AS MERKO EHITUS GROUP months consolidated unaudited interim report

Transcription

1 AS MERKO EHITUS GROUP months consolidated unaudited interim report Business name: Main activities: AS Merko Ehitus Holding companies General contracting of construction Real estate development Commercial Register No.: Address: Järvevana tee 9G, Tallinn Postal address: Pärnu mnt 141, Tallinn Phone: Fax: Web site: group@merko.ee group.merko.ee Financial year: Reporting period: Supervisory Board: Management Board: Toomas Annus, Teet Roopalu, Indrek Neivelt Andres Trink, Tõnu Toomik Auditor: AS PricewaterhouseCoopers 1

2 TABLE OF CONTENTS BRIEF OVERVIEW OF THE GROUP... 3 MANAGEMENT REPORT... 5 MANAGEMENT BOARD'S DECLARATION TO THE MANAGEMENT REPORT CONSOLIDATED FINANCIAL STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT NOTES NOTE 1 ACCOUNTING POLICIES USED NOTE 1.1 CHANGES IN THE PRESENTATION OF INFORMATION NOTE 1.2 NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND AMENDMENTS TO PUBLISHED STADARDS NOTE 2 OPERATING SEGMENTS NOTE 3 COST OF GOODS SOLD NOTE 4 EARNINGS AND DIVIDENDS PER SHARE NOTE 5 CASH AND CASH EQUIVALENTS NOTE 6 TRADE AND OTHER RECEIVABLES NOTE 7 INVENTORIES NOTE 8 LONG-TERM FINANCIAL ASSETS NOTE 9 INVESTMENT PROPERTY NOTE 10 PROPERTY, PLANT AND EQUIPMENT NOTE 11 INTANGIBLE ASSETS NOTE 12 BORROWINGS NOTE 13 PAYABLES AND PREPAYMENTS NOTE 14 SHORT-TERM PROVISIONS NOTE 15 OTHER LONG-TERM PAYABLES NOTE 16 RELATED PARTY TRANSACTIONS NOTE 17 CONTINGENT LIABILITIES MANAGEMENT BOARD'S CONFIRMATION TO THE CONSOLIDATED INTERIM REPORT DEFINITION OF RATIOS

3 BRIEF OVERVIEW OF THE GROUP AS Merko Ehitus is a construction and real estate development group operating in Estonia, Latvia, Lithuania and Norway. BUSINESS SEGMENTS ESTONIA LATVIA LITHUANIA NORWAY General construction Civil engineering Electrical construction Road construction Residential real estate development and investments General construction Civil engineering Electrical construction Residential real estate development and investments General construction Residential real estate development and investments General construction The construction company with the largest equity in the Baltics, long-term capability to self-finance its projects A strong position on the Baltic construction market, the leading residential real estate developer International quality, environmental protection and occupational safety certificates ISO 9001, ISO 14001, OHSAS SHARES The shares are listed in the Main List of NASDAQ Tallinn since The main shareholder is AS Riverito (72%) 2017 KEY FIGURES Revenue 317,6 million EUROS Net profit 14,7 million EUROS 757 employees 3

4 VISION Our vision is reliable solutions and quality performance for your ideas. VALUES RESPONSIBILITY KEEPING PROMISES COMPETENCE INITIATIVE CREATIVITY We decide based on business thinking, awareness and ethical beliefs. We offer enduring and environmentally friendly solutions. We give realistic promises to the shareholders, contracting entities, cooperation partners, employees and we keep our promises. Good solutions are born in cooperation, the keeping of one's promises is mutual. We value quality and professionalism. We constantly develop our professional knowledge and skills. We manage processes and we are result-oriented. We accept the challenges which presume more. We are open, innovative and creative in working out and implementing the solutions. We have a will to carry out forward-looking ideas. STRATEGY The business strategy of AS Merko Ehitus is focussed on improving profitability and enhancing the efficiency of the cost base, offering general contracting services in the field of construction of buildings and infrastructure facilities and developing residential real estate in its main home markets Estonia, Latvia, Lithuania and Norway. AS Merko Ehitus aims to be a preferred partner to its clients for construction works. 4

