Börsiteade

Pealkiri

2012 3 months consolidated unaudited interim report

Teade

MANAGEMENT REPORT

General information and structure of the group

AS Merko Ehitus is operating as a construction and real estate development
group providing integrated solutions in the field of construction in Estonia,
Latvia and Lithuania. The largest construction companies of the group are AS
Merko Ehitus Eesti (100%), SIA Merks (100%), UAB Merko Statyba (100%) and
companies belonging to the AS Merko Ehitus Eesti group Tallinna Teede AS
(100%), AS Merko Infra (100%), AS Gustaf (85%), OÜ Gustaf Tallinn (80%) and AS
Merko Tartu (66%). 

In accordance with the strategic directions approved in 2010 and pursuant to
the decision of the Supervisory Board of AS Merko Ehitus dated 30 December
2011, all of the construction activities of the group were transferred to AS
Merko Ehitus Eesti as of 1 January 2012. The aim of the changes was to separate
the management of the group and Estonian production activities and more
efficient distribution of resources between the business areas of the group.
After the changes are completed AS Merko Ehitus will operate as a holding
company that is independently not involved in production activities and which
holds 100% holdings in the construction companies AS Merko Ehitus Eesti, SIA
Merks and UAB Merko Statyba as well as the real estate business unit of the
group together with the companies owning real estate. The main activity of the
holding company is to develop and realise the strategies of the different
business areas of the Merko Ehitus group, first and foremost through the
long-term planning of resources. 

In the first quarter of the year 2012 a 100% subsidiary Merko Finland OY was
registered in Finland with the aim of establishing technical preconditions for
starting potential construction projects in longer perspective in Russia and as
a result of an intra-group transaction Lithuanian subsidiaries UAB Balsiu
Mokyklos SPV and UAB Merko Bustas were transferred, respectively, to OÜ Merko
Property and AS Merko Ehitus. 

Operating results

In 2012 3 months, the revenue of the group was EUR 47.8 million. Estonia
contributed 87.8%, Latvia 8.1% and Lithuania 4.1% to the group’s revenue. As
compared to 2011 3 months, the group’s revenue increased by +82.6%, including
+110.9% in Estonia, +74.7% in Lithuania and -24.7% in Latvia. 

The consolidated revenue of the group’s largest entities:

                                        3 months        3 months        3 months
                                            2012          2011**          2010**
---------------------------------------                                         
Estonian entities                                                               
AS Merko Ehitus*                           2 897             100              15
AS Merko Ehitus Eesti group (100%         39 329          19 837          16 624
 ownership)                                                                     
AS Merko Ehitus Eesti (100% ownership)    22 738          13 567          13 365
Tallinna Teede AS (100% ownership)         3 688           1 940           1 818
AS Merko Infra (100% ownership)            9 038           1 437               5
Other subsidiaries                         3 865           2 893           1 436
Latvian entity                                                                  
SIA Merks (100% ownership)                 3 880           5 116          15 068
Lithuanian entity                                                               
UAB Merko Statyba (100% ownership)         1 685           1 120             289
Total Merko Ehitus group                  47 791          26 173          31 996

* includes the revenues of the smaller subsidiaries of AS Merko Ehitus
** approximate comparative indicators of the new structure of AS Merko Ehitus

As of 31 March 2012, the group’s portfolio on unfinished construction contracts
totalled EUR 189 million. The contract portfolio does not include residential
projects developed by the group and the works related to construction of
investment properties (incl. the contract for the construction and leasing of
Jõgeva police and court building). 

