Börsiteade

Pealkiri

2015 12 months and IV quarter consolidated unaudited interim report

Teade

Tallinn, Estonia, 2016-02-11 07:00 CET (GLOBE NEWSWIRE) --




COMMENTARY OF THE CHAIRMAN OF THE MANAGEMENT BOARD

Merko Ehitus posted revenue of EUR 66 million in Q4 2015 and a 12-month figure
of EUR 251 million, thus remaining on par with 2014. The group earned a net
profit of EUR 4.4 million in Q4, with a figure of EUR 10 million for the entire
year. Profit before taxes made up EUR 11.7 million. The drop in government
contracts for infrastructure has been compensated by private sector orders in
the field of buildings and real estate development projects. The share of
revenue earned outside Estonia grew to 38% and real estate development revenue
increased to 28%. The Management Board of Merko Ehitus proposes to pay
shareholders 90% of last year’s profit in dividends, which amounts to 0.51
euros per share. 

With the slump in the Baltic construction market, the group’s result for the
year, and particularly the Q4 profit, exceeded the group’s management
expectations to some extent. The management consideres the growth of sales
revenue and profit in Lithuania as positive, as well as the results of the real
estate development sector. Considering the slump in government contracts, the
share of public sector orders in the secured order book has dropped below 20%
and we continue to focus on the comprehensive supply of design and construction
contracts to private sector customers, including to international companies.
Last year, the group was able to strengthen our secured order book as a whole,
above all in Estonia, where noteworthy orders accrued in the last quarter as
well. In Latvia, we weren’t able to conclude contracts in a volume comparable
to the large projects that have been in progress in the past few years, yet we
continue to be active on the Latvian market. 

The volume of construction orders has clearly dropped in the field of civil
engineering construction, as a result of which we have scaled down our
workforce in the field of external networks. At the same time, the total number
of the group’s employees has grown, above all on the account of additional
personnel in Lithuania. We have kept sales revenue at last year’s levels
primarily with the support of general construction and apartment development.
The sales revenue in the real estate development sector has grown by 54%,
making up 28% of the group's sales revenue. We have invested EUR 42 million
into new and ongoing development projects in 2015 and we will continue
investments in 2016 as well. 

In the fourth quarter of 2015, group companies signed new contracts worth EUR
95 million and the total volume of new contracts during the year was EUR 247
million. As at 31 December 2015, the group had a secured order book balance of
EUR 247 million. The group’s gross profit margin for the 12-month period was
9.1% and the net profit margin was 4.0%; the 2015 profit before taxes was EUR
11.7 million and in the fourth quarter alone, EUR 4.7 million. In 2015, the
group sold 403 apartments at the total value of EUR 61 million compared to the
395 apartments sold in 2014 for EUR 39 million (excl. VAT). In Q4, 155
apartments were sold at the total value of EUR 19 million (excl. VAT). 

The Management Board of Merko Ehitus proposes to pay shareholders 9 million
euros (0.51 euros per share) in dividends in 2016 from retained earnings of
previous periods, which translates into a dividend rate of 90% for the year
2015. The managments proposes to pay shareholders dividends over the company’s
50-70% target level as the orders on the Baltic construction market continue to
be in a slump, with the prices down while the supply is also increasing on the
apartment market. In this market situation, it will be complicated to improve
profitability. 

Major projects in progress for Merko in Q4 included the construction of Hilton
Tallinn Park in Tallinn, the design and construction of the T1 shopping centre
and the Öpiku Office Building, the renovation of the Mustamäe blocks of the
North Estonia Medical Centre in Tallinn, and the design and renovation of tram
line No. 4 in Tallinn. Projects completed in Latvia in Q4 were the Liepaja
concert hall and Dzintaru 28 apartment buildings and, in Lithuania, the
foundations of Šilute wind farm and general construction works of Nordbalt’s
Klaipeda transformer substation. 



OVERVIEW OF THE 12 MONTHS AND IV QUARTER RESULTS

PROFITABILITY

Profit before tax in 12M 2015 was EUR 11.7 million (12M 2014: EUR 13.3
million), which is equivalent to a profit before tax margin of 4.7% (12M 2014:
5.3%). Gross margin in 12M was 9.1% (12M 2014: 9.8%). Net margin in 12M 2015
decreased to 4.0% (12M 2014: 4.9%) and net profit was EUR 10.0 million (12M
2014: EUR 12.4 million), having decreased by 19.5% compared to the same period
last year. Q4 2015 profit before tax was EUR 4.7 million (Q4 2014: EUR 5.3
million). Q4 net profit was EUR 4.4 million (Q4 2014: EUR 4.8 million). 

REVENUE

Revenue in 12M 2015 was EUR 215.0 million (12M 2014: EUR 252.3 million), which
has decreased by 0.5% compared to last year. Q4 revenue was EUR 66.4 million
(Q4 2014: EUR 70.1 million). The share of construction service revenue earned
outside of Estonia has increased in 12M 2015 to 28.7% (12M 2014: 25.8%). The
number of apartments sold in 12 months of 2015 (403 units, revenues of EUR 61.4
million) has increased by 2.0% and the revenue from apartment sales has
increased by 55.8% (12 months of 2014: 395 units, revenues of EUR 39.4
million). 

CASH POSITION

At the end of the reporting period, the group had EUR 39.9 million in cash and
cash equivalents and equity EUR 125.7 million (59.5% of total assets).
Comparable figures as at 31 December 2014 were accordingly EUR 51.6 million and
EUR 127.0 million (51.0% of total assets). As at 31 December 2015 the group had
net debt of negative EUR 8.7 million (31 December 2014: negative EUR 13.9
million). 

SECURED ORDER BOOK

In Q4 2015, group companies signed new contracts in the amount of EUR 94.8
million (Q4 2014: EUR 62.9 million). 12M 2015 new contracts signed in amount of
EUR 247.0 million (12M 2014: EUR 170.4 million). As at 31 December 2015, the
group’s secured order book stood at EUR 246.9 million (31 December 2014: EUR
179.1 million). 