5 MANAGEMENT REPORT COMMENTARY FROM MANAGEMENT Sales revenue of Merko Ehitus in Q1 of 2018 grew to EUR 80.3 million, bolstered by the pre-existing portfolio of construction contracts. The group s net profit was EUR 1.1 million. In the first quarter, Merko companies signed new construction contracts worth EUR 22 million and the secured order book stood at EUR 292 million. Considering the volume of Merko Ehitus secured order book and the major projects currently under way, the growth of the group s sales revenue compared to the same period last year was as expected. The greatest growth came in sales revenue in Latvia, and the volume of construction works performed outside Estonia in the first quarter was greater than the volume for Estonia In the first quarter, the trends of pressure on the growth of input prices and the limited availability of construction resources continued from last year. In the construction value chain, risks are being redistributed among parties, which also exerts an effect on general contracting companies and, ultimately, customers. Although compared to the first quarter of last year, construction volumes grew and profitability of construction service improved, group s management was not satisfied with the overall result for our construction activity under contracts. Merko group is continuing to look for greater effectiveness both in project management and on the expenses side and for optimum risk to income ratio, but not at the expense of construction quality. One quarter will not yield big major changes in this area, but solely growth in construction volumes is not a goal unto itself M REVENUE 80 MILLION EUROS PROFIT BEFORE TAX 1.3 MILLION EUROS In Q1, Merko Ehitus sold 51 apartments, compared to 141 last year in the same period. Although the share of the apartment development activity was less of a factor in the results for Q1, this was more due to technical reasons: sales depend on the moment that the authorisation for use for the building is received, at which point Merko Ehitus can start delivering the apartments to buyers. The number of apartments sold under preliminary contracts grew and these sales will be realised in quarters to come. Group s management didn t see major changes in the first three months of the year on the apartment market in the Estonian, Latvian and Lithuanian capitals. The economic environment is currently solid in the Baltic states, financing conditions are favourable and purchasing power remains stable. Driven by customer demand, more attention has to be devoted in apartment development to well-designed and sustainable solutions and an integral living environment. Greater efficiency and rationality in processing building permits and planning documents would help to raise apartment development volumes. In the first quarter, Merko Ehitus Group launched four new development projects with more than 140 apartments, and this year plans to bring several new development projects to market in Vilnius, Tallinn and Riga. In Q1 of 2018, Merko Ehitus posted revenue of EUR 80.3 million (EUR 58.1 million for the same period last year; growth of +38%), EBITDA of EUR 1.8 million, profit before taxes of EUR 1.3 million and net profit of EUR 1.1 million. In the first 3 months of 2018, the group entered into new contracts with a total volume of EUR 22.3 million, including for establishing public space for the central square in Kuressaare, Estonia and for performing additional works on the Z-Towers complex in Latvia. As of 31 March 2018, Merko Ehitus Group s secured order book amounted to EUR million. Among major projects in progress in Q1 in Estonia there were the construction of T1 Mall of Tallinn shopping centre, Maakri Kvartal, Öpiku Maja s building B, Noblessner residential quarter, Pärnu mnt 22 office building, expansion of Wendre productio n facility, the residence of the Embassy of the People s Republic of China, the Tallink office building, Viimsi state gymnasium and the Toom-Kuninga 21 apartment building. In Latvia, the major projects in progress were the Akropole and Alfa shopping centres, the Z-Towers complex and the Ventspils music school and concert hall; in Lithuania, the expansion of the Radisson Blu Hotel Lietuva, Neringa Hotel, a Philip Morris plant, and the Rinktines Urban and Basteja Life development projects. In Norway, the largest project under way in Q1 was the renovation and conversion of the office building at Akersgata 8 in Oslo. 5

6 OVERVIEW OF THE 3 MONTHS RESULTS PROFITABILITY Net profit in 3M 2018 was EUR 1.1 million (3M 2017: EUR 1.0 million), having increased by 7.3% compared to the same period last year. Net profit margin decreased to 1.4% (3M 2017: 1.8%). Profit before tax in 3M 2018 was EUR 1.3 million (3M 2017: EUR 1.1 million), which brought the profit before tax margin to 1.6% (3M 2017: 1.9%). REVENUE 3M 2018 revenue was EUR 80.3 million (3M 2017: EUR 58.1 million). 3M revenue has increased by 38.1% compared to last year. The share of revenue earned outside Estonia in 3M 2018 was 57.5% (3M 2017: 29.2%). SECURED ORDER BOOK As at 31 March 2018, the group s secured order book was EUR million (31 March 2017: EUR million). In 3M 2018, group companies signed new contracts in the amount of EUR 22.3 million (3M 2017: EUR 58.6 million). REAL ESTATE DEVELOPMENT The group sold a total of 51 apartments (incl. 25 apartment in a joint venture) in 3 months of 2018 at a total value of EUR 4.3 million (excl. VAT). During 3 months of 2017, 141 apartments (incl. 1 apartment in a joint ventures) were sold at total value of EUR 16.3 million. CASH POSITION At the end of the reporting period, the group had EUR 27.6 million in cash and cash equivalents, and equity EUR million (47.6% of total assets). Comparable figures as at 31 March 2017 were EUR 33.8 million and EUR million (53.6% of total assets), respectively. As at 31 March 2018 the group had net debt of EUR 23.1 million (31 March 2017: EUR 6.9 million). DISTRIBUTION OF PROFITS The general meeting of shareholders held on 9 May 2018 resolved to approve the profit allocation proposal for 2017 and to distribute EUR 17.7 million (1 euro per share) in dividends from retained earnings. This is equivalent to a 120% dividend rate for

