Börsiteade

Pealkiri

2010 6 months and II 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%) and
AS Tartu Maja Betoontooted (25%).

At the regular meeting of shareholders held on 3 June 2010 Jaan Mäe was
removed from the position of a Member of the Supervisory Board in
connection with the restructuring of the company's managerial structure
in the course of which he was elected a Member of the Management Board
of AS Merko Ehitus.

Due to the extensive changes in the economic environment and on the
construction market, the management and supervisory boards of AS Merko
Ehitus have reviewed the corporate strategy and established the group's
strategic targets for 2010 to 2015.

The strategy covers the period from this year until the end of 2015.
All the main principles and some of the financial targets, such as the
minimum equity ratio, must be applied or met throughout the defined period.

The detailed strategy is based on the following estimates and assumptions
about Baltic economy:
- There will be no economic growth in 2010; the construction sector will
  experience a fall by max. 10%;
- In the coming years (2011 and 2012), economic growth will not exceed 3%,
  as estimated by different experts;
- The main clients in the coming years will come from the public sector
  where focus will be on infrastructure projects co-financed by the EU funds;
- Since the public sector lacks the financial means for investment, there
  will be more extensive application of PPP (public private partnership)
  models;
- There will be more projects related to the improvement of energy
  performance;
- There will be more activity on the apartment market, compared to the
  slump in recent years; 
- There will be an increased demand for industrial facilities;
- The availability of credit/loans will improve;
- Starting 2011, unemployment rates will decrease and the retail business
  will enter the phase of recovery.

AS Merko Ehitus strategic targets:
- The vision of AS Merko Ehitus is to provide its clients with
  high-quality construction services in various fields.
- AS Merko Ehitus aims to be the leading construction company on its home
  market - in the Baltic countries.
- In addition to the home market, AS Merko Ehitus has identified Ukraine
  (especially Kiev) and St. Petersburg in Russia as its prospective markets.
- Outside of the above-mentioned markets, the company will only provide
  construction/development services for clients that Merko has cooperated
  with in the past or that require a facility similar to previous
  construction/development projects successfully executed by Merko.
- In 2015, turnover from Estonian operations would constitute approx.
  35% of the consolidated turnover; turnover from Latvian operations,
  Lithuanian operations, and other markets would account for approx.
  30%, 25% and 10%, respectively, of the consolidated turnover. The
  division of profit between the different markets is expected to be
  more or less similar to the division of turnover.
- In addition to current construction and design-engineering services,
  the company will offer an even more comprehensive service covering
  the entire process, from helping to find the suitable plot of land
  to helping the client obtain financing. 

AS Merko Ehitus long-term financial targets:
- To ensure that the average annual return on equity (ROE) of the group
  between 2011 and 2015 is at least 15%;
- To ensure that the group's equity ratio is at least 40% throughout the
  entire period.

In order to fulfil our targets:
1. We will look for opportunities to acquire holdings in successful
   companies, especially in Lithuania and Latvia.
2. We will restructure the group's management system with the help of the
   following methods, above all:
   - We will add a fifth member to the management board; their
     responsibilities will initially include foreign markets and
     development activities;
   - We will launch several new activities in order to improve horizontal
     cooperation between the different companies in the group, and in
     order to utilise the engineering know-how and management expertise
     (acquired in different countries) in the different functions of the
     group;
   - As the final outcome of the restructuring, we envision a publicly
     traded holding company which has divisions in all countries where
     the group has permanent operations, controlled through locally
     registered entities. 
3. We will preserve the core of the motivational system, which has
   proved to be effective so far, and will enhance the system in line
   with our set targets.

Operating results

Group's revenue for the year 2010 6 months was EEK 1108.6 million.
65.9% of the sales originated from Estonia, 31.9% from Latvia and
2.2% from Lithuania. As compared to with the 2009 6 months, company's
sales increased in Latvia by 6.4% and decreased in Lithuania by 52.6%
and in Estonia by 31.4%.

Group's revenue for the II quarter 2010 was EEK 608.0 million, which
constitutes an annual decrease of EEK 230.7 million.