PROPOSAL FOR DISTRIBUTION OF PROFITS

The Management Board proposes to distribute to shareholders EUR 9.0 million
(EUR 0.51 per share) in dividends from retained earnings in 2016. This is
equivalent to a 90% dividend rate for 2015. 



                             12M ‘15  12M ‘14  Varianc  Q4 ‘15  Q4 ‘14  Variance
                                                     e                          
--------------------------------------------------------------------------------
Revenue           million      251.0    252.3    -0.5%    66.4    70.1     -5.2%
                   EUR                                                          
--------------------------------------------------------------------------------
Gross profit      million       23.0     24.7    -7.1%     7.7     8.5     -9.1%
                   EUR                                                          
--------------------------------------------------------------------------------
Gross profit      %              9.1      9.8    -6.6%    11.6    12.1     -4.2%
 margin                                                                         
--------------------------------------------------------------------------------
EBITDA            million       15.5     16.4    -5.7%     5.6     6.2    -11.0%
                   EUR                                                          
--------------------------------------------------------------------------------
EBITDA margin     %              6.2      6.5    -5.2%     8.4     8.9     -6.1%
--------------------------------------------------------------------------------
Profit before     million       11.7     13.3   -12.1%     4.7     5.3    -12.3%
 tax               EUR                                                          
--------------------------------------------------------------------------------
PBT margin        %              4.7      5.3   -11.7%     7.0     7.6     -7.5%
--------------------------------------------------------------------------------
Net profit        million       10.0     12.4   -19.5%     4.4     4.8     -7.3%
 (parent)          EUR                                                          
--------------------------------------------------------------------------------
Net profit        %              4.0      4.9   -19.0%     6.7     6.8     -2.3%
 margin                                                                         
--------------------------------------------------------------------------------
EPS               EUR           0.56     0.70   -19.5%    0.25    0.27     -7.3%
--------------------------------------------------------------------------------



                                    31.12.2015  31.12.2014  Variance
--------------------------------------------------------------------
ROE (on yearly basis)  %                   8.0        10.1    -20.5%
--------------------------------------------------------------------
Equity ratio           %                  59.5        51.0    +16.8%
--------------------------------------------------------------------
Secured order book     million EUR       246.9       179.1    +37.9%
--------------------------------------------------------------------
Total assets           million EUR       211.1       249.3    -15.3%
--------------------------------------------------------------------
Number of employees    people              791         765     +3.4%
--------------------------------------------------------------------



OPERATING RESULTS

Revenue and gross profit

Merko Ehitus group generated a total of EUR 251.0 million in revenue in 12
months of 2015 (12 months of 2014: EUR 252.3 million). 43.3% of the revenue was
generated in Estonian construction service, 28.7% in Latvian and Lithuanian
construction service and 28.0% in and real estate development segment (12
months of 2014: 56.1% in Estonian construction service, 25.8% in Latvian and
Lithuanian construction service and 18.1% in real estate development segment).
Compared to the 12 months of 2014 the group revenue has decreased by 0.5%.
Compared to the 12 months of the previous year in the 12 months of 2015 the
share of Latvian and Lithuanian construction service revenue in the group’s
revenue has increased from 25.8% to 28.7%. Revenue in Q4 2015 was EUR 66.4
million, which has decreased by 5.2% compared to the previous year (Q4 2014:
EUR 70.1 million). The main changes in the revenue structure compared to the
same period last year, can mainly be attributed to increase in revenue of
projects pursued in the Latvian and Lithuanian construction service and real
estate development segments. At the same time there has been a reduction in
sales revenue from Estonian construction service segment, which is primarily
due to the end of major projects financed from EU structural funds and the
reduced project volumes. This trend has been similar and anticipated since the
beginning of 2014. 

In 12 months of 2015 the group’s gross profit from development and construction
activities totalled EUR 23.0 million (12 months of 2014: EUR 24.7 million) and
in Q4 2015 EUR 7.7 million (Q4 2014: EUR 8.5 million). The 12 months gross
profit margin (9.1%) has decreased by 0.7 pp compared to the same period last
year (12 months of 2014: 9.8%). Maintaining the stability of profit margins
during the 12 months of 2015 in the Estonian construction service segment has
been vital for the group, despite the decline in sales volumes, the
profitability has been supported by the slight decrease in input prices, which
may not necessarily continue during 2016. Gross profit margin has also been
impacted by the reduced profitability in the real estate development segment,
which depends largely on the price of the land as part of the total specific
project expenses and is thus different on a project basis. The scarcity of
projects and the ever-tightening competition in the construction sector poses a
great challenge in the maintaining of the current gross profit margin for new
procurements in all segments. The number of companies participating in tenders
and the risk of low pricing bids is high in all three Baltic states. 

Profit before tax and net profit

In 12 months of 2015, the group’s profit before tax totalled EUR 11.7 million
and net profit attributable to equity holders of the parent was EUR 10.0
million as compared to the pre-tax profit or EUR 13.3 million and net profit
attributable to equity holders of the parent of EUR 12.4 million in 12 months
of 2014. In the second quarter of 2015, the group paid EUR 7.3 million in
dividends, which incurred additional income tax expense in the amount of EUR
0.9 million. The situation in the second quarter of 2014 was alike, when the
group paid EUR 7.3 million in dividends, with the exception that then the group
incurred no additional income tax expense in connection with previously
received and taxed distribution of profits from subsidiaries. Moreover, profit
growth in Latvia and Lithuania has raised the income tax expense for 2015,
compared to last year. Group’s profit before tax margin was 4.7% (12 months of
2014: 5.3%) and the net profit margin was 4.0% (12 months of 2014: 4.9%). Both
the group’s profit before tax (EUR 11.7 million) and the profit before tax
margin (4.7%) have decreased compared to the same period last year (12 months
of 2014: EUR 13.3 million and 5.3%, respectively). 