7 OUTLOOK OF CONSTRUCTION AND REAL ESTATE MARKET CONSTRUCTION SERVICES BALTIC STATES CONSTRUCTION MARKETS (WITH OWN FORCES) ROLLING 12 MONTHS in million euros MONTHSCHANGE IN CONSTRUCTION PRICE INDEX percentages 4 3, ,9 1, Estonia Latvia Lithuania -2 3M M M M M 2018 Estonia Latvia Lithuania Source: Local national statistical offices Source: Local national statistical offices The construction sector has not seen major changes in trends compared to Q4 of last year. The rise in input prices has become even more distinct, however. Construction volumes remain high, which keeps the situation with availability of workforce tight: the market is characterised by a shortage of qualified employees and subcontractors. That means wages are continuing to rise and general contractors are facing problems finding enough subcontractors to ensure high-quality construction that stays on schedule. With strong price based competition between general contractors, it is even harder to channel rising input prices to customers. Looking ahead, three major narratives can be traced, which are expected to have an impact on the activity of the construction market in the future: the end of the current EU financing period in 2020; the potential start of Rail Baltic construction; and the entry into force of nearly zero energy requirements for new buildings. Although there are differences between the group s home markets, in general, it can be said that activity has been high in both the residential and commercial real estate market for qu ite some time. A trend toward greater stabilisation can now be expected. Riga is a separate matter, as construction activity there has not fully recovered since the recession in the last decade. Perhaps we will see a postponed renewal of activity there. As a result of the aforementioned trends, however, the market may experience additional demand from the public sector. EU funding must be used up by the end of the corresponding multiannual financing period, which may mean that some part of it will be directed into construction (infrastructure, but buildings as well). If Rail Baltic construction should go ahead, that would mean major utilisation of existing construction resources (manpower, machinery etc.). In addition, EU s nearly zero energy (NZE) requirements will come into effect in Estonia from 1 January 2020 at the building permit application stage for new buildings. Regulatory development s are more modest in Latvia and Lithuania, but considering that NZE rules apply to all EU member states, it is only a matter of time until they will more specifically be established at local levels in those countries as well. In the short term, the new state of af fairs may result in a rise in construction activity due to a rush to obtain building permits before the new rules come into force. After an uptick in activity in the interim, however, the next few years after that may see a slowdown in the pace of construction of new buil dings until the market, including customers and end-consumers, grow accustomed to the new conditions (higher prices). Principally, it is a matter of how the above-mentioned developments will unfold over time ideally, the growth in demand from the public sector would offset a decline in activity after the NZE requirements come into effect. In the worst case, however, demand from different sectors will accumulate at the same time, overheating the already active construction sector and making the question of sufficient resources even more urgent. DEVELOPMENT OF APARTMENTS In Tallinn and Vilnius, the pace of apartment market growth is generally tapering off, but in spite of increased supply, we can still see a rise in prices, which is largely a function of rising wages. As time goes on, the more important quality, location and integrity of the development area will be. Sales periods will lengthen for less attractive projects. The apartment market in Riga is characterised by a lower activity level than Tallinn and Vilnius, yet here, too, we can see the rate of increase in prices rise somewhat. The macroeconomic environment is still an apartment buyer s market economic growth has sped up and is expected to remain strong, incomes and savings are increasing, loan interest rates are still low and bank loans are readily available. On the Norwegian housing market, a certain price correction has taken place and sales periods have become longer. At the end of last year and in Q1, prices have retreated and stabilised a few percent short of their peak levels. NEW AND ALL (dotted line) DWELLINGS QUARTERLY HOUSE PRICE INDEX (4 QUARTER ROLLING AVERAGE) (2013=100) Estonia Latvia Lithuania Source: Eurostat 7

8 BUSINESS ACTIVITIES The group business reporting is divided into three business segments: Estonian construction service; other home markets construction service; real estate development. See additionally the detailed management structure on page 17. ESTONIAN CONSTRUCTION SERVICE The Estonian construction service segment consists of services in the field of general construction, civil engineering, electricity, external networks and road construction, as well as concrete works and construction services. million EUR 3M M 2017 VARIANCE 12M 2017 Revenue % % of total revenue 34.6% 46.0% 42.6% Operating profit (loss) 0.3 (0.5) 5.9 Operating profit margin 1.1% (5.3%) 4.3% In the 3 months of 2018, the revenue of the Estonian construction service segment was EUR 27.8 million (3 months of 2017: EUR 26.7 million), having increased by 4.0% from the same period last year. The Estonian construction service segment revenue for 3 months 2018 was 34.6% of the group s revenue (3M 2017: 46.0%). In this segment, the group earned an operating profit of EUR 0.3 million for 3 months (3 months of 2017: EUR operating loss 0.5 million). In 3 months of 2018, the operating profit margin of the Estonian construction service segment was 1.1% (3 months of 2017: -5.3%). The competition in main contracting in the area of general construction is getting increasingly tighter in the Estonian const ruction services market. The number of construction objects in the market is limited and therefore contractors tend to leave an increasingly small buffer for profitability and adverse developments when competing in price. This is particularly evident in public procurements where Merko is finding it increasingly difficult to successfully participate. Thus, the share of the public sector in Merko s Estonian construction services portfolio has considerably decreased. The depression in sales prices is accompanied by an increasing co st pressure from growing construction prices. The prices of labour, construction equipment and building materials have all increased. In order to ensure sustainable profitability, the group has to continue improving the efficiency of internal project manageme nt processes and optimizing the placement of resources and the cost base. Larger projects in the first quarter in Estonian construction service segment included the construction works of Maakri Kvartal business complex, T1 shopping centre, Öpiku office building B, Pärnu mnt 22 office building, extension works to the complex of the air traffic control centre, Tallink office building, Embassy of the People s Republic of China residence, extension works of Wendre production building, Viimsi State Gymnasium and Toom-Kuninga 21 residenial building construction works and clean up works of the residual pollution of the Maadevahe and Priimetsa asphalt concrete plant. OTHER HOME MARKETS CONSTRUCTION SERVICE The other home markets construction service segment consists of general construction work in Latvia, Lithuania and Norway, as well as provision of civil engineering and electricity construction services in Latvia. million EUR 3M M 2017 VARIANCE 12M 2017 Revenue % % of total revenue 54.2% 19.2% 34.1% Operating profit (loss) 0.1 (0.6) 1.8 Operating profit margin 0.3% (5.3%) 1.7% The sales revenue of the other home markets construction service segment amounted to EUR 43.5 million in the 3 months of 2018 (3 months of 2017: EUR 11.2 million), which is 289.2% more than in the 3 months of If the other home markets construction service segment revenues of 3 months of 2017 formed 19.2% of the group s revenue, then during 3 months of 2018, that ratio increased to 54.2%. The revenue growth has been supported mainly by major construction contracts in Latvia. 8