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

In 2010 6 months, the Group sold 84 apartments in total cost of EEK 97.4
million (without VAT). As at 30.06.2010 Group held in inventories unsold
106 completed apartments in total cost EEK 138.3 million and 438 apartments
in the construction stage in total cost EEK 259.8 million. Compared to the
results of 31 December 2009, the group's surplus of products in progress
arising from the construction of apartments started at the end of 2009
(three buildings, 109 apartments) increased by EEK 45.6 million. The
abovementioned apartments will reach to realisation in the 3rd quarter
of 2010. 

From the point of view of new orders, the first half of 2010 was successful
for the company. On 13 July 2010 UAB Merko Statyba, a subsidiary of AS Merko
Ehitus, concluded a contract with a Vilnius city real estate company
regarding the construction and 25-year rental of a Balsiai school building.
The estimated investment of the project is EUR 10 million and the building
needs to be ready to welcome its new students on 1 September 2011. This
project is a long-term real estate investment for the group the construction
activities of which will neither be seen in the figures reflecting the
group's construction revenue nor in the portfolio of backlog of
construction contracts.
As at 30 June 2010, the group's backlog of construction contracts in
progress amounted to EEK 2.4 billion.

Companies of the Group 6M 2010 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):

                                              6M 2010             6M 2009
                                            EEK      EUR        EEK       EUR
Estonian companies
   AS Merko Ehitus (parent company)     537 486   34 352    797 262    50 954
   AS Gustaf (75% partnership)           10 902      697     28 596     1 828
   OÜ Gustaf Tallinn (80% partnership)   26 409    1 688     36 105     2 308
   AS Merko Tartu (66% partnership)      18 073    1 155     50 659     3 238
   Tallinna Teede AS (100% partnership) 130 297    8 327    127 881     8 173
Latvian company
   SIA Merks (100% partnership)         354 076   22 630    332 701    21 263
Lithuanian company
   UAB Merko Statyba (100% partnership)  23 132    1 478     49 207     3 145

In one year, the Group's cost of goods sold decreased by 23.7% and marketing
and general administrative expenses by 16.4%. The economizing measures taken
to reduce costs helped to decrease marketing and administrative expenses,
with the EEK 8.2 million decrease in labour costs, EEK 3.4 million decrease
in office expenses and communication services and EEK 2.7 million decrease
in advertising and sponsoring 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
88.1% and marketing and administrative costs to 7.3%. 

The group's earnings before taxes in 2010 6 months were EEK 61.1 million,
which means a decrease by EEK 16.8 million compared to 2009 6 months.
The net profit in the period was EEK 51.9 million; representing an EEK
21.3 million or 29.1% decrease. The fall in earnings was affected by
revenue, the reduced profitability of the construction and property
development sectors. The cyclical nature of the development activity was
insignificant. In the 2nd quarter of 2010, due to the slight recovery of
the selling prices of apartments, the value of products in progress which
had previously been decreased was increased by EEK 4 million.

In 2010 6 months Group's total cash flows amounted to EEK -75.0 million,
of which the cash flows from operating activities totalled EEK +28.8 million,
from investment activities EEK +184.7 million and from financing activities
EEK -288.5 million. The cash flows from operating activities of the reporting
period were mostly affected by change in trade and other payables related to
operating activities EEK +129.2 million, change in receivables and
liabilities related to construction contracts recognised under the stage of
completion method EEK -186.1 million and operating profit EEK +64.3 million.
From investment activities cash flows EEK -46.4 million from balance of
granted/received loans and EEK +232.3 million from return of deposits with
maturities greater than 3 months. Of the cash flow from financing activities,
EEK -194.7 million was used to dividend payment, EEK -108.9 million for loan
rapayments and EEK -13.8 million for finance lease principal payments.
As at 30 June 2010, the Group has EEK 455.1 million of funds on the Group's
bank accounts and deposits.