During the first 3 months of the year 2012, 14 apartments were sold at the
total cost of EUR 2.0 million (VAT not included), which does not include
transactions covered with preliminary contracts under the law of obligations.
As of 31.03.2012 inventories included 114 unsold completed apartments (81
apartments in Tallinn, 29 in Tartu and 4 in Riga) with the total cost of EUR
11.5 million and 507 apartment in the stage of construction, the cost of which,
as on the balance sheet date was EUR 20.9 million. Due to the continuing low
transaction activity on the housing market, the construction of 311 apartments
(in the amount of EUR 8.4 million) has currently been halted and the
construction of 196 apartments is underway, including two 21-apartment
buildings in Tallinn, on Hane street (time of completion: summer of 2012),
three 13-apartment buildings in Tallinn, on Pallasti street (time of
completion: summer of 2012) and a 115-apartment building in Riga, on Skanstese
street (time of completion: autumn of 2012). In order to minimise risks, new
projects are generally small-scaled or directed at a specific target group and
regionally dispersed. The impact of the cyclical nature of the development
activity was insignificant for the results of the first quarter. 

With the first three months of the year 2012, the group earned a gross profit
of EUR 2.5 million (within 3 months of 2011 EUR -1.4 million) from development
and construction activities. The impact of seasonality of construction
activities on the results of the quarter as compared to the previous years has
been insignificant. As compared to the first quarter of the year 2011, the
marketing and general administration costs of the group decreased by 2.3% and
the share of these costs in the revenue formed 5.2% (9.7% in the first quarter
of 2011). 

During the first 3 months of the year 2012, the profit before taxes of the
group was EUR 0.4 million and the net profit EUR 0.2 million as compared to the
EUR 4.1 million of loss before taxes and net loss of the same sum during the
first three months of the year 2011. 

In 2012 3 months, the change in short-term investments, and cash and cash
equivalents of Merko Ehitus group was EUR -9.7 million and as of 31 March 2012,
the cash and cash equivalents in the bank accounts and term deposits of the
group were in the amount of EUR 8.7 million. The cash flows from operating
activities totalled EUR -6.7 million, cash flows from investing activities
totalled EUR +0.1 million and cash flows from financing activities totalled EUR
-3.1 million. The cash flows from operating activities in the reporting period
were mostly affected by the change in receivables and prepayments of EUR -5.4
million, change in liabilities and prepayments related to operating activities
of EUR +3.4 million and the change in inventories EUR -2.9 million. Of the cash
flows from financing activities, the balance of loans received and repaid
totalled EUR -2.9 million and finance lease payments totalled EUR -0.2 million. 

The financial ratios and methodology for calculating the ratios describing the
group’s main operations 

                                              3 months     3 months     3 months
                                                  2012         2011         2010
------------------------------------------                                      
Net profit margin                                0,3 %      -15,7 %        3,3 %
EBT margin                                       0,9 %      -15,7 %        4,8 %
Operating profit margin                          0,5 %      -14,6 %        5,2 %
Gross margin                                     5,2 %       -5,5 %       11,7 %
EBITDA margin                                    1,7 %      -12,4 %        7,0 %
Return on equity per annum                       0,6 %      -13,4 %        3,1 %
Return on assets per annum                       0,3 %       -8,4 %        1,9 %
Equity ratio                                    51,7 %       62,1 %       63,2 %
Current ratio                                      2,0          2,6          2,5
Quick ratio                                        0,9          0,9          1,2
General expense ratio                            5,2 %        9,7 %        8,3 %
Gross remuneration ratio                         7,2 %       14,5 %       12,3 %
Debt to assets                                  17,4 %       12,8 %       13,9 %
Accounts receivable turnover (in days)              60           75           45
Accounts payable turnover (in days)                 55           48           39
Revenue per employee (in thousand euros)            55           29           43
Average number of full-time employees at           863          901          748
 the group                                                                      

Net profit margin: Net profit* / Revenue
EBT margin: Profit before taxes / Revenue
Operating profit margin: Operating profit / Revenue
Gross margin: Gross profit / Revenue
EBITDA margin: (Operating profit + Depreciation and impairment charge) / Revenue
Return on equity: Net profit x 4* / Average equity during the period*
Return on assets: Net profit x 4* / 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
Debt to assets: Interest-bearing liabilities / Total assets
Accounts receivable turnover: Trade receivables x 365 / Revenue x 4
Accounts payable turnover: Payables to supplies x 365 / Cost of goods sold x 4
Revenue per employee: Revenue / Average number of full-time employees

