -       1 418          -         91
Financial income and expenses
from stocks of associate
companies and joint ventures       (18 222)     (4 565)    (1 165)      (292)
Financial income and expenses from other
long-term financial investments     (8 867)          -       (567)         -
Interest expense                   (23 478)    (18 392)    (1 501)    (1 175)
Foreign exchange gain                1 209      (6 942)        77       (444)
Other financial income              38 307      34 405      2 448      2 199
Other financial expenses            (1 119)     (1 297)       (71)       (83)
Total financial income and expenses(12 170)      4 627       (779)       296

PROFIT BEFORE TAX                  119 858     332 709      7 661     21 265

Corporate income tax expense        (8 496)    (26 339)      (543)    (1 684)

NET PROFIT FOR FINANCIAL YEAR      111 362     306 370      7 118     19 581
 incl.equity holders of the parent 116 166     299 140      7 424     19 119
      minority interest             (4 804)      7 230       (306)       462

OTHER COMPREHENSIVE INCOME
Exchange differences on
translating foreign subsidiaries    (2 266)     (7 465)      (145)      (477)

COMPREHENSIVE INCOME               109 096     298 905      6 973     19 104
 incl.equity holders of the parent 113 900     291 675      7 279     18 642
      minority interest             (4 804)      7 230       (306)       462

Earnings per share for profit attributable
to the equity holders of the parent
(basic and diluted, in EEK and EUR)   6,56       16,90       0,42       1,08


STATEMENT OF COMPREHENSIVE INCOME Q4 2009
consolidated, unaudited, in thousand EEK and EUR

                                           EEK                   EUR
                                   Q4 2009     Q4 2008    Q4 2009    Q4 2008

Revenue                            847 830   1 101 566     54 186     70 403
Cost of goods sold                (779 438) (1 080 425)   (49 815)   (69 051)

GROSS PROFIT                        68 392      21 141      4 371      1 352

Marketing expenses                 (14 129)    (17 801)      (903)    (1 138)
Administrative and general expenses(36 645)    (45 600)    (2 342)    (2 914)
Other operating income               4 306         842        275         53
Other operating expenses           (23 466)    (30 815)    (1 499)    (1 969)

OPERATING PROFIT                    (1 542)    (72 233)       (98)    (4 616)

Financial income and expenses
from stocks of subsidiaries              -       1 418          -         91
Financial income and expenses
from stocks of associate
companies and joint ventures       (10 178)     (5 749)      (650)      (367)
Financial income and expenses from other
long-term financial investments     (8 867)          -       (567)         -
Interest expense                    (4 355)     (5 950)      (278)      (380)
Foreign exchange gain                  (56)        417         (4)        26
Other financial income              13 606      16 536        870      1 057
Other financial expenses                 7         (10)         0         (1)
Total financial income and expenses (9 857)      6 682       (629)       428

PROFIT BEFORE TAX                  (11 399)    (65 551)      (727)    (4 188)

Corporate income tax expense        (4 166)    (21 240)      (266)    (1 357)

NET PROFIT FOR FINANCIAL YEAR       (7 233)    (44 311)      (461)    (2 831)
 incl. equity holders of the parent (2 736)    (44 733)      (175)    (2 858)
       minority interest            (4 497)        422       (286)        27

OTHER COMPREHENSIVE INCOME
Exchange differences on
translating foreign subsidiaries    (1 234)      1 696        (79)       108

COMPREHENSIVE INCOME                (8 467)    (42 615)      (540)    (2 723)
 incl. equity holders of the parent (3 970)    (43 037)      (254)    (2 750)
       minority interest            (4 497)        422       (286)        27

Earnings per share for profit attributable
to the equity holders of the parent
(basic and diluted, in EEK and EUR)  (0,15)      (2,53)     (0,01)     (0,16)


STATEMENT OF FINANCIAL POSITION AS OF 31.12.2009
consolidated, unaudited, in thousand EEK and EUR

                                       EEK                      EUR
                             31.12.2009   31.12.2008  31.12.2009  31.12.2008
ASSETS
Current assets
Cash and cash equivalents       359 732      515 191      22 991      32 927
Shortterm financial investments 400 916      262 759      25 623      16 793
Trade and other receivables     723 301      784 540      46 226      50 141
Inventories                   1 479 001    1 817 486      94 527     116 158
Assets held for sale                  -          173           -          11
Total current assets          2 962 950    3 380 149     189 367     216 030

Non-current assets
Long-term financial investments 243 958      260 036      15 592      16 619
Investment property              16 552       12 002       1 058         767
Property, plant and equipment   266 276      197 094      17 018      12 597
Intangible assets                24 238       11 807       1 549         755
Total non-current assets        551 024      480 939      35 217      30 738

TOTAL ASSETS                  3 513 974    3 861 088     224 584     246 768

LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings                      447 569      206 657      28 605      13 208
Trade and other payables        787 719      972 330      50 344      62 144
Short-term provisions            37 702       32 317       2 410       2 065
Total current liabilities     1 272 990    1 211 304      81 359      77 417

Non-current liabilities
Long-term borrowings             76 316      531 396       4 878      33 962
Long-term payables to suppliers  10 653        8 824         681         564
Long-term suppliers advance payments  5            -           0           -
Total non-current liabilities    86 974      540 220       5 559      34 526

Total liabilities             1 359 964    1 751 524      86 918     111 943

Equity
Minority interest                27 129       34 633       1 734       2 213
Equity attributable to equity holders of the parent company
Share capital                   177 000      177 000      11 312      11 312
Statutory reserve capital        17 700       17 700       1 131       1 131
Currency translation differences(14 816)     (12 550)       (947)       (802)
Retained earnings             1 946 997    1 892 781     124 436     120 971
Total equity attributable to
equity holders of the parent  2 126 881    2 074 931     135 932     132 612
Total equity                  2 154 010    2 109 564     137 666     134 825

TOTAL LIABILITIES AND EQUITY  3 513 974    3 861 088     224 584     246 768


Alar Lagus
Member of Board
+372 6 805 109
alar.lagus@merko.ee