The ratios and calculation methods characterizing the operating activities
of the Group
                             2010 6 months    2009 6 months    2008 6 months

Net profit margin                    4,7 %            5,1 %           12,2 %
Profit before taxes margin           5,5 %            5,4 %           14,1 %
Operating profit margin              5,8 %            5,2 %           14,3 %
Gross profit margin                 11,9 %           11,6 %           19,4 %
EBITDA margin                        7,7 %            6,1 %           14,9 %
Return on equity per annum           5,0 %            7,0 %           26,9 %
Return on assets per annum           3,0 %            3,9 %           14,5 %
Equity ratio                        60,1 %           56,8 %           56,2 %
Current ratio                        2,3              2,9              2,3
Quick ratio                          1,0              1,4              1,1
General expense ratio                7,3 %            6,7 %            5,0 %
Gross remuneration ratio            10,9 %           10,1 %            9,0 %

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* x 2 / Average equity during the period*
Return on assets: Net profit* x 2 / 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

In the first half of 2010 the sector was characterized by the continually
low demand of construction services and intense competition in the sphere
of offers. Construction volumes continued to decrease (I quarter 2010 vs
I quarter 2009: in Estonia -41.4%, in Latvia -46.6% and in Lithuania
-48.5%, at current prices). Despite the extremely intense competition,
the prices of services and materials on the construction market increased
by app. 10%. An increase could be noticed both in the prices of metal- and
oil-based construction materials as well as in the cost of labour and
equipment. Strong demand for services in Central Europe and Scandinavia has
improved the mobility of labour, resulting in the increase of the prices of
services - the prices of construction services have, by today, been to and
come back from to the lowest of lows and will most probably increase by
another 5-10% during the next six months. 

On the main contracting market, companies continue to submit tenders
featuring sums below their actual service costs in order to get new orders
while participating at invitations to tender, which results in the
withdrawal of tenders of termination of contracts. Generally, the victim
in such situations is the contracting entity from whom the launching of
new procurement proceedings requires additional time and funds. It is
often the case that companies that submit below actual cost tenders
complete the costly preparatory work, make a considerable profit from it
and then leave the construction site. When new procurement proceedings are
launched, it is often discovered that the price of the unfinished work is
actually 2 to 3 times higher than the price stated on the tender that was
not completed by the previous contractor and that the already completed
work is 2 to 3 times cheaper. Unhealthy competition is promoted by the
indifference of contracting entities and their fear of becoming the
general public's centre of attention due to unsuccessful procurements
plus their fear that, when the matter is taken to court, the dispute with
the company that submitted the below actual cost tender could drag on for
an extended period of time resulting in the withdrawal of the financing
from the European Union by the time a verdict is reached. Contracting
entities fail to realize that by not punishing the substandard work
performed, they encourage the companies that are used to submitting
tenders that are below actual costs to take even cruder measures and
that by not demanding the contractor who terminated the contract
unilaterally to pay the damages they are stealing from the owner, that
is from the state or the local government. We sincerely hope that the
state bodies concerned will review the procedures of public procurements
and that the contractors who have breached their contracts in the
abovementioned manner will not be allowed to enter any new procurement
proceedings.

However, the submitting of below actual cost tenders might not always
be based on ill will. During the past year, the prices of construction
services have changed by app. 25% and increased by app. 10% during the
past six months. Such price volatility makes it difficult to draw up
budgets for new projects, includes new risks in the completion of
long-term construction projects (lasting for 12 months and longer)
with fixed price ranges and puts more pressure on the profitability of
projects. Companies that, despite the difficult times, manage to fully
complete their contractual obligations are worth to be acknowledged.

Most new construction projects are initiated in the sphere of
infrastructure- and environment-related structures financed by the
public sector and the structural funds of the European Union. Foreign
investors have also become more interested in the real estate- and
lease flow-related projects. Among of the most active parties in the
real estate sector are also the companies created by banks to deal
with and manage the development of unsuccessful real estate projects.
The involvement of the latter has made it more plausible that the
market prices of residential premises and land will soon stabilize.