* attributable to equity holders of the parent

Employees and remuneration

The number of group’s employees decreased by 65 (-6.9%) employees in a year and
as of 31.03.2012, the group had 883 employees. Within the framework of the
efficiency program implemented from the first quarter changes were carried out
in the management of Merko Statyba, furthermore, the number of administrative
employees was decreased in the Lithuanian and Latvian subsidiaries. The gross
remuneration paid to employees in 2012 3 months amounted to EUR 4.1 million an
increase of 7.3% compared to previous year. Salaries accounted for 85.5% of the
gross remuneration, and performance-related pay accounted for 14.5%. 

Construction market

Tendencies influencing the construction market in the coming quarters:

In the year 2012, the majority of the new large-scale construction contracts in
the Baltic states still come from the public sector and are funded from the
European Union structural funds. Considering the continuously high requirements
of the clients on guarantees and long payment terms, the burden on the
circulating capital of the construction companies continues to be intense and
in order to remain in competition, it is important that the company has the
capacity to manage cash flows. Some companies may be in difficulty in obtaining
sufficient guarantees due to the lack of security. Furthermore, there are many
examples on clients cancelling the procurements due to the fact that the bids
are not within the previously prepared budget and the funds allocated for
funding the projects are insufficient. 

Intense competition in major public procurements continues. Considering the
extremely low profitability of the construction sector and the negative
financial results of earlier years, the construction companies cannot afford
new objects that yield loss. Assessing and managing risks in making
construction offers has become more and more important and construction
companies are paying a lot of attention to it. Construction companies with a
stronger equity base  and lower debt burden are more likely to strengthen their
market position in the segment of larger construction orders. 

As a positive trend, increase of activeness of private clients in the
preparation of development projects of commercial real estate can be observed,
although the activeness of concluding actual construction contracts will
presumably remain low in 2012. 

The activeness of the apartment market in all three Baltic states continues to
be low as compared to the years before the crisis. At the same time, the
realisation of various apartment development projects that were frozen before,
has been activated. This will increase the offer of new apartments. The
apartment buyers are increasingly focused on the construction quality and in
making their purchase decisions, they are relying on the availability of
infrastructure in the region (parking, services, logistics). The availability
of bank loans in financing apartment transactions may be considered rather good
in all three Baltic states, although in Latvia, the internal demand and
activeness of private clients continues to be very low. 

Share and shareholders

Share information

ISIN                                         EE3100098328
Short name of the security         MRK1T
Stock Exchange List                   Baltic Main List
Nominal value                           no par value
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 2012 3 months 547 transactions with the shares of Merko
Ehitus were performed in the course of which 0.3 million shares were traded and
the total monetary value of transactions was EUR 1.7 million. The lowest share
price was EUR 5.37 and the highest price was EUR 6.80 per share. The closing
share price as of 31.03.2012 was EUR 6.00. AS Merko Ehitus market value as of
31.03.2012 was EUR 106 million. 

                                    31.03.2012  31.03.2011  31.03.2010
-----------------------------------                                   
No. of shares, thousand pcs             17 700      17 700      17 700
Earnings per share (EPS), in euros        0,01       -0,23        0,06
Equity per share, in euros                6,18        6,82        7,74
P/B (price to book ratio)                 0,97        1,36        0,99

Main shareholders of AS Merko Ehitus as of 31.03.2012

                                                     Number of     Percentage of
                                                        shares             total
-----------------------------------------------                                 
AS Riverito                                         12 742 686            71,99%
ING Luxembourg S.A., clients                           974 126             5,50%
Skandinaviska Enskilda Banken Ab, clients              757 289             4,28%
Firebird Republics Fund Ltd                            182 754             1,03%
Ergo Pensionifond 2P2                                  171 679             0,97%
State Street Bank and Trust Omnibus Account a          156 718             0,89%
 Fund No OM01                                                                   
Gamma Holding OÜ                                       143 847             0,81%
SEB Elu- ja Pensionikindlustus AS                      125 520             0,71%
Andersson Investeeringud OÜ                            103 570             0,59%
Clearstream Banking Luxembourg S.A. clients            102 937             0,58%
AS Midas Invest                                        102 805             0,58%