In Q4 of 2015, the group’s pre-tax profit totalled EUR 4.7 million and net
profit was EUR 4.4 million as compared to the pre-tax profit of EUR 5.3 million
and net profit of EUR 4.8 million in Q4 of 2014. Similarly to the 12 months of
2015, both the group’s quarterly profit before tax (EUR 4.7 million) and the
quarterly profit before tax margin (7.0%) have decreased compared to the same
period last year (Q4 2014: EUR 5.3 million and 7.6%, respectively). 



Business segments

The group operates mainly in Estonian, Latvian and Lithuanian market through
its subsidiaries and depending on the country provide construction services and
real estate development services across the following business segments:
Estonian construction service (incl. construction services in Finland), Latvian
and Lithuanian construction service and real estate development. The group’s
segment structure is alined with group’s management structure. 

As of 21 April 2015, the Management Board of AS Merko Ehitus decided to change
the segment reporting structure in the group’s financial reports and harmonise
it with the group’s new internal reporting structure, which corresponds to the
group’s country-based management structure and takes into account the changes
in the operational volumes of business segments. 

As a result of the change, instead of the previous five segments presented
(general construction, civil engineering, road construction, real estate
development and other segments), the group is submitting segment reporting in
the following three segments: Estonian construction service, Latvian and
Lithuanian construction service and Real estate development. 

As a result of the change the operating segments presented in the group’s
external financial reporting structure are grouped together according to the
requirements applicable to disclosure of operating segments pursuant to the
conditions specified in the International Financial Reporting Standards (IFRS
8). 

Estonian construction service (incl. construction services in Finland) and
Latvian and Lithuanian construction service segments include all projects of
the respective countries pertaining to construction services: 

  -- General construction consists of the construction of different buildings,
     from commercial and office buildings, retail and entertainment centres to
     public sector and residential and specialised industrial buildings. Group
     companies provide strategic consulting and quality complete solutions as
     part of the general contracting service of construction according to the
     customer's requirements: preparation, design, construction, interior and
     warranty service. In the field of general construction the group operates
     in all three Baltic countries.

  -- The civil engineering pürojects the group constructs include port, waste
     management and road structures (bridges, tunnels, overpasses, roads),
     electrical construction of up to 330 kV, various environmental protection
     structures, water treatment plants, both open-cut and trenchless
     construction of water and sewerage pipelines and other various engineering
     projects. Complex and unique engineering projects require specialised
     knowledge and a good partnership with the customer and local authorities.
     In this area the group operates in Estonia and Latvia.

  -- In the road construction division, the group carries out road construction
     and builds the associated infrastructure, road maintenance and maintenance
     repair. In the area or road construction the group operates only in
     Estonia.

Real estate development is based on the development of real estate in the
ownership of the group, encompassing development of apartment projects,
long-term investments into real estate and real estate projects executed for
business purposes, and to a minor extent also real estate maintenance and
lease. In this segment, similarly to before, the group recognises projects
being developed in all of the different countries. 



Estonian construction service

The Estonian construction services segment consists of various services in the
field of general construction, civil engineering (including construction of
electrical and external networks) and road construction. 

In the 12 months of 2015, the revenue of the Estonian construction service
segment was EUR 108.6 million (12 months of 2014: EUR 141.5 million), having
decreased by 23.3% from the same period last year. The 12 months revenue also
includes revenue from Finnish projects in the amount of EUR 2.8 million. The
revenues have clearly decreased in the field of civil engineering. Additionally
the decrease of revenues is largely due to the fact that in 2015, the group did
not have large-scale projects in progress as it did in the same period of the
previous year (such as the Tondiraba Ice Arena and the Vääna-Jõesuu and
Narva-Jõesuu water supply and sewerage system renovation projects). A number of
general construction and design projects were launched in 2015, with the main
construction of these projects commencing in 2016. 

In this segment, the group earned a gross profit of EUR 10.4 million for 12
months (12 months of 2014: EUR 14.0 million). The Estonian construction service
segment revenues for 12 months 2015 were 43.3% of the group’s revenue, forming
the largest proportion in the group’s revenue, but still having decreased by
22.9%. 

In 12 months of 2015, the gross margin of the Estonian construction service
segment was 9.6%, which decreased by 3.4% compared to the 12 months of 2014
(9.9%). In light of the close competition on the Estonian construction services
market and the drop in volumes of work for nearly all market participants, we
consider this as a good result, which is mainly due to improvement of internal
efficiencies in project management. Due to the decrease in the volume of public
procurements, above all, with regard to external networks in civil engineering
construction, we are critically monitoring any changes in the volume of
work-in-progress. We have scaled down external networks and, in order to
maintain the efficiency of the cost base, made preparations for responding to
further market changes. 

Our major projects in the fourth quarter included the construction works of
Hilton Tallinn Park hotel, the design and construction works of Öpik Office
Building in Tallinn, the design and construction works of logistics centre in
Maardu, the design and construction works of T1 shopping centre in Tallinn, the
reconstruction work at the North-Estonia Medical Centre in Mustamäe and the
design and renovation of the infrastructure of tram line No. 4 in Tallinn. 

Latvian and Lithuanian construction service

The Latvian and Lithuanian construction service segment consists of general
construction work in both of these countries and provision of civil engineering
services in Latvia. 

The revenue of the Latvian and Lithuanian construction service segment amounted
to EUR 72.0 million in the 12 months of 2015 (12 months of 2014: EUR 65.0
million), which is 10.8% more than in the 12 months of 2014. If the Latvian and
Lithuanian construction service segment revenues of 12 months of 2014 formed
25,8% of the group’s revenue, then during 12 months of the current year the
segments revenues have increased to 28.7%. This increase was expected
considering the completion of large contracts signed in late 2013 in Latvia,
such as the Liepaja Concert Hall and the Dzintaru 28 apartment building. The
group’s continued focus is on increasing the revenues outside Estonia. The 12
month gross profit of the Latvian and Lithuanian construction service segment
amounted to EUR 4.8 million (12 months of 2014: EUR 2.6 million) and the gross
profit margin was 6.7% (12 months of 2014: 4.0%), which increased by 67.3%
compared to the same period previous year. 