9 In Latvia, Merko has gained a stronger position among general contractors than previously, which provides opportunities to grow business volumes. In Lithuania, we are continuing our strategic plan to focus on foreign customers, who make up the predominant part of the group s Lithuanian secured order book. In Lithuania, we have also entered more widely the public procurement sphere in the field of general construction. In Norway, the group is performing a number of smaller-scale agreements. The group is facing tough competition and growing costs also in other home markets (primarily Latvia and Lithuania). We are therefore carefully deliberating in participating in procurements in those markets and submit tenders for contracts in which we consider the risk to reward ratio to be sufficiently good. In 2018, the primary focus in this segment is on the successful co mpletion of large projects in progress. The 3 months operating profit of the other home market construction service segment amounted to EUR 0.1 million (3 months of 2017: operating loss EUR 0.6 million) and the operating profit margin was 0.3% (3 months of 2017: -5.3%). In the first quarter of 2018, the larger ongoing projects in the other home markets construction service segment included, in Riga, the construction works of Multifunctional Centre Akropole and of Alfa Shopping Centre, finishing works of Z-Towers complex and, in Ventspils, the construction works of music school and concert hall. In Vilnius, the larger projects were the construction works of the design and construction works of Radisson Blu Hotel Lietuva extension, Hotel Neringa and construction works of the residential complex in Šaltiniu Namai quarter, in Klaipeda, the reconstruction and extension construction works of Philip Morris plant. In Norway, the larger project included renovation and building works of Akersgata 8 office building in Oslo. REAL ESTATE DEVELOPMENT The real estate development segment includes residential real estate development and construction of joint venture projects, longterm real estate investments and commercial real estate projects in Estonia, Latvia and Lithuania. In the interests of the finest quality and maximum convenience and assurance for buyers, Merko handles all phases of development: acquisition of the real estate, planning, design of the development project, construction, sales and marketing, and warranty-period customer service. million EUR 3M M 2017 VARIANCE 12M 2017 Revenue % 74.0 Incl. apartments revenue Incl. construction service to joint venture projects Incl. revenue from immovable properties % of total revenue 11.2% 34.8% 23.3% Operating profit % 13.8 Operating profit margin 14.3% 13.3% 18.6% The group sold a total of 51 apartments (incl. 25 apartment in a joint ventures) in 3 months of 2018 at a total value of EUR 4.3 million (excl. VAT) comparing to months when 141 apartments (incl. 1 apartment in a joint ventures) were sold at a total value of EUR 16.3 million. In 3 months of 2018, real estate development segment revenues decreased by 55.4% compared to the same period last year. In the 3 months of 2018, the share of revenue from the real estate development segment formed 11.2% of the group s total revenue (3 months of 2017: 34.8%). The 3 months of 2018 operating profit of the segment amounted to EUR 1.3 million (3 months of 2017: EUR 2.7 million) and the operating profit margin was 14.3% (3 months of 2017: 13.3%), which increased by 1.0 pp 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 months segment s profitability was positively influenced by the sale of immovable property that is not strategically needed by the group. At the same time, the operating profit margin has been reduced, in comparison with 2017, by the growth in the volume of construction service projects developed by joint ventures. Profit from construction has been recognised in the course of construction and the profit from development is realised at a later stage, upon sale of apartments to the final customer, based on the equity method. At the end of the period, group s inventory comprised 322 apartments where a preliminary agreement had been signed: 39 completed apartments (5 in Estonia and 34 in Latvia) and 283 apartments under construction (207 in Estonia and 76 in Lithuania). 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 March 2018, the group had a total of 403 apartments for active sale (as at 31 March 2017: 598 apartments; as at 31 December 2017: 317 apartments), for which there are no pre-sale agreements and of which 138 have been completed (33 in Estonia, 100 in Latvia and 5 in Lithuania) and 265 are under construction (141 in Estonia and 124 in Lithuania). 9