The end of 2009 and the first half of 2010 showed the first signs of
increased activity on the residential premises market with an increase
in both the number of transactions as well as in the prices. The
current price range of premises offered and the signs showing the
stabilization of the economic environment have motivated the people
who have been putting off buying a home for a long period of time to
take action. As a result of the trends mentioned above, the financing
situation has improved during the past few months, the most significant
improvements being the reduced self-financing limits and interest
margins for end consumers.
The temporary success in selling residential premises has encouraged
numerous developers to review frozen projects and formalize new
business plans and loan applications. Some developers that are less
dependent on the financing spheres, including AS Merko Ehitus, have
launched new small-scale development projects. Despite the noticeable
optimism displayed by developers, the volume of development projects
will still remain modest in the nearest future, which will lead to a
decrease in the number of residential premises offered. Due to the
decrease of residential premises offered and the increase in
construction prices we expect the prices of residential premises to
increase by 5-10% during the next 12 months. 

The availability of funds for financing long-term projects continues
to be limited, the price of funds is high and the preconditions for
new loan means becoming available unrealistic, which is why we do not
expect new lease projects to enter the market. During the second half
of the year, the cash flows from lease projects might also recover due
to increased consumption but the sector will still be characterized by
coping with decreased levels of lease profits, loan commitments and
liquidity.

Employees and remuneration

In 30.06.2010, the number of employees in the Group's service was 847,
including 798 full-time employees. The Group increased the number of its
personnel by 1.9% or 16 employees in a year. The gross remuneration paid
to employees in 2010 6 months amounted to EEK 121.2 million a decrease of
16.7% compared to previous year. The smaller amount of performance pay,
due to the fall in the group's profitability 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 2010 6 months 2693 transactions with the
shares of Merko Ehitus were performed in the course of which 1.1 million
shares were traded and the total monetary value of transactions was
EEK 120.7 million. The lowest share price was EEK 79.02 and the highest
price was EEK 135.7 per share. The closing share price as at 30.06.2010
was EEK 115.8. AS Merko Ehitus market value as at 30.06.2010 was
EEK 2.05 billion.


STATEMENT OF COMPREHENSIVE INCOME 6M 2010
consolidated, unaudited, in thousand EEK and EUR

                                           EEK                   EUR
                                   6M 2010     6M 2009    6M 2010    6M 2009

Revenue                          1 108 623   1 447 887     70 854     92 537
Cost of goods sold                (976 445) (1 280 561)   (62 406)   (81 843)

GROSS PROFIT                       132 178     167 326      8 448     10 694

Marketing expenses                 (15 615)    (20 135)      (998)    (1 287)
Administrative and general expenses(65 163)    (76 489)    (4 165)    (4 889)
Other operating income              15 869       6 987      1 014        447
Other operating expenses            (3 017)     (1 758)      (193)      (112)

OPERATING PROFIT                    64 252      75 931      4 106      4 853

Financial income and expenses
from stocks of associate
companies and joint ventures        (4 437)     (5 964)      (284)      (381)
Interest expense                    (6 417)    (14 683)      (410)      (938)
Foreign exchange gain                1 486       3 884         95        248
Other financial income               6 242      19 872        399      1 270
Other financial expenses                (2)     (1 112)        (0)       (71)
Total financial income and expenses (3 128)      1 997       (200)       128

PROFIT BEFORE TAX                   61 124      77 928      3 906      4 981

Corporate income tax expense        (9 531)     (4 938)      (610)      (316)

NET PROFIT FOR FINANCIAL YEAR       51 593      72 990      3 296      4 665
  incl.equity holders of the parent 51 909      73 191      3 318      4 678
       minority interest              (316)       (201)       (22)       (13)

OTHER COMPREHENSIVE INCOME
Exchange differences on
translating foreign subsidiaries     1 002       3 930         64        251

COMPREHENSIVE INCOME                52 595      76 920      3 360      4 916
  incl.equity holders of the parent 52 911      77 121      3 382      4 929
       minority interest              (316)       (201)       (22)       (13)

Earnings per share for profit attributable
to the equity holders of the parent
(basic and diluted, in EEK and EUR)   2,93        4,14       0,19       0,26