The gross margin improved especially in the fourth quarter, along with an
improvement in the results of projects successfully completed in Latvia and
Lithuania, compared to initial estimations. 

In the fourth quarter of 2015, the main ongoing projects included were the
construction of Dzintaru 28 apartment building in Jurmala, the construction of
multifunctional concert hall in Liepaja, the construction of BLRT warehouse and
office in Riga, the re-cultivation and construction works of waste recycling
site at A. Deglava Street in Riga, the construction works of Kauno/Algirdo
residential complex with office premises in Vilnius, the construction of
concrete foundations for wind turbine generators in Šilute wind farm and the
general construction works of the ABB HVDC transformer substation in Klaipeda. 

Real estate development

The real estate development segment includes residential construction, the
development of apartment projects, long-term real estate investments and
commercial real estate projects. 

The group sold a total of 403 apartments in 12 months of 2015 at the total
value of EUR 61.4 million (excl. VAT), compared to 395 apartments and EUR 39.4
million in 12 months of 2014. In Q4 of 2015 a total of 155 apartments were sold
at the total value of EUR 18.8 million (excl. VAT), (Q4 2014: 160 apartments
and EUR 16.0 million). In 12 months of 2015, the group has earned EUR 6.6
million of revenue from the sale of immovable properties (12 months of 2014:
EUR 1.4 million). Q4 revenue from the sale of immovable properties was EUR 4.4
million (Q4 2014: EUR 0.0 million). In 12 months of 2015 real estate
development segment revenues have increased 53.8% compared to the same period
last. The growth is primarily influenced by sales of apartments in more
exclusive developments where the sales price per apartment is higher than the
apartments sold last year during the same period. The share of revenue from the
real estate development segment also increased as anticipated in the 12 months
to 28.0% of the group’s total revenue (12 months of 2014: 18.1%). 

The 12 month gross profit of the segment amounted to EUR 7.8 million (12 months
of 2014: EUR 8.1 million) and the gross profit margin was 11.0% (12 months of
2014: 17.7%), which decreased by 37.8% compared to the same period previous
year. The profitability of the apartment development projects varies by project
and depends greatly on the cost structure of the specific project, incl. the
land acquisition price. 

The Q4 2015 profitability of the segment was negatively impacted by impairment
of development projects and immovable properties in the amount of EUR 1.1
million (Q4 2014: positively by a net change in impairments amounting to EUR
0.5 million). 

At the end of the period, Merko Ehitus group’s inventory comprised 189
apartments where a preliminary agreement had been signed: 37 completed
apartments (22 in Estonia, 13 in Latvia and 2 in Lithuania) and 152 apartments
under construction (127 in Estonia, 1 in Latvia, 21 in Lithuania and 3 in
Finland). The sale of these apartments had not yet been finalised and delivered
to customers, because the development site is still under construction or the
site was completed at the end of the reporting period and the sales
transactions have not all been finalised yet. 

As at 31 December 2015, Merko Ehitus group had a total of 497 apartments for
active sale (as at 31 December 2014: 326 apartments), for which there are no
pre-sale agreements and of which 105 have been completed (41 in Estonia, 41 in
Latvia and 23 in Lithuania) and 392 are under construction (257 in Estonia, 51
in Lithuania, 77 in Lithuania and 7 in Finland). The number of apartments on
sale as at 31 December 2015 has increased, compared to 31 December 2014, mainly
due to the volume of projects launched in the fourth quarter of 2015: launch of
construction of 188 new apartments, compared to the 60 new apartments in the
fourth quarter of 2014. 

In 12 months of 2015, we launched the construction of a total of 574 new
apartments in the Baltic states (12 months of 2014: 369 apartments) – including
the first stage of Tartu mnt 52 development project, the preparation works of
which took place in 2014. In the 12 months of this year, the group has invested
a total of EUR 42.4 million (12 months of 2014: EUR 46.9 million) in new
development projects launched in 2015 as well as projects already in progress
from previous year. 

We will continue to invest in residential real estate projects and depending on
the apartment market developments in 2016, the group will launch the
construction of approximately 500-550 new apartments in the Baltic states
(2015: construction of 574 new apartments launched). In 2016, the group’s
investments in both development projects initiated in the previous years and
new projects to be launched in 2016 will be in the range of EUR 40-45 million
(2015: EUR 42.4 million invested). 

One of our objectives is to keep a moderate portfolio of land plots to ensure
stable inventory of property development projects considering the market
conditions. At 31 December 2015, the group's inventories included land plots
with the development potential, where the construction works have not started,
of EUR 58.0 million (31.12.2014: EUR 55.2 million). 

In the 12 months of 2015, the group has purchased new land plots at an
acquisition cost of EUR 11.7 million (12 months of 2014: at an acquisition cost
of EUR 3.2 million), which allocated by country is following: in Estonia EUR
6.6 million and in Lithuania EUR 5.1 million. Whereas in Estonia the group
bought different smaller land plots then in Lithuania, in 2015, the group
acquired an approximately 1.3-hectare Rinktines development area in the city
centre of Vilnius, where up to 350 apartments can be constructed. 

Also the group signed a notarised contract of sale of registered immovables,
under which all of the real estate governed by an option agreement in Tallinn
were realised for total of EUR 4.0 million. Similarly in 2014, the group
realized an option agreement to acquire a land plot in Tallinn for total of EUR
1.8 million. In addition AS Merko Ehitus group 50% joint venture Kodusadam OÜ
(ex. Kalaranna Arenduse OÜ) signed a contract for the acquisition of
approximately 1.7 hectares of land in the Noblessner quarter, an historically
prestigious industrial area in Tallinn with great potential, for development
purpose to build approximately 200 apartments. The group is searching for new
land plots for real estate development purposes primarily in Estonian and
Lithuania. 