10 APARTMENT PROJECTS IN PROGRESS AND INDICATIVE DATE OF COMPLETION PROJECT PLACE/COUNTRY COMPLETION DATE NO OF UNSOLD APARTMENTS * INCL. PRE-SOLD APARTMENTS Fizikų 8 Vilnius, Lithuania Completed 2 - Tartu road 52 stage I & II Tallinn, Estonia Completed 13 - Krokuvos 73 Vilnius, Lithuania Completed 3 - Grostonas 12 stage I (Skanstes Parks) Grostonas 12 stage II (Skanstes Parks) Staapli 4 (Noblessner Homeport) *** Gaiļezers stage I (Gaiļezers nami) Ceikiniu 3 (Rinktinės Urban) ** Staapli 3 (Noblessner Homeport) *** / ** Staapli 8 (Noblessner Homeport) *** Paepargi 43 and 47 (Paepargi) Paepargi 39,41 and 45 (Paepargi) Started in Q Staapli 12 (Noblessner Homeport) *** Riga, Latvia Completed 5 - Riga, Latvia Completed 33 2 Tallinn, Estonia Completed 25 5 Riga, Latvia Completed Vilnius, Lithuania Second half of Tallinn, Estonia End of Tallinn, Estonia End of Tallinn, Estonia Summer of Tallinn, Estonia Autumn of Tallinn, Estonia End of Strazdelio 5 (Basteja Life)** Vilnius, Lithuania End of Suur-Patarei 20 (Rand) Tähepargi stage I (Tähepargi) Tallinn, Estonia Autumn of Tartu, Estonia Spring of Total * The completed apartments indicate the number of apartments that are unsold and where possession has not been given to customers. ** The number of apartments has been corrected due to changes in the project. *** Project developed by a joint venture. Group revenue generated through provision of construction services, and profit of development activities recognised based on the equity method. In 3 months of 2018, the group launched the construction of a total of 145 new apartments in the Baltic states (3 months of 2017: 408 apartments). In the 3 months of 2018, the group has invested a total of EUR 7.1 million (3 months of 2017: EUR 7.5 million) in new development projects launched in 2018 as well as projects already in progress. Merko group continues to invest in residential real estate projects also in Depending on the apartment market developments in the Baltic states in 2018, the group will launch the construction of approximately new apartments. The planned investment level in 2018 in both development projects initiated in the previous years and new projects to be launched in 2018 is nearly EUR 60 million (2017: EUR 48.4 million invested). However, when making the investments, the group continues to be dependent on the pace of processing of building permits. One of group s objectives is to keep a sufficient portfolio of land plots to ensure stable inventory of property development projects, which considers the market conditions. As at 31 March 2018, the group's inventories included land plots with development potential, where the construction works have not started, in amount of EUR 62.1 million ( : EUR 67.0 million). 10

11 GROUP S INVENTORIES WITH DEVELOPMENT POTENTIAL BY COUNTRY million EUR Estonia Latvia Lithuania Total No new land plots for real estate development purposes were acquired in the 3 months of 2018 (3 months of 2017: EUR 4.1 million; 12 months of 2017: acquired different new land plots in Tallinn, Estonia at an acquisition cost of EUR 5.1 million and in Riga, Latvia at an acquisition cost of EUR 4.1 million). SECURED ORDER BOOK As at 31 March 2018, the group s secured order book amounted to EUR million, compared to EUR million as at 31 March 2017, having increased by 1,4% in the annual comparison. The secured order book excludes the group's own residential development projects and construction works related to developing real estate investments. In 3 months of 2018, EUR 22.3 million worth of new contracts were signed, compared to EUR 58.6 million in same period LARGEST CONSTRUCTION CONTRACTS SIGNED IN THE FIRST QUARTER OF 2018 BRIEF DESCRIPTION OF CONTRACT COUNTRY COMPLETION TIME Design and construction contract for the establishment of public space for the central square of Kuressaare VALUE MILLION EUR Estonia September of After the balance sheet date, the group has concluded the following larger construction contracts: On 2 April 2018, AS Merko Ehitus Eesti, part of AS Merko Ehitus group, and OÜ Hansa Hotell entered into a contract for the construction of the second stage of an office building, located at Sadama 9, Tallinn. The contract value is approximately EUR 4 million and scheduled to be completed in March On 10 April 2018, AS Merko Ehitus Eesti, part of AS Merko Ehitus group, and Fausto Capital OÜ entered into a contract for the construction of the first stage of an office building, located at Tartu mnt 80, Tallinn. The contract value is approximately EUR 3.8 million and the deadline for the complition is scheduled in July On 18 April 2018, AS Merko Infra, part of AS Merko Ehitus group, and Elering AS entered into contracts for the construction of Kilingi-Nõmme and Tsirguliina substations. The Kilingi-Nõmme substation contract value is approximately EUR 3.1 million and the Tsirguliina substation contract value is approximately EUR 4.3 million. The works are scheduled to be completed in November Of the contracts signed in the 3 months of 2018, private sector orders accounted for the majority, which is also represented in the group s secured order book, where private sector orders from projects in progress constitute approximately 84% ( : approximately 70%; : approximately 86%). To diversify group s operating portfolio, a strategic goal is to increase construction service revenues outside Estonia. Thus, the group continues to identify and strengthen its competitive advantages and are closely monitoring the development and opportunities in both the Baltic states and the Nordic countries, especially in Norway. At the same time, it has to be ensured that the growth is profitable. The group is therefore focused on ensuring that sales revenue is grown only on the basis of projects with an acceptable risk to reward ratio. CASH FLOWS As at 31 March 2018, the group had cash and cash equivalents in the amount of EUR 27.6 million ( : EUR 33.8 million; : EUR 39.2 million). The group's cash position continues to be strong: the group has not utilised all its credit lines of existing overdrafts and loan agreements within reporting period. As at the end of the reporting period, the group entities had concluded overdraft contracts with banks in a total amount of EUR 17.5 million, of which EUR 9.7 was unused ( : EUR 11.2 million of which EUR 9.7 was unused). In addition to the overdraft facilities, the company has a working capital loan facility with the limit of EUR 3.5 million ( : EUR 3.5 million) from AS Riverito, which was not withdrawn at the end of current period ( : not withdrawn). The 3 month cash flow from operating activity was negative at EUR 3.0 million (3 months of 2017: positive EUR 5.6 million), cash flow from investing activity was positive at EUR 0.1 million (3 months of 2017: negative EUR 0.1 million) and the cash flow from financing 11