STATEMENT OF COMPREHENSIVE INCOME Q2 2010
consolidated, unaudited, in thousand EEK and EUR

                                           EEK                   EUR
                                   Q2 2010     Q2 2009    Q2 2010    Q2 2009

Revenue                            608 000     838 696     38 858     53 602
Cost of goods sold                (534 339)   (755 559)   (34 150)   (48 290)

GROSS PROFIT                        73 661      83 137      4 708      5 312

Marketing expenses                  (8 437)    (13 085)      (539)      (836)
Administrative and general expenses(30 737)    (39 480)    (1 965)    (2 523)
Other operating income               3 918       5 077        250        325
Other operating expenses               (44)       (947)        (3)       (60)

OPERATING PROFIT                    38 361      34 702      2 451      2 218

Financial income and expenses
from stocks of associate
companies and joint ventures        (2 007)     (2 641)      (129)      (169)
Interest expense                    (3 167)     (6 844)      (202)      (437)
Foreign exchange gain                   37       3 714          2        237
Other financial income               4 059      12 094        259        773
Other financial expenses                 -          (1)         -         (0)
Total financial income and expenses (1 078)      6 322        (70)       404

PROFIT BEFORE TAX                   37 283      41 024      2 381      2 622

Corporate income tax expense        (1 424)       (285)       (91)       (19)

NET PROFIT FOR FINANCIAL YEAR       35 859      40 739      2 290      2 603
  incl.equity holders of the parent 35 342      40 465      2 259      2 586
       minority interest               517         274         31         17

OTHER COMPREHENSIVE INCOME
Exchange differences on
translating foreign subsidiaries       157       4 936         10        315

COMPREHENSIVE INCOME                36 016      45 675      2 300      2 918
  incl.equity holders of the parent 35 499      45 401      2 269      2 901
       minority interest               517         274         31         17

Earnings per share for profit attributable
to the equity holders of the parent
(basic and diluted, in EEK and EUR)   2,00        2,29       0,13       0,15


STATEMENT OF FINANCIAL POSITION AS AT 30.06.2010
consolidated, unaudited, in thousand EEK and EUR

                                       EEK                      EUR
                             30.06.2010   31.12.2009  30.06.2010  31.12.2009
ASSETS
Current assets
Cash and cash equivalents       286 441      359 732      18 307      22 991
Shortterm financial investments 168 643      400 916      10 778      25 623
Trade and other receivables     746 228      665 839      47 692      42 554
Inventories                   1 520 514    1 536 463      97 178      98 199
Total current assets          2 721 826    2 962 950     173 955     189 367

Non-current assets
Long-term financial investments 257 613      243 958      16 465      15 592
Investment property              16 226       16 552       1 037       1 058
Property, plant and equipment   283 339      266 276      18 109      17 018
Intangible assets                23 572       24 238       1 507       1 549
Total non-current assets        580 750      551 024      37 118      35 217

TOTAL ASSETS                  3 302 576    3 513 974     211 073     224 584

LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings                      374 924      447 569      23 962      28 605
Trade and other payables        770 346      787 719      49 235      50 344
Short-term provisions            54 270       37 702       3 468       2 410
Total current liabilities     1 199 540    1 272 990      76 665      81 359

Non-current liabilities
Long-term borrowings             83 924       76 316       5 364       4 878
Long-term payables to suppliers   9 355       10 653         598         681
Long-term suppliers advance payments  -            5           -           0
Total non-current liabilities    93 279       86 974       5 962       5 559

Total liabilities             1 292 819    1 359 964      82 627      86 918

Equity
Minority interest                24 665       27 129       1 576       1 734
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(13 814)     (14 816)       (883)       (947)
Retained earnings             1 804 206    1 946 997     115 310     124 436
Total equity attributable to
equity holders of the parent  1 985 092    2 126 881     126 870     135 932
Total equity                  2 009 757    2 154 010     128 446     137 666

TOTAL LIABILITIES AND EQUITY  3 302 576    3 513 974     211 073     224 584


Alar Lagus
Member of Management Board
+372 6 805 109
[email protected]