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited, in thousand euros

                                                                  2012      2011
                                                              3 months  3 months
                                                                                
Revenue                                                         47 791    26 173
Cost of goods sold                                            (45 288)  (27 608)
Gross profit (-loss)                                             2 503   (1 435)
                                                                                
Marketing expenses                                               (428)     (562)
Administrative and general expenses                            (2 048)   (1 972)
Other operating income                                             237       184
Other operating expenses                                          (23)      (37)
Operating profit (-loss)                                           241   (3 822)
                                                                                
Finance income/costs                                               175     (276)
incl. finance income/costs from investments in associates          105      (76)
and joint ventures                                                              
finance income/costs from other long-term investments              335         -
interest expense                                                 (313)     (210)
foreign exchange gain                                             (63)       (9)
other financial income (expenses)                                  111        19
Profit (loss) before tax                                           416   (4 098)
Corporate income tax expense                                     (269)         -
Net profit (-loss) for current period                              147   (4 098)
                                                             -------------------
incl. net profit (-loss) attributable to equity holders of         155   (4 107)
 the parent                                                                     
net profit (-loss) attributable to non-controlling interest        (8)         9
                                                                                
Other comprehensive income (-loss)                                              
Currency translation differences of foreign entities              (23)        18
Comprehensive income (-loss) for the period                        124   (4 080)
                                                             -------------------
                                                             -------------------
incl. net profit (-loss) attributable to equity holders of         132   (4 089)
 the parent                                                                     
net profit (-loss) attributable to non-controlling interest        (8)         9
                                                                                
Earnings per share for profit (loss) attributable to equity       0,01    (0,23)
holders of the parent (basic and diluted, in euros)                             


CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited, in thousand euros

                                                       31.03.2012  31.12.2011
ASSETS                                                                       
                                                                             
Current assets                                                               
Cash and cash equivalents                                   8 732      18 510
Short-term deposits                                             -         140
Trade and other receivables                                64 154      64 449
Prepaid corporate income tax                                  711         686
Inventories                                                90 290      87 834
Total current assets                                      163 887     171 619
                                                                             
Non-current assets                                                           
Long-term financial assets                                 26 256      27 051
Deferred income tax assets                                  1 635       1 870
Investment property                                         2 702       2 313
Property, plant and equipment                              15 650      16 057
Intangible assets                                           1 408       1 427
Total non-current assets                                   47 651      48 718
                                                                             
TOTAL ASSETS                                              211 538     220 337
                                                      -----------------------
                                                      -----------------------
                                                                             
LIABILITIES AND EQUITY                                                       
                                                                             
Current liabilities                                                          
Borrowings                                                 17 545      16 574
Payables and prepayments                                   56 581      61 635
Short-term provisions                                       6 437       6 781
Total current liabilities                                  80 563      84 990
                                                                             
Non-current liabilities                                                      
Long-term borrowings                                       19 333      23 764
Long-term trade payables                                      737         790
Deferred corporate income tax liability                       131         131
Long-term provisions                                           54          66
Total non-current liabilities                              20 255      24 751
                                                                             
Total liabilities                                         100 818     109 741
                                                      -----------------------
                                                      -----------------------
                                                                             
Equity                                                                       
                                                                             
Non-controlling interest                                    1 348       1 356
Equity attributable to equity holders of the parent                          
Share capital                                              12 000      12 000
Statutory reserve capital                                   1 131       1 131
Currency translation differences                            (593)       (570)
Retained earnings                                          96 834      96 679
Total equity attributable to equity holders of parent     109 372     109 240
                                                                             
Total equity                                              110 720     110 596
                                                      -----------------------
                                                      -----------------------
                                                                             
TOTAL LIABILITIES AND EQUITY                              211 538     220 337
                                                      -----------------------



Andres Trink
Chairman of Management Board
+372 680 5400
[email protected]