12 activity was negative at EUR 8.7 million (3 months of 2017: negative EUR 5.2 million). Compared to the year 2017, the cash flow from operating activities had positive impacts from EBITDA EUR 1.8 million (3 months of 2017: EUR 1.9 million) and from the positive change in trade and other payables related to operating activities EUR 4.5 million (3 months of 2017: negative change of EUR 5.0 million), while the negative impacts came from change in trade and other receivables related to operating activities EUR 3.6 million (3 months of 2017: positive change of EUR 10.8 million), change in inventories EUR 3.3 million (3 months of 2017: positive change of EUR 2.6 million) and change in the provisions EUR 1.6 million (3 months of 2017: negative change of EUR 2.0 million. To support cash flows from operating activities, the group has judiciously raised additional external capital. At the same time, the debt ratio has remained at a moderate level (18.4% as at ; 17.7% as at ; 21.4% as at ). Cash flows from investing activities include negative cash flow from the acquisition of non-current assets in the amount of EUR 0.2 million (3 months of 2017: EUR 0.4 million) and positive cash flow from the sale of non-current assets in the amount of EUR 0.3 million (3 months of 2017: EUR 0.3 million). Project specific loans obtained using investment property as collateral, included under cash flows from financing activities, were repaid in the amount of EUR 0.1 million (3 months of 2017: negative cash flow in the net amount of EUR 0.1 million). Net of l oans received and loans repaid in connection with development projects amounted to negative cash flow of EUR 8.1 million (3 months of 2017: net positive cash flow of EUR 9.1 million) and finance lease principal repayments of EUR 0.2 million (3 months of 2017: EUR 0.2 million). RATIOS (attributable to equity holders of the parent) INCOME STATEMENT SUMMARY 3M M M M 2017 Revenue million EUR Gross profit million EUR Gross profit margin % Operating profit million EUR Operating profit margin % Profit before tax (PBT) million EUR PBT margin % Net profit million EUR attributable to equity holders of the parent million EUR attributable to non-controlling interest million EUR 0.1 (0.0) (0.1) 1.1 Net profit margin % Other income statement indicators 3M M M M 2017 EBITDA million EUR EBITDA margin % General expense ratio % Labour cost ratio % Revenue per employee thousand EUR OTHER SIGNIFICANT INDICATORS Return on equity % Return on assets % Return on invested capital % Equity ratio % Debt ratio % Current ratio times Quick ratio times Accounts receivable turnover days Accounts payable turnover days Average number of employees people million Secured order book EUR Ratio definitions are provided on page 40 of the report

13 RISK MANAGEMENT Risk management is part of strategic management and is inseparable from daily operations of the company. In managing risks, the main objective of the company is to determine significant risks and to optimally manage risks so that the company achieves its strategic and financial objectives. Merko Ehitus divides risks into four main categories: business risk, market risk (incl interest risk and foreign exchange risk), financial risk (incl credit risk and liquidity risk) and operational risk (incl health and safety risk and environmental risk). The topic of risk management has been thoroughly covered on the group s website Legal risk Due to different interpretations of contracts, regulations and laws related to group s principal activities, there is a risk that so me buyers, contractors or supervisory authorities evaluate the company s activities from the perspective of laws or contracts from a different position and dispute the legitimacy of the company s activities. As at 31 March 2018, a provision has been set up at the group in the amount of EUR 0.1 million ( : EUR 0.3 million) for covering potential claims and legal costs. An overview of the key legal disputes of group entities ended during 2018 and ongoing as of is presented below: Estonia Lawsuit against former employee On 17 December 2014, AS Merko Infra filed a claim in Harju County Court against a former AS Merko Infra employee, Maksim Vihharev, seeking EUR 97 thousand in damages (EUR 84 thousand being the principal claim and EUR 13 thousand late interest) along with a petition to secure the action. The lawsuit relates to intentional damage caused by fictitious transactions concluded by Maksim Vihharev on behalf of AS Merko Infra while serving as electrical work project manager and purchase of items not necessary for contractual work. The potential positive outcome of this suit is not recognised in the group s financial reporting. Appeal for the revocation of the order of the Minister of the Environment Several court cases are ongoing in connection with Minister of the Environment regulation No 22 of 27 March 2015, which redre w the boundaries of species protection sites to exclude properties on Paekalda street owned by AS Merko Ehitus subsidiaries Suur- Paekalda OÜ and Väike-Paekalda OÜ. On 2 February 2016, AS Merko Ehitus group companies Suur-Paekalda OÜ and Väike-Paekalda OÜ filed a complaint in Tallinn Administrative Court for compensation of damage. The plaintiffs are seeking a ruling ordering that the state pay damages of approximately EUR 3.2 million to Suur-Paekalda OÜ (exact amount to be determined) and approximately EUR 1.6 million to Väike- Paekalda (exact amount to be determined) as well as late interest at the rate specified in subsection 113 (1) of the Law of Obligations Act starting from 2 February 2016 until due compliance with the demand for compensation. The claims consist of direct patrimonial damage (reduction in the value of immovable property and expenditures made on development activity) and claims for revenue foregone (failed development activity in ). The possible positive impact of the claim submitted has not been recognized by the group in its financial statements. Latvia Lawsuit against former employee On 5 May 2015, SIA Merks filed suit in Riga District Court against former SIA Merks employee Rolands Mēnesis in a claim for the compensation of damage amounting to EUR 337 thousand. The object of the statement of claim is damage deliberately caused by project manager Rolands Mēnesis by entering into fictitious transactions on behalf of SIA Merks and purchase of items not necessary for contractual work. The court ruling is expected during the first half of The possible effect of the potential positive outcome of this claim has not been taken into account in the group s financial reporting. Starptautiskā lidosta Rīga On 21 September 2017, SIA Merks has initiated court proceedings against VAS Starptautiskā lidosta Rīga (Riga International Airport). The basis of the court proceeding is a dispute with Riga International Airport on the terms and conditions of signing the final completion certificate of the new passenger terminal of Riga International Airport. SIA Merks seeks court decision requiring Riga International Airport to sign the final completion certificate and thus entitling SIA Merks for payme nt of EUR 449 thousand (EUR 414 thousand being the principal claim and EUR 35 thousand late interest) for the works. The date of the first court hearing is scheduled on 16 May On 5 March 2018, SIA Merks prepared an additional claim to the court to confirm that the works are fully and properly performed and should be duly accepted by Riga International Airport and, releasing the retention money for the warranty period guarante e in the amount of EUR 920 thousand. No additional provisions are recognised in relation to the potential outcome of this claim. Lithuania Vilniaus vandenys On 18 May 2016, AS Merko Ehitus and UAB Merko Statyba, acting pursuant to the joint venture agreement, filed an action against UAB Vilniaus vandenys in the total amount of EUR 183 thousand. The plaintiffs maintain that due to the actions of UAB Vilniaus vandenys, both the construction period became longer and also additional works were carried out works that the customer later refused to pay for. In the hearing on 9 January 2018, the court expertise was appointed. The potential positive outcome of this claim is not recognised in the group s financial reporting. 13

