2018 9 months and III quarter consolidated unaudited interim report Attachments

Merko Ehitus
Quarterly report

2018 9 months and III quarter consolidated unaudited interim report

COMMENTARY FROM MANAGEMENT

Merko Ehitus Group posted revenue of EUR 115 million in Q3 and the nine-month figure was EUR 299 million. The group's net profit in Q3 increased to 5.6 million and the nine-month net profit amounted to EUR 12.3 million. This year, Merko Ehitus has launched nine new residential development projects with a total of 840 units, of which 550 are in Vilnius.

The growth of the group's revenue in both Q3 and in the first nine months of the year meets management expectations, considering the volume of construction contracts signed in the past few years and the major construction projects in progress. Input prices have continued to increase on the Baltic construction market and it is difficult to find the necessary workforce capacity for meeting rapid construction schedules. In the current market situation, the growth of construction volumes is not a goal unto itself, if it worsens the risk profile. It is important to operate profitably.

The volume of new construction contracts concluded by the group's companies in the first nine months is lower than the volume of works performed and the secured order-book as a whole has decreased for four quarters in a row. This will also likely impact the group's future construction volumes. The construction market is impacted significantly by the price rise and the shortage of construction capacity. This postpones the launch of customers' new construction projects, as there are no resources for this in their budget or they are not able to ask higher prices from their end clients. In the first nine months of 2018, the group signed new contracts worth a total of EUR 157 million, including for the construction of Lidl logistics centre in Riga, the Quadrum office building and two school buildings in Vilnius and the Kiini and Harku substations in Estonia. As of 30 September 2018, Merko Ehitus Group's secured order book amounted to EUR 239.4 million.

Merko Ehitus continues to invest into the apartment development field. In the nine months of this year, the group has delivered 255 new apartments to buyers in the Baltics and launched nine new development projects with a total of 840 apartments, including 550 in Vilnius. The biggest projects that should be highlighted are the Uus-Veerenni and Pikaliiva residential environments in Tallinn as well as the Vilneles slenis and Rinktinės Urban developments in Vilnius. As some of the developments will be completed in 2020, the sale of the apartments in question will also be recognized in the group's result in the year after the next.

The apartment market in the Baltic states is supported by economic growth, rapid rise in wages and low interest rates. In Tallinn and Vilnius, the prices of new apartments have risen while the total number of recently and soon to be completed units is high and buyers have a wider selection to choose from. The quality of development projects, the living environment to be established and the strength and reliability of the developer have become more and more important in the case of all developments, especially in the premium price segment. Considering the low transaction activity on the Riga apartment market in recent years and the improving macroeconomic indicators, the growth potential is good.

Q3 sales revenue for Merko Ehitus was EUR 115.1 million (Q3 2017: EUR 86.0 million) and the nine-month revenue amounted to EUR 298.8 million (9 months of 2017: EUR 214.8 million, growth of 39.1%). The share of revenue earned outside Estonia as of the nine-month mark was 51.5% (nine months of 2017: 35.8%). The group's EBITDA was EUR 6.2 million for Q3 and EUR 14.3 million for the first nine months of 2018. Net profit in Q3 was EUR 5.6 million (Q3 2017: EUR 3.4 million) and the nine-month net profit was EUR 12.3 million (9 months of 2017: EUR 6.6 million, growth of 87.6 %).

In the first nine months of 2018, the group sold 255 apartments, including 47 apartments in a joint venture. In Q3, the group sold 87 apartments, including 13 apartments in a joint venture. This year, the group has invested EUR 22 million into development projects launched and those already in progress.

In Q3, Merko's largest works in progress were, in Estonia, the T1 Mall of Tallinn shopping centre, Maakri Kvartal business complex, Öpiku Office Building tower B, Tallink office building, the residence of the Embassy of the People's Republic of China, the Viimsi state upper secondary school, Toom-Kuninga 21 apartment building, the first phase of the office building at Tartu mnt 80, renovation works on the Tsirguliina 330kV substation and the renovation and dredging of the Port of Hundipea. In Latvia, the largest sites in Q3 were the construction of Akropole multifunctional centre, Alfa shopping centre, Z-Towers complex and Lidl logistics centre in Riga as well as the Ventspils Music School and Concert Hall. In Vilnius, the largest sites in progress were Hotel Neringa, Quadrum office building, the apartment building complex in the Šaltiniu Namai quarter and two school buildings

OVERVIEW OF THE III QUARTER AND 9 MONTHS RESULTS

PROFITABILITY

Q3 2018 net profit was EUR 5.6 million (Q3 2017: EUR 3.4 million) and net profit margin 4.9% (Q3 2017: 3.9%). Net profit in 9 months 2018 was EUR 12.3 million (9M 2017: EUR 6.6 million), having increased by 87.6% compared to the same period last year. Net profit margin increased to 4.1% (9M 2017: 3.1%). Increase in net profitability was influenced by the fact that, in 2017, AS Merko Ehitus incurred income tax costs of EUR 0.9 million in connection with dividend payments, while in 2018, dividend payments did not carry income tax cost - the dividends were paid out from dividends paid to the parent company by foreign subsidiaries.

Q3 2018 profit before tax was EUR 5.6 million (Q3 2017: EUR 3.9 million) and 9 months 2018 profit before tax was EUR 12.6 million (9M 2017: EUR 8.2 million), which brought the profit before tax margin to 4.2% (9M 2017: 3.8%).

REVENUE

Q3 2018 revenue was EUR 115.1 million (Q3 2017: EUR 86.0 million) and 9 months 2018 revenue was EUR 298.8 million (9M 2017: EUR 214.8 million). 9 months' revenue has increased by 39.1% compared to same period last year. The share of revenue earned outside Estonia in 9 months 2018 was 51.5% (9M 2017: 35.8%).