Secured order book

As at 31 December 2015, the group’s secured order book (without own
developments) amounted to EUR 246.9 million as compared to EUR 179.1 million as
at 31 December 2014. The secured order book excludes the group's own
residential development projects and construction work related to developing
real estate investments. 

In fourth quarter of 2015, EUR 94.8 million worth of new contracts were signed
(without own developments) as compared to EUR 62.9 million in same period last
year. The value of new contracts signed (without own developments) in the 12
months of 2015 amounted to EUR 247.0 million (12 months of 2014: EUR 170.4
million). 

After the balance sheet date, the group concluded one large construction
contract: 

  -- On 27 January 2016 a contract between, AS Merko Ehitus Eesti, 100% owned
     subsidiary part of AS Merko Ehitus group and Inf Maja OÜ came into force.
     AS Merko Ehitus is to perform the design and construction works of Tallink
     Tennis Centre first stage, located at Punane 76, Tallinn, Estonia. The
     value of the contract is approximately EUR 7.0 million. The works are
     scheduled for completion by the end of 2016.

Of the contracts signed in the 12 months of 2015, private sector orders
accounted for the majority proportion, which is also represented in the group’s
secured order book as at the end of the reporting period, where private sector
orders from projects in progress constitute nearly 80% (as at 31.12.2014
approximately 50%). Apart from a few large-scale procurements where Merko
companies were not as optimistic as our competitors in bidding at a low price,
the share of government contracts in the 12 months of 2015 has been modest. The
group continues to focus on comprehensive design and construction contracts. In
this regard, two important contracts were signed in Estonia in the last
quarter, although it should be noted that for the most part, the actual
construction activity on these projects will largely start only in 2016. 

The portfolio of contracts stands strong, especially in Estonia. At the same
time, the group has not managed to conclude new contracts in the estimated
volume, especially in Latvia and Lithuania. This is due to a
lower-than-estimated number of orders on the market, which is also liable to
affect the volumes for 2016. 

Considering the beginning phase of the current EU funding period, one can
forecast the volume of public procurements to stay at the previous years level.
We forecast that the volume of public procurements will start to increase in
the second half of 2016. In this respect, it will not be easy to maintain the
secured order book at the level of 2015 or growing it. 

Traditionally the share of Estonian construction activity has been the highest
in the group's revenues. Given the weak growth outlook of the Estonian
construction market, the group's goal is to increase the volume of construction
orders from outside Estonia. Thus, we will continue to identify the groups
competitive advantages and are closely monitoring the development and
opportunities both in the Baltic states and the Nordic countries. Starting from
2014 AS Merko Ehitus Eesti has selectively and on project basis participated in
procurements in Finland, Sweden and Norway in order to gain experience and
sufficient knowledge in the qualification conditions, requirements established
and risks associated in these countries. As a result, the group completed the
first projects in Finland in 2015 and will continue to pursue revenue from new
markets in 2016. 



Cash flows

As at 31 December 2015 the group had cash equivalents in the amount of EUR 39.9
million (31.12.2014: EUR 51.6 million). The group's cash level is lower
compared to the same period last year; still, the financial position is strong,
as the group has not utilized its credit lines of existing overdrafts and loan
agreements and has not concluded loan agreements for financing all of the
projects in development. 

The 12-month cash flow from operating activity was positive at EUR 7.4 million
(12 months of 2014: positive EUR 14.5 million), cash flow from investing
activity was negative at EUR 0.8 million (12 months of 2014: negative EUR 1.9
million) and the cash flow from financing activity was negative at EUR 18.3
million (12 months of 2014: negative EUR 7.6 million). 

The cash flow from operating activity was mostly influenced by the EBITDA
(operating profit adjusted with depreciation and amortisation) EUR 15.5 million
(12 months of 2014: EUR 16.4 million), by the positive change in receivables
and liabilities related to construction contracts recognised under the stage of
completion method EUR 2.2 million (12 months of 2014: negative change of EUR
0.2 million), by the negative change in the provisions EUR 1.5 million (12
months of 2014: positive change of EUR 1.3 million), by the positive change in
trade and other receivables related to operating activities EUR 10.0 million,
incl. a negative change in financing co-financed projects of EUR 4.2 million
(12 months of 2014: posittive change of EUR 12.7 million, incl. a negative
change in financing co-financed projects of EUR 0.4 million), by the positive
change in inventory EUR 10.9 million, incl. negative cash flow from purchase of
new land plots in the amount of EUR 11.7 million (12 months of 2014: negative
change of EUR 14.8 million, incl. negative cash flow from purchase of new land
plots in the amount of EUR 3.2 million), by the negative change in trade and
other payables related to operating activities EUR 27.2 million, incl.
significant negative outflow from the realization of an option agreement in the
amount of EUR 4.0 million but also from the advances for real estate
development projects (12 months of 2014: positive change of EUR 0.3 million)
interest received EUR 1.8 million (12 months of 2014: EUR 1.4 million) and by
the corporate income tax paid EUR 1.8 million (12 months of 2014: EUR 0.1
million). 

The group’s cash flows from operating activities continue to have contracts
(incl. both government and private sector) with long payment terms (by
contract, an average of 56 days after registered delivery of the work) and
there is an persistent burden on working capital, including optimal management
of cash flows. This is especially true, considering the increase in Latvian and
Lithuanian construction volumes and the need for additional working capital. To
support cash flows arising from operating activity, the group has been prudent
in raising additional external capital, including factoring. At the same time,
the debt ratio has remained at a moderate level (14.8% as at 31.12.2015; 15.1%
as at 31.12.2014). 

