Börsiteade

Pealkiri

2010 9 months and III 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 9 months was EEK 1975.7 million. 72.2% of
the sales originated from Estonia, 25.4% from Latvia and 2.4% from Lithuania.
As compared to with the 2009 9 months, Group's sales decreased by 15.5% incl.
by 14.5% in Estonia, by 17.2% in Latvia and by 20.3% in Lithuania.

Group's revenue for the III quarter 2010 was EEK 867.1 million, which
constitutes an annual decrease of EEK 18.4 million.

In 2010, the company has successfully increased the portfolio of its
construction works. 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 Balsiu 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. The largest construction contracts concluded in
2010 have been the construction of the E20 Loo-Maardu road section
(EEK 288.8 million), construction of the Iru Waste energy block
(EEK 197.9 million) and the contract concluded after the balance sheet date
for the water management project of the city of Maardu for the construction
of the water and sewerage pipelines and facilities of the residential area
of Muuga (EEK 207.7 million) and renovation of the common water supply of
the Kohtla-Järve area (EEK 121.9 million).

As of 30 September 2010, the Group's backlog of construction contracts in
progress amounted to EEK 2.6 billion.

The Group's apartment sales during the period were good, considering the
market situation. In 2010 9 months, the Group sold 175 apartments in total
cost of EEK 205.1 million (without VAT). As of 30.09.2010 Group held in
inventories unsold 121 completed apartments in total cost EEK 139.0 million
and 316 apartments in the construction stage in total cost EEK 178.2 million.
In the III quarter of 2010, Merko Ehitus started constructing a new apartment
building with 110 apartments in Tallinn at Tartu mnt 50. New apartments will
be completed in the IV quarter of the year 2011. SIA Merks restarted its
development project with 116 apartments in Riga, in the Skanstes area.
The investment necessary for completing the project is EUR 3 million and
the construction works of the objects are planned to be completed in the I
quarter of the year 2011.

Companies of the Group 9M 2010 consolidated revenue
(sales outside the Group) were (in thousand kroons and euros):

                                              9M 2010             9M 2009
                                            EEK      EUR        EEK       EUR
Estonian companies
   AS Merko Ehitus (parent company)   1 051 357   67 194  1 263 801    80 772
   AS Gustaf (75% partnership)           27 862    1 781     39 942     2 553
   OÜ Gustaf Tallinn (80% partnership)   37 697    2 409     47 136     3 013
   AS Merko Tartu (66% partnership)      26 898    1 719     61 730     3 945
   Tallinna Teede AS (100% partnership) 249 806   15 965    216 760    13 854
   Woody OÜ (100% partnership)           23 682    1 514     24 988     1 597
Latvian company
   SIA Merks (100% partnership)         501 724   32 066    605 853    38 721
Lithuanian company
   UAB Merko Statyba (100% partnership)  47 347    3 026     58 380     3 731

In one year, the Group's cost of goods sold decreased by 13.8% and marketing
and general administrative expenses by 18.1%. As compared to the first six
months of the year, the share of marketing and general administrative expenses
in revenues decreased. The economizing measures taken to reduce costs helped
to decrease marketing and administrative expenses, with the EEK 7.0 million
decrease in labour costs, EEK 7.1 million decrease in office expenses and
communication services and EEK 5.1 million decrease in advertising and
sponsoring were the most significant factors. Regardless of the general
decrease in the marketing and general administrative expenses, the expenses
on consultations and legal assistance increased, as compared to the previous
year, by EEK 3.6 million, which is largely due to legal disputes related to
procurement proceedings.

Group's earnings before taxes in 2010 9 months were EEK 91.9 million, which
means a decrease by EEK 39.3 million compared to 2009 9 months. The net
profit in the period was EEK 81.4 million; representing an EEK 37.5 million
or 31.6% decrease. Revaluating the previously discounted real estate to the
level of today's transaction formed EEK 1.3 million. The fall in profits was
affected by revenue, the reduced profitability of the construction and
property development sectors. The cyclical nature of the development
activity was insignificant.

