OREANDA-NEWS. 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 ?piku Office Building, the renovation of the Mustam?e 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 ?ilute 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 Variance Q4 ‘15 Q4 ‘14 Variance
Revenue million EUR 251.0 252.3 -0.5% 66.4 70.1 -5.2%
Gross profit million EUR 23.0 24.7 -7.1% 7.7 8.5 -9.1%
Gross profit margin % 9.1 9.8 -6.6% 11.6 12.1 -4.2%
EBITDA million EUR 15.5 16.4 -5.7% 5.6 6.2 -11.0%
EBITDA margin % 6.2 6.5 -5.2% 8.4 8.9 -6.1%
Profit before tax million EUR 11.7 13.3 -12.1% 4.7 5.3 -12.3%
PBT margin % 4.7 5.3 -11.7% 7.0 7.6 -7.5%
Net profit (parent) million EUR 10.0 12.4 -19.5% 4.4 4.8 -7.3%
Net profit margin % 4.0 4.9 -19.0% 6.7 6.8 -2.3%
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 p?rojects 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 V??na-J?esuu and Narva-J?esuu 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 ?pik 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 Mustam?e 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 ?ilute 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 O? (ex. Kalaranna Arenduse O?) 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 O? 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 O? 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 O? 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 O? 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 ‘15 12M ‘14 12M ‘13 Q4 ‘15 Q4 ‘14 Q4 ‘13
Income statement summary              
Revenue million EUR 251.0 252.3 262.7 66.4 70.1 64.9
Gross profit million EUR 23.0 24.7 22.7 7.7 8.5 5.4
Gross profit margin % 9.1 9.8 8.6 11.6 12.1 8.3
Operating profit million EUR 12.5 14.0 12.3 4.9 5.5 2.7
Operating profit margin % 5.0 5.5 4.7 7.3 7.8 4.2
Profit before tax million EUR 11.7 13.3 11.1 4.7 5.3 2.4
PBT margin % 4.7 5.3 4.2 7.0 7.6 3.8
Net profit million EUR 9.8 12.3 10.4 4.3 4.8 2.5
attributable to equity holders of the parent million EUR 10.0 12.4 10.4 4.4 4.8 2.5
attributable to non-controlling interest million EUR (0.2) (0.1) 0.0 (0.1) 0.0 0.0
Net profit margin % 4.0 4.9 4.0 6.7 6.8 3.8
               
Other income statement indicators              
EBITDA million EUR 15.5 16.4 15.1 5.6 6.2 3.5
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 thousand EUR 322 319 308 85 89 76

 

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
 12 months		 2014
12 months		 2015
IV quarter		 2014
IV 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 ventures (138) (130) (32) (27)
finance income/costs from other long-term investments 3 2 2 1
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 equity holders of the parent 10,000 12,417 4,445 4,796
net profit attributable to non-controlling interest (165) (164) (174) 17
Other comprehensive income        
Currency translation differences of foreign entities 2 4 1 4
Comprehensive income for the period 9,837 12,257 4,272 4,817
incl. net profit attributable to equity holders of the parent 10,002 12,421 4,446 4,800
net profit attributable to non-controlling interest (165) (164) (174) 17
Earnings per share for profit attributable to equity holders of the parent (basic and diluted, in EUR) 0.56 0.70 0.25 0.27

 

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

AS Merko Ehitus 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.