14 EMPLOYEES AND LABOUR COSTS As of 31 March 2018, Merko Ehitus Group employed 764 people (including temporary and part-time staff). Compared to the same period last year, the number of group s employees decreased by 35 (-4.4%). The number of employees has increased mainly due to increase of construction volumes in Latvia and Lithuania and decreased due to partial disposal of road maintenance activity in Estonia. Professionals with longstanding experience are the company s key value. The group s objective is to pay its employees competitive salary. The interests of employees and the company are balanced by performance-based remuneration. The group defines labour cost as salary (incl. fixed salary, additional pay, holiday pay, and performance pay), taxes based on salary, fringe benefits and taxes on fringe benefits. In 3 months 2018, the labour cost was EUR 7.2 million (3 months 2017: EUR 7.7 million), which decreased by 5.7% compared to the same period previous year, the labour cost ratio decreased by 4.2 pp from 13.2% to 9.0%. During 3 months of 2018, AS Merko Ehitus Eesti, the largest Estonian construction company belonging to the Merko Ehitus group, has paid EUR 1.5 million in labour taxes in Estonia, making it the largest labour tax payer in the construction sector. ETHICAL BUSINESS PRACTICES Group s core values include ethical business practices, which are an important long-term success factor. By following highly ethical policies, we promote profitable growth, gain the trust of our stakeholders, and support fair competition and equal treatment. We do business honestly, follow ethical principles in our activities and make sure our employees know and follow business ethics standards in their everyday work. To allow the principles to take firmer root, the Group has established a Code of Business Ethics. The topic of business ethics has been thoroughly covered on the group s website: 14

15 share price in EUR volume of transactions, thousand EUR AS MERKO EHITUS CONSOLIDATED INTERIM REPORT SHARE AND SHAREHOLDERS INFORMATION ON SECURITY Issuer AS Merko Ehitus Name of security Share of Merko Ehitus Ticker MRK1T Residency of issuer Estonia Stock Exchange List NASDAQ Tallinn, Baltic Main List Industry Construction ISIN EE Nominal value without nominal value Number of securities 17,700,000 Volume of issue 12,000,000 Currency EUR Listing date The shares of Merko Ehitus are listed in the Main List of NASDAQ Tallinn. As at 31 March 2018, the company has 17,700,000 shares. The number of shares has not changed during A total of 1,071 transactions were conducted with the shares of Merko Ehitus in 3 months of 2018, with 0.27 million shares (1.5% of total shares) traded, generating a turnover of EUR 2.79 million (comparable figures in 3 months 2017 were accordingly: 634 transactions with 0.15 million shares traded (0.9% of total shares) and generating a turnover of EUR 1.39 million). The lowest share price amounted to EUR 8.70 and the highest to EUR per share (3 months of 2017: EUR 8.75 and EUR 9.39). The closing price of the share was EUR on 31 March 2018 ( : EUR 8.96; : EUR 8.81). As at 31 March 2018, the market value of AS Merko Ehitus amounted to EUR million, which has increased by 28.3% compared to the same period end last year ( : EUR million; : EUR million) Number of shares 17,700,000 17,700,000 17,700,000 17,700,000 Earnings per share (EPS), euros Equity per share, euros P/B ratio P/E ratio Market value, million EUR CHANGE IN THE PRICE AND TRANSACTION VOLUME OF MERKO EHITUS SHARE AT NASDAQ TALLINN STOCK EXCHANGE IN /17 01/18 02/18 03/18 share price volume of transactions 15