In 2010 9 months Group's change in short-term investments and pecuniary
means amounted to EEK -431.7 million and as of 30 September 2010, the Group
had EEK 331.1 million of funds on the Group's bank accounts and deposits.
Group's cash flows from operating activities were EEK -39.0 million, from
investment activities EEK -62.8 million and from financing activities
EEK -329.9 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 +181.7 million, change in receivables
and liabilities related to construction contracts recognised under the
stage of completion method EEK -300.5 million and operating profit
EEK +96.1 million. From investment activities cash flows balance of
granted/received loans totalled EEK -48.2 million and purchase of property,
plant and equipment totalled EEK -10.0 million. Of the cash flow from
financing activities, EEK -194.7 million was used to dividend payment,
EEK -146.4 million for loan repayments and EEK -17.9 million for finance
lease principal payments.

The ratios and calculation methods characterizing the operating activities
of the Group
                             2010 9 months    2009 9 months    2008 9 months

Net profit margin                    4,1 %            5,1 %            9,7 %
Profit before taxes margin           4,7 %            5,6 %           11,2 %
Operating profit margin              4,9 %            5,7 %           11,3 %
Gross profit margin                 10,3 %           11,9 %           16,5 %
EBITDA margin                        6,3 %            6,6 %           11,9 %
Return on equity per annum           5,2 %            7,5 %           22,2 %
Return on assets per annum           3,2 %            4,2 %           11,2 %
Equity ratio                        61,2 %           58,1 %           50,0 %
Current ratio                        2,6              2,4              2,0
Quick ratio                          1,2              1,2              0,9
General expense ratio                6,2 %            6,4 %            5,2 %
Gross remuneration ratio             9,2 %            9,3 %            8,8 %

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 4/3 / Average equity during the period*
Return on assets: Net profit* x 4/3 / 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 third quarter of the year 2010 did not bring any alleviation to the
building sector, the market was characterised by the weak demand
characteristic of the first half of the year, and tight competition on the
offer side, additionally decrease in the volumes continued (II quarter
2010 vs. II quarter 2009 in Estonia -21.4%, in Latvia -35.4% and Lithuania
-20.9%, at current rates). Most of the new construction projects are
started in the area of infrastructure and environmental facilities
financed by the public sector and structural funds of the European Union.
At the same time, increase in the interests of the foreign investors in
registered immovables and projects with rent flow can be noticed.
Companies founded by banks for developing and managing unsuccessful real
estate projects are actively operating in the real estate sector and in
many ways thanks to the latter, the prices of housing and registered
immovables have stabilised.

Due to the improvement in the global demand, the prices of the
construction materials based on metal, cement and petrochemicals as well
as prices of labour and machinery have increased during the last 9 months.
String demand in Central Europe and Scandinavia has made the labour
force move again, resulting in intense convergence of prices. We can
say with certainty that the construction prices have passed the bottom
now and the 10-15% increase in prices during the last nine months is
still not sufficient to achieve a balance point. High volatility of the
prices makes budgeting of the new projects very complicated and brings
along additional risk of performing construction projects with fixed
prices and price pressure on profitability of projects.

The construction services market is still characterised by tight
competition, the margins for covering costs and risks are minimal and
the price offers are generally bordering net cost. As compared to the
first half of the year, the number of low bids and aggressiveness of
the market participant has clearly decreased. This is conditioned by
the increase of the input prices, which have turned to rise in the
year 2010. Attitude of the clients and suppliers who won tenders with
low bids has become more aware, bigger guarantees as well as
substantial explanations on the biddings made are requested from the
bidders. Many of the companies who won tenders with low bids in the
year 2009 have ended their activities by now or are about to do so.