SECURED ORDER BOOK

As at 30 September 2018, the group's secured order book was EUR 239.4 million (30 September 2017: EUR 396.4 million). In 9 months 2018, group companies signed new contracts in the amount of EUR 157.0 million (9M 2017: EUR 303.6 million). In Q3 2018, new contracts were signed in the amount of EUR 89.4 million (Q3 2017: EUR 87.0 million).

REAL ESTATE DEVELOPMENT

In 9 months 2018, the group sold a total of 255 apartments (incl. 47 apartments in a joint venture); in 9 months 2017, the group sold 286 apartments (incl. 1 apartment in a joint venture). The group earned a revenue of EUR 24.3 million from sale of own developed apartments in 9 months 2018 and EUR 33.8 million in 9 months 2017. In Q3 of 2018, the group sold a total of 87 apartments (incl. 13 apartments in a joint venture); in Q3 of 2017, the group sold 47 apartments. The group earned a revenue of EUR 8.0 million from sale of own developed apartments in Q3 of 2018 and EUR 6.9 million in Q3 of 2017.

CASH POSITION

At the end of the reporting period, the group had EUR 23.9 million in cash and cash equivalents, and equity EUR 124.8 million (43.1% of total assets). Comparable figures as at 30 September 2017 were EUR 18.6 million and EUR 122.1 million (46.4% of total assets), respectively. As at 30 September 2018, the group had net debt of EUR 29.8 million (30 September 2017: EUR 29.1 million).

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

unaudited
in thousand euros

	2018 9 months	2017 9 months	2018 III quarter	2017 III quarter	2017 12 months
Revenue	298,768	214,807	115,118	86,000	317,598
Cost of goods sold	(276,984)	(198,109)	(106,363)	(79,482)	(286,747)
Gross profit	21,784	16,698	8,755	6,518	30,851
Marketing expenses	(2,482)	(2,420)	(753)	(782)	(3,215)
General and administrative expenses	(8,583)	(7,789)	(2,919)	(2,871)	(11,289)
Other operating income	2,477	2,645	782	1,419	3,793
Other operating expenses	(277)	(324)	(172)	(191)	(601)
Operating profit	12,919	8,810	5,693	4,093	19,539
Finance income/costs	(273)	(594)	(102)	(232)	(767)
incl. finance income/costs from sale of subsidiary	(59)	-	-	-	14
finance income/costs from joint ventures	274	(12)	48	(10)	64
finance income/costs from other long-term investments	-	-	-	-	2
interest expense	(452)	(553)	(143)	(206)	(745)
foreign exchange gain (loss)	(1)	(2)	-	(1)	(1)
other financial income (expenses)	(35)	(27)	(7)	(15)	(101)
Profit before tax	12,646	8,216	5,591	3,861	18,772
Corporate income tax expense	(169)	(1,395)	32	(282)	(3,020)
Net profit for financial year	12,477	6,821	5,623	3,579	15,752
incl. net profit attributable to equity holders of the parent	12,312	6,561	5,643	3,350	14,694
net profit attributable to non-controlling interest	165	260	(20)	229	1,058
Other comprehensive income, which can subsequently be classified in the income statement
Currency translation differences of foreign entities	31	(27)	3	3	(74)
Comprehensive income for the period	12,508	6,794	5,626	3,582	15,678
incl. net profit attributable to equity holders of the parent	12,343	6,538	5,647	3,356	14,637
net profit attributable to non-controlling interest	165	256	(21)	226	1,041
Earnings per share for profit attributable to equity holders of the parent (basic and diluted, in EUR)	0.70	0.37	0.32	0.19	0.83

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

unaudited
in thousand euros

	30.09.2018	30.09.2017	31.12.2017
ASSETS
Current assets
Cash and cash equivalents	23,868	18,590	39,210
Trade and other receivables	114,150	80,289	75,844
Prepaid corporate income tax	163	716	492
Inventories	116,601	130,991	118,421
	254,782	230,586	233,967
Non-current assets
Long-term financial assets	11,060	16,758	17,242
Deferred income tax assets	5	1,325	5
Investment property	13,785	3,915	15,719
Property, plant and equipment	9,443	10,043	9,665
Intangible assets	593	468	497
	34,886	32,509	43,128
TOTAL ASSETS	289,668	263,095	277,095
LIABILITIES
Current liabilities
Borrowings	17,758	4,911	24,218
Payables and prepayments	95,410	82,380	74,972
Income tax liability	306	404	413
Short-term provisions	7,755	3,471	4,569
	121,229	91,166	104,172
Non-current liabilities
Long-term borrowings	35,878	42,777	35,138
Deferred income tax liability	1,370	1,201	1,259
Other long-term payables	1,647	1,932	1,789
	38,895	45,910	38,186
TOTAL LIABILITIES	160,124	137,076	142,358
EQUITY
Non-controlling interests	4,768	3,948	4,567
Equity attributable to equity holders of the parent
Share capital	7,929	7,929	7,929
Statutory reserve capital	793	793	793
Currency translation differences	(671)	(668)	(702)
Retained earnings	116,725	114,017	122,150
	124,776	122,071	130,170
TOTAL EQUITY	129,544	126,019	134,737
TOTAL LIABILITIES AND EQUITY	289,668	263,095	277,095

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).

Priit Roosimägi
Head of Group Finance Unit
AS Merko Ehitus
[phone]
[e-mail]

AS Merko Ehitus (group.merko.ee) group 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, Peritus Entreprenør AS construction company in Norway and the real estate development business unit along with real estate holding companies. As at the end of 2017, the group employed 757 people and the company's 2017 revenue was EUR 317.6 million.