16 STRUCTURE OF SHAREHOLDERS ACCORDING TO NUMBER OF SHARES AS AT NUMBER OF SHARES NUMBER OF SHAREHOLDERS % OF SHAREHOLDERS NUMBER OF SHARES % OF SHARES 1,000, % 12,742, % 100,001 1,000, % 2,778, % 10, , % 949, % 1,001-10, % 775, % 101-1,000 1, % 412, % % 39, % Total 2, % 17,700, % SHAREHOLDERS OF AS MERKO EHITUS AS AT AND CHANGE COMPARED TO THE PREVIOUS QUARTER NUMBER OF SHARES % OF TOTAL % OF TOTAL CHANGE AS Riverito 12,742, % 71.99% - ING Luxembourg S.A. AIF Account 974, % 5.50% - Firebird Republics Fund Ltd 363, % 2.05% - SEB S.A. UCITS client assets 232, % 1.31% - Firebird Avrora Fund Ltd 222, % 1.25% 1,900 OÜ Midas Invest 174, % 0.92% 11,900 Skandinaviska Enskilda Banken AB, Swedish customers 169, % 1.19% (41,451) State Street Bank and Trust Omnibus Account a Fund No OM01 153, % 0.86% - SEB Elu- ja Pensionikindlustus AS 143, % 0.81% - Firebird Fund L.P. 131, % 0.74% - Total largest shareholders 15,307, % 86.64% (27,651) Total other shareholders 2,392, % 13.36% 27,651 Total 17,700, % 100% - PERFORMANCE OF THE SHARE OF MERKO EHITUS AND COMPARISON INDEX OMX TALLINN IN

17 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. According to the current dividends policy the objective is paying the shareholders 50-70% of the annual profit. The annual general meeting of shareholders of AS Merko Ehitus held at 9 May 2018 approved the Supervisory Board s proposal to pay the shareholders the total amount of EUR 17.7 million (EUR 1.00 per share) as dividends from net profit brought forward, which is equivalent to a 120% dividend rate and a 11.4% dividend yield for the year 2017 (using the share price as at 31 December 2017). Comparable figures in 2016 were accordingly: EUR 7.3 million (EUR 0.41 per share) as dividends, which is equivalent to a 119% dividend rate and a 4.5% dividend yield (using the share price as at 31 December 2016). According to the Estonian Income Tax Law section 50 subsection 1 1, AS Merko Ehitus can pay dividends, without any additional income tax expense and liabilities occurring, up to the amount it has received dividends from subsidiaries, which are resident companies of a Contracting State of the EEA Agreement subject to that state s income tax legislation. Taking into account the dividends already paid to the parent company by foreign subsidiaries, the group will not incur income tax expenses arising in 2018 in Estonia in connection with disbursement of dividends in Estonia (Q2 2017: EUR 0.9 million). The dividend payment to the shareholders will take place on 15 June CORPORATE GOVERNANCE CORPORATE GOVERNANCE AND STRUCTURE AS Merko Ehitus operates as a holding company whose companies in Estonia, Latvia, Lithuania and Norway offer complete solutions in the field of construction and real estate development. The group s largest companies are AS Merko Ehitus Eesti (100%), SIA Merks (100%), UAB Merko Statyba (100%) and the companies belonging to the AS Merko Ehitus Eesti group: Tallinna Teede AS (100%) and AS Merko Infra (100%). The main area of activity of the holding company is developing and implementing strategies for the Merko Ehitus group s various business domains by way of planning resources, deciding on major investments, targeting and overseeing the activity of subsidiaries and coordinating partner relations. The holding company AS Merko Ehitus has a two-member Management Board: Andres Trink and Tõnu Toomik. The overview of the Management Board and Supervisory Board have been presented on pages and in Note 16 of the consolidated financial statements, and published, together with the track record and photographs, on the company s website at It is important to maintain a simple organisational structure in the group and in management to be guided primarily by the group's objectives and requirements. For the purposes of maximum efficiency in the group management, we in some cases differentiate the management structure and legal structure. Management of the group s operating activity takes place in a country-specific manner and is coordinated at the level of the holding company. As of 31 March 2018, the management structure is as follows: AS MERKO EHITUS ESTONIA LATVIA LITHUANIA NORWAY GROUP'S LEGAL STRUCTURE As at 31 March 2018, the group comprises 33 companies ( : 42; : 45). The group's legal structure is predominantly based on regulatory requirements and there is not in all cases a direct linear relationship with the group's effective management structure. The detailed list of group companies is provided in Notes 16 of the financial statements. Changes in the legal structure of the group On March , AS Merko Ehitus and AS Ehitusfirma Rand ja Tuulberg initiated a process to dissolve joint venture Poolkoksimäe Sulgemise OÜ, in which each joint owner has a 50% share. The liquidation of the company was completed and the deletion entry to the Commercial Register made on 26 January On 20 November 2017, AS Merko Ehitus supervisory board has decided to start liquidation procedures of 100% owned subsidiary based in Russia, OOO Lenko Stroi. The liquidation of the company is planned to be completed in In connection with the improvement of efficiency of the business operations and the structure of the Estonian companies of AS Merko Ehitus group, on 21 December 2017, AS Merko Ehitus and AS Merko Ehitus Eesti, 100% subsidiary of AS Merko Ehitus, entered into a real right contract to transfer the right of ownership on real estate development segment s registered immovables and 17