The year 2010 has shown signs of recovery in the housing market in
Estonia and Latvia, the number of transactions as well as the average
prices have increased. The increasing price level of housing and signs
of stabilisation in the economic environment have made people, who
have been postponing buying a home for a long time, more active.
The improved financing environment, including the decreased
self-financing rate and interest margin for final consumers has
facilitated the improvement of the outlook. Temporary sales success
in the housing sector has encouraged many developers to review their
frozen projects and formalise new business plans and loan
applications. Some developers who depend less on the financing
environment, including Merko Ehitus, have started with new small-scale
development projects. Regardless of the budding optimism in the ranks
of the developers, the volume of new development projects will remain
modest in the nearest future and therefore decreased in the housing
offers can be expected. Due to decrease in the offers and increase in
the construction prices, we predict a certain increase of the housing
prices during the next 12 months.

With the restoration of the sense of security of consumers,
consumption will be activated in 2011 and the market of commercial
premises will be stabilised. The developers will gain new courage to
carry out the postponed improvements and expansions in the existing
centres. There is no reason to expect arrival of new large-scale office
and commercial premises to the market - interest of the financial
institutions in funding new long-term development projects continues
to be low, price of the money high and the preconditions for opening
the loan funds unrealistic.


Employees and remuneration

In 30.09.2010, the number of employees in the Group's service was 891,
including 846 full-time employees. The Group increased the number of its
personnel by 16.0% or 123 employees in a year. The gross remuneration paid
to employees in 2010 9 months amounted to EEK 181.5 million a decrease of
16.6% 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 9 months 3385 transactions with the shares of Merko
Ehitus were performed in the course of which 1.3 million shares were traded
and the total monetary value of transactions was EEK 149.3 million. The
lowest share price was EEK 79.02 and the highest price was EEK 135.7 per
share. The closing share price as of 30.09.2010 was EEK 127.5. AS Merko
Ehitus market value as of 30.09.2010 was EEK 2.26 billion.


STATEMENT OF COMPREHENSIVE INCOME 9M 2010
consolidated, unaudited, in thousand EEK and EUR

                                           EEK                   EUR
                                   9M 2010     9M 2009    9M 2010    9M 2009

Revenue                          1 975 684   2 333 379    126 269    149 130
Cost of goods sold              (1 771 359) (2 055 731)  (113 210)  (131 385)

GROSS PROFIT                       204 325     277 648     13 059     17 745

Marketing expenses                 (23 075)    (32 965)    (1 475)    (2 107)
Administrative and gener. expenses(100 062)   (108 629)    (6 395)    (6 943)
Other operating income              19 029      10 101      1 216        646
Other operating expenses            (4 078)    (12 586)      (261)      (805)

OPERATING PROFIT                    96 139     133 569      6 144      8 536

Financial income and expenses
from stocks of associate
companies and joint ventures        (3 125)     (8 044)      (200)      (515)
Interest expense                   (10 301)    (19 123)      (658)    (1 222)
Foreign exchange gain                1 499       1 265         96         81
Other financial income               7 701      24 702        492      1 579
Other financial expenses                (2)     (1 112)        (0)       (71)
Total financial income and expenses (4 228)     (2 312)      (270)      (148)

PROFIT BEFORE TAX                   91 911     131 257      5 874      8 388

Corporate income tax expense       (11 490)    (12 662)      (734)      (809)

NET PROFIT FOR FINANCIAL YEAR       80 421     118 595      5 140      7 579
  incl.equity holders of the parent 81 370     118 902      5 201      7 599
       minority interest              (949)       (307)       (61)       (20)

OTHER COMPREHENSIVE INCOME
Exchange differences on
translating foreign subsidiaries       568      (1 032)        36        (66)

COMPREHENSIVE INCOME                80 989     117 563      5 176      7 513
  incl.equity holders of the parent 81 938     117 870      5 237      7 533
       minority interest              (949)       (307)       (61)       (20)

Earnings per share for profit attributable
to the equity holders of the parent
(basic and diluted, in EEK and EUR)   4,60        6,72       0,29       0,43


STATEMENT OF COMPREHENSIVE INCOME Q3 2010
consolidated, unaudited, in thousand EEK and EUR

