Construction, Estonia, Good for Business, Latvia, Real Estate

"The group's revenue increased mostly because of the growth in construction contracts concluded with private sector customers in the last two years. The sales revenue increased on all of group's home markets – in Estonia, Latvia, Lithuania and Norway. The net profit exceeded management expectations set a year ago, but it should be noted that such a strong quarterly result is not usual. A number of positive factors supported the growth of profit in the last quarter of the year, including real estate transactions of a one-time nature in the fourth quarter, the preparations for which spanned a longer period. Also, a large share of the apartments sold coincided with the last quarter, as did an improvement in the profitability of several projects