Cash flows from investment activities include negative cash flow from the
acquisition of non-current asset in the amount of EUR 0.8 million (12 months of
2014: EUR 1.5 million) and the positive cash flow from the sale of non-current
assets in the amount of EUR 0.3 million (12 months of 2014: EUR 0.1 million).
The group mainly invested in non-current assets for the purpose of renewing its
fleet of machinery in the road construction segment. Cash flows from investing
activities in 2015 also include an additional contribution to the share capital
of the joint venture OÜ Unigate in the amount of EUR 0.4 million. Cash flows
from investment activities in 12 months of 2014 was negatively impacted by the
cash balance excluded from the group in connection with the sale of subsidiary
Gustaf Tallinn OÜ in the amount of EUR 0.4 million, but also negative cash flow
from the acquisition of minority shareholding in subsidiary AS Gustaf in the
amount of EUR 0.1 million and the acquisition of subsidiary UAB Timana (related
to the purchase of a new land plot in Lithuania) in the amount of EUR 0.3
million. 

The largest single negative item in cash flows from financing activities was
the dividend payment of EUR 7.3 million (12 months of 2014: EUR 7.3 million)
and also a one-time share capital reduction payment to the shareholders in the
amount of EUR 4.1 million. Project specific loans obtained using investment
property as collateral were repaid in the net amount of EUR 0.6 million, incl.
refinancing of an investment loan in the amount of EUR 1.2 million (12 months
of 2014: negative cash flow in net amount of EUR 0.6 million). Net of loans
received and loans repaid in connection with development projects amounted to
negative cash flow of EUR 4.6 million (12 months of 2014: positive cash flow of
EUR 4.9 million) and finance lease principal repayments of EUR 2.2 million (12
months of 2014: EUR 1.1 million). All of the new land plots acquired by the
group both in the 12 months of 2015 and 2014 were financed in full from the
group’s resources without drawing on external funding. The group has not used
bank loans to finance all ongoing development projects – and this is the case
particularly in Estonia, where many advance sales were agreed in the early
phase of construction. Cash flows from financing activities in 12 months of
2014 was negatively impacted by the premature repayment of a working capital
loan in the amount of EUR 3.5 million, instead of which the group entered into
an overdraft contract with an overall limit of EUR 3.5 million. 

The Q4 2015 cash flow from operating activity was positive at EUR 23.4 million
(Q4 2014: positive EUR 14.7 million), cash flow from investing activity was
negative at EUR 0.7 million (Q4 2014: negative EUR 0.3 million) and the cash
flow from financing activity was negative at EUR 2.8 million (Q4 2014: negative
EUR 3.2 million). 

The quarterly cash flows from operating activities were positive primarily as a
result of the positive change in trade and other receivables in the amount of
EUR 22.6 million, incl. the extraordinary positive impact of the transfer of
registered immovables in the amount of EUR 4.4 million. On the negative side
cash flow from operating activities was impacted by the increase of receivables
and decrease of liabilities calculated using the percentage of completion
method in the total amount of EUR 4.8 million and by the negative change in
trade and other payables in the amount of EUR 11.1 million. 

Cash flows from investment activities was negative primarily due to the
additional equity contribution in joint venture OÜ Unigate in the amount of EUR
0.4 million and the purchase of non-current asset in the amount of EUR 0.3
million, which is mainly related to the renewal of equipment in the road
construction segment. 

The quarterly cash flow from financing activities was negative primarily due to
the share capital reduction payment of EUR 4.1 million. The net positive cash
flow of loans received and loans repaid to finance the construction costs of
both investment property and development projects amounted to EUR 1.9 million,
which was supplemented by the finance lease principal repayments in the amount
of EUR 0.6 million. 



Dividends and dividend policy

The distribution of dividends to the shareholders of the company is recorded as
a liability in the financial statements as of the moment when the payment of
dividends is approved by the company’s shareholders. 

At the meeting held on 8 April 2013, the Management Board and Supervisory Board
of AS Merko Ehitus reviewed the company’s strategic development trends and
approved the long-term financial objectives until 2018, under which a new
objective of paying the shareholders 50-70% of the annual profit as dividends
was established. The achievement of this objective is an important priority for
the group. 

The annual general meeting of shareholders of AS Merko Ehitus held at 29 April
2015 approved the Supervisory Boards proposal to pay the shareholders the total
amount of EUR 7.3 million (EUR 0.41 per share) as dividends from net profit
brought forward, which is equivalent to a 58% dividend rate and a 5.7% dividend
yield for the year 2014 (using the share price as at 31 December 2014),
(comparable figures in 2014 were accordingly: EUR 7.3 million (EUR 0.41 per
share) as dividends, which is equivalent to a 70% dividend rate and a 5.7%
dividend yield (using the share price as at 31 December 2013)). 

According to the Estonian Income Tax Law §50 section 11 AS Merko Ehitus can pay
dividends without any additional income tax expense and liabilities occurring
due to previously received and taxed distribution of profits from subsidiaries.
Taking into account the dividends already paid to the parent company by the
subsidiaries, the group incurred additional income tax expense in connection
with the disbursement of dividends of EUR 0.9 million (2014: EUR 0.0 million)
in Estonia in the second quarter of 2015.The dividend payment to the
shareholders took place on 26 May 2015. 

The Management Board proposes to pay the shareholders EUR 9.0 million as
dividends from net profits brought forward (EUR 0.51 per share) in 2016, which
is equivalent to a 90% dividend rate and a 6.0% dividend yield for the year
2015 (using the share price as at 31 December 2015). Taking into account the
dividends already paid to the parent company and planned to be paid by foreign
subsidiaries in early 2016, the group will incur income tax expenses of
approximately EUR 1.0 million in 2016 in Estonia in connection with
disbursement of dividends. 



Share capital reduction

The general meeting of the shareholders held on 29 April 2015 resolved to
approve the Supervisory Boards proposal to reduce the share capital by EUR 4
071 000 (EUR 0.23 per share). 

Pursuant to subsection §50 section 2 of the Income Tax Act in force in Estonia,
income tax does not have to be paid on the portion of payments made from the
equity upon reduction of the share capital or contributions, upon redemption of
shares or contributions or in other cases, and on the portion of the paid
liquidation distributions made by way of previous monetary contributions. About
EUR 4.0 million in the said monetary contributions have been made in AS Merko
Ehitus. 

Based on the resolution of the general meeting of the shareholders, share
capital was reduced by EUR 4,071,000 (EUR 0.23 per share), from the amount EUR
12.0 million to EUR 7.9 million. Share capital was reduced by way of reducing
the book value of the shares and as a result of the reduction the book value of
one share was reduced from EUR 0.677966 to EUR 0.447966; the number of shares
remained the same – 17,700,000 shares. 

Pursuant to the articles of association of Merko Ehitus, the minimum share
capital of the company is EUR 6.0 million and the maximum share capital is EUR
24.0 million. The new share capital amounts to EUR 7.9 million, which is in
line with the company’s articles of association. 

Considering the perspectives of the Baltic construction market in the coming
years and the related need for capital by the group, the share capital was
reduced in order to improve the group’s capital structure and support return on
equity. AS Merko Ehitus lacked the need to possess share capital in the
previous amount and the requirements that legislation imposes on share capital
are also fulfilled in the case of the reduced share capital. 

The reduction of share capital in the Commercial Register was made on 14 August
2015 and the monetary payments to the shareholders in the amount of EUR
4,071,000 (EUR 0.23 per share), related to the reduction of share capital were
made on 16 November 2015. Shareholders, that were entered into the share
register of AS Merko Ehitus on 22 May 2015, at 23.59, are entitled to the
monetary payments from the reduction of share kapital. 

Considering the resolutions of the general meeting of the shareholders to pay
EUR 7.3 million from retained earnings to shareholders as dividends (EUR 0.41
per share) and to reduce share capital by EUR 4.1 million (EUR 0.23 per share),
and considering the share price as at 31 December 2014, return on the
investment in 2014 was 9.0% and the payout ratio of 91% from 2014 profit. 



Ratios
(attributable to equity holders of the parent)

                                     12M     12M     12M  Q4 ‘15  Q4 ‘14  Q4 ‘13
                                     ‘15     ‘14     ‘13                        
--------------------------------------------------------------------------------
Income statement                                                                
 summary                                                                        
--------------------------------------------------------------------------------
Revenue                  million   251.0   252.3   262.7    66.4    70.1    64.9
                           EUR                                                  
--------------------------------------------------------------------------------
Gross profit             million    23.0    24.7    22.7     7.7     8.5     5.4
                           EUR                                                  
--------------------------------------------------------------------------------
Gross profit margin         %        9.1     9.8     8.6    11.6    12.1     8.3
--------------------------------------------------------------------------------
Operating profit         million    12.5    14.0    12.3     4.9     5.5     2.7
                           EUR                                                  
--------------------------------------------------------------------------------
Operating profit margin     %        5.0     5.5     4.7     7.3     7.8     4.2
--------------------------------------------------------------------------------
Profit before tax        million    11.7    13.3    11.1     4.7     5.3     2.4
                           EUR                                                  
--------------------------------------------------------------------------------
PBT margin                  %        4.7     5.3     4.2     7.0     7.6     3.8
--------------------------------------------------------------------------------
Net profit               million     9.8    12.3    10.4     4.3     4.8     2.5
                           EUR                                                  
--------------------------------------------------------------------------------
attributable to equity   million    10.0    12.4    10.4     4.4     4.8     2.5
 holders of the parent     EUR                                                  
--------------------------------------------------------------------------------
attributable to          million   (0.2)   (0.1)     0.0   (0.1)     0.0     0.0
 non-controlling           EUR                                                  
 interest                                                                       
--------------------------------------------------------------------------------
Net profit margin           %        4.0     4.9     4.0     6.7     6.8     3.8
--------------------------------------------------------------------------------
                                                                                
--------------------------------------------------------------------------------
Other income statement                                                          
 indicators                                                                     
--------------------------------------------------------------------------------
EBITDA                   million    15.5    16.4    15.1     5.6     6.2     3.5
                           EUR                                                  
--------------------------------------------------------------------------------
EBITDA margin               %        6.2     6.5     5.7     8.4     8.9     5.4
--------------------------------------------------------------------------------
General expense ratio       %        4.8     4.9     4.7     5.1     4.9     4.7
--------------------------------------------------------------------------------
Labour cost ratio           %       12.2    11.9    11.8    12.4    11.3    10.7
--------------------------------------------------------------------------------
Revenue per employee     thousan     322     319     308      85      89      76
                          d EUR                                                 
--------------------------------------------------------------------------------



Other significant indicators               31.12.2015  31.12.2014  31.12.2013
-----------------------------------------------------------------------------
Return on equity                   %              8.0        10.1         8.8
-----------------------------------------------------------------------------
Return on assets                   %              4.4         5.0         4.4
-----------------------------------------------------------------------------
Return on invested capital         %              7.9         8.8         8.0
-----------------------------------------------------------------------------
Equity ratio                       %             59.5        51.0        50.9
-----------------------------------------------------------------------------
Debt ratio                         %             14.8        15.1        14.8
-----------------------------------------------------------------------------
Current ratio                    times            3.2         2.3         2.0
-----------------------------------------------------------------------------
Quick ratio                      times            1.2         1.1         1.1
-----------------------------------------------------------------------------
Accounts receivable turnover     days              39          56          58
-----------------------------------------------------------------------------
Accounts payable turnover        days              39          39          43
-----------------------------------------------------------------------------
Average number of employees      people           779         790         853
-----------------------------------------------------------------------------
Secured order book            million EUR       246.9       179.1       213.7
-----------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited

in thousand euros

                                             2015       2014      2015      2014
                                        12 months  12 months        IV        IV
                                                               quarter   quarter
--------------------------------------------------------------------------------
Revenue                                   251,012    252,323    66,448    70,086
--------------------------------------------------------------------------------
Cost of goods sold                      (228,044)  (227,591)  (58,749)  (61,612)
--------------------------------------------------------------------------------
Gross profit                               22,968     24,732     7,699     8,474
--------------------------------------------------------------------------------
Marketing expenses                        (3,230)    (3,190)     (883)     (900)
--------------------------------------------------------------------------------
General and administrative expenses       (8,907)    (9,128)   (2,478)   (2,551)
--------------------------------------------------------------------------------
Other operating income                      1,943      1,901       595       636
--------------------------------------------------------------------------------
Other operating expenses                    (278)      (340)      (77)     (184)
--------------------------------------------------------------------------------
Operating profit                           12,496     13,975     4,856     5,475
--------------------------------------------------------------------------------
Finance income/costs                        (804)      (667)     (199)     (165)
--------------------------------------------------------------------------------
incl. finance income/costs from joint       (138)      (130)      (32)      (27)
 ventures                                                                       
--------------------------------------------------------------------------------
finance income/costs from other                 3          2         2         1
 long-term investments                                                          
--------------------------------------------------------------------------------
interest expense                            (756)      (662)     (181)     (180)
--------------------------------------------------------------------------------
foreign exchange gain (loss)                  (3)       (12)       (2)       (7)
--------------------------------------------------------------------------------
other financial income (expenses)              90        135        14        48
--------------------------------------------------------------------------------
Profit before tax                          11,692     13,308     4,657     5,310
--------------------------------------------------------------------------------
Corporate income tax expense              (1,857)    (1,055)     (386)     (497)
--------------------------------------------------------------------------------
Net profit for financial year               9,835     12,253     4,271     4,813
--------------------------------------------------------------------------------
incl. net profit attributable to           10,000     12,417     4,445     4,796
 equity holders of the parent                                                   
--------------------------------------------------------------------------------
net profit attributable to                  (165)      (164)     (174)        17
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Other comprehensive income                                                      
--------------------------------------------------------------------------------
Currency translation differences of             2          4         1         4
 foreign entities                                                               
--------------------------------------------------------------------------------
Comprehensive income for the period         9,837     12,257     4,272     4,817
--------------------------------------------------------------------------------
incl. net profit attributable to           10,002     12,421     4,446     4,800
 equity holders of the parent                                                   
--------------------------------------------------------------------------------
net profit attributable to                  (165)      (164)     (174)        17
 non-controlling interest                                                       
--------------------------------------------------------------------------------
Earnings per share for profit                0.56       0.70      0.25      0.27
 attributable to equity holders of the                                          
 parent (basic and diluted, in EUR)                                             
--------------------------------------------------------------------------------



CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited

in thousand euros

                                                     31.12.2015  31.12.2014
---------------------------------------------------------------------------
ASSETS                                                                     
---------------------------------------------------------------------------
Current assets                                                             
---------------------------------------------------------------------------
Cash and cash equivalents                                39,905      51,583
---------------------------------------------------------------------------
Trade and other receivables                              24,854      46,382
---------------------------------------------------------------------------
Prepaid corporate income tax                                421           3
---------------------------------------------------------------------------
Inventories                                             109,090     117,638
---------------------------------------------------------------------------
                                                        174,270     215,606
---------------------------------------------------------------------------
Non-current assets                                                         
---------------------------------------------------------------------------
Long-term financial assets                               16,703      11,476
---------------------------------------------------------------------------
Deferred income tax assets                                1,423       1,535
---------------------------------------------------------------------------
Investment property                                       4,371       4,619
---------------------------------------------------------------------------
Property, plant and equipment                            13,442      15,003
---------------------------------------------------------------------------
Intangible assets                                           879       1,011
---------------------------------------------------------------------------
                                                         36,818      33,644
---------------------------------------------------------------------------
                                                                           
---------------------------------------------------------------------------
TOTAL ASSETS                                            211,088     249,250
---------------------------------------------------------------------------
                                                                           
---------------------------------------------------------------------------
LIABILITIES                                                                
---------------------------------------------------------------------------
Current liabilities                                                        
---------------------------------------------------------------------------
Borrowings                                                5,525      14,287
---------------------------------------------------------------------------
Payables and prepayments                                 43,266      71,122
---------------------------------------------------------------------------
Income tax liability                                        711         352
---------------------------------------------------------------------------
Short-term provisions                                     5,013       6,239
---------------------------------------------------------------------------
                                                         54,515      92,000
---------------------------------------------------------------------------
Non-current liabilities                                                    
---------------------------------------------------------------------------
Long-term borrowings                                     25,660      23,359
---------------------------------------------------------------------------
Deferred income tax liability                               788         738
---------------------------------------------------------------------------
Other long-term payables                                  1,159       1,671
---------------------------------------------------------------------------
                                                         27,607      25,768
---------------------------------------------------------------------------
                                                                           
---------------------------------------------------------------------------
TOTAL LIABILITIES                                        82,122     117,768
---------------------------------------------------------------------------
                                                                           
---------------------------------------------------------------------------
EQUITY                                                                     
---------------------------------------------------------------------------
Non-controlling interests                                 3,268       4,455
---------------------------------------------------------------------------
Equity attributable to equity holders of the parent                        
---------------------------------------------------------------------------
Share capital                                              7929      12,000
---------------------------------------------------------------------------
Statutory reserve capital                                 1,200       1,200
---------------------------------------------------------------------------
Currency translation differences                          (663)       (665)
---------------------------------------------------------------------------
Retained earnings                                       117,232     114,492
---------------------------------------------------------------------------
                                                        125,698     127,027
---------------------------------------------------------------------------
TOTAL EQUITY                                            128,966     131,482
---------------------------------------------------------------------------
                                                                           
---------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY                            211,088     249,250
---------------------------------------------------------------------------



Interim report and the investor presentation are attached to the announcement
and are also published on NASDAQ Tallinn and Merko’s web page (group.merko.ee). 



Signe Kukin
Group CFO
AS Merko Ehitus
+372 650 1250
[email protected]



AS Merko Ehitus (group.merko.ee) consists of Estonia’s leading construction
company AS Merko Ehitus Eesti, the Latvian-market-oriented SIA Merks, UAB Merko
Statyba that is operating on the Lithuanian market and the real estate
development business unit along with real estate holding companies. As at the
end of the year 2015, the group employed 791 people and the company’s revenue
for 2015 was EUR 251 million.