                                           EEK                   EUR
                                   Q3 2010     Q3 2009    Q3 2010    Q3 2009

Revenue                            867 061     885 492     55 415     56 593
Cost of goods sold                (794 914)   (775 170)   (50 804)   (49 542)

GROSS PROFIT                        72 147     110 322      4 611      7 051

Marketing expenses                  (7 460)    (12 830)      (477)      (820)
Administrative and general expenses(34 899)    (32 140)    (2 230)    (2 054)
Other operating income               3 160       3 141        202        201
Other operating expenses            (1 061)    (10 855)       (68)      (695)

OPERATING PROFIT                    31 887      57 638      2 038      3 683

Financial income and expenses
from stocks of associate
companies and joint ventures         1 312      (2 080)        84       (134)
Interest expense                    (3 884)     (4 440)      (248)      (284)
Foreign exchange gain                   13      (2 619)         1       (167)
Other financial income               1 459       4 830         93        309
Total financial income and expenses (1 100)     (4 309)       (70)      (276)

PROFIT BEFORE TAX                   30 787      53 329      1 968      3 407

Corporate income tax expense        (1 959)     (7 724)      (124)      (493)

NET PROFIT FOR FINANCIAL YEAR       28 828      45 605      1 844      2 914
  incl.equity holders of the parent 29 461      45 711      1 883      2 921
       minority interest              (633)       (106)       (39)        (7)

OTHER COMPREHENSIVE INCOME
Exchange differences on
translating foreign subsidiaries      (434)     (4 962)       (28)      (317)

COMPREHENSIVE INCOME                28 394      40 643      1 816      2 597
  incl.equity holders of the parent 29 027      40 749      1 855      2 604
       minority interest              (633)       (106)       (39)        (7)

Earnings per share for profit attributable
to the equity holders of the parent
(basic and diluted, in EEK and EUR)   1,66        2,58       0,11       0,17


STATEMENT OF FINANCIAL POSITION AS OF 30.09.2010
consolidated, unaudited, in thousand EEK and EUR

                                       EEK                      EUR
                             30.09.2010   31.12.2009  30.09.2010  31.12.2009
ASSETS
Current assets
Cash and cash equivalents       213 698      359 732      13 658      22 991
Shortterm financial investments 117 355      400 916       7 500      25 623
Trade and other receivables     904 242      665 839      57 790      42 554
Inventories                   1 457 840    1 536 463      93 173      98 199
Total current assets          2 693 135    2 962 950     172 121     189 367

Non-current assets
Long-term financial investments 267 594      243 958      17 102      15 592
Investment property              24 443       16 552       1 562       1 058
Property, plant and equipment   282 428      266 276      18 051      17 018
Intangible assets                23 107       24 238       1 477       1 549
Total non-current assets        597 572      551 024      38 192      35 217

TOTAL ASSETS                  3 290 707    3 513 974     210 313     224 584

LIABILITIES AND OWNERS' EQUITY
Current liabilities
Borrowings                      217 740      447 569      13 916      28 605
Trade and other payables        758 334      787 719      48 466      50 344
Short-term provisions            60 259       37 702       3 851       2 410
Total current liabilities     1 036 333    1 272 990      66 233      81 359

Non-current liabilities
Long-term borrowings            205 693       76 316      13 146       4 878
Long-term payables to suppliers  10 523       10 653         673         681
Long-term suppliers advance payments  7            5           0           0
Total non-current liabilities   216 223       86 974      13 819       5 559

Total liabilities             1 252 556    1 359 964      80 052      86 918

Equity
Minority interest                24 032       27 129       1 536       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(14 248)     (14 816)       (911)       (947)
Retained earnings             1 833 667    1 946 997     117 193     124 436
Total equity attributable to
equity holders of the parent  2 014 119    2 126 881     128 725     135 932
Total equity                  2 038 151    2 154 010     130 261     137 666

TOTAL LIABILITIES AND EQUITY  3 290 707    3 513 974     210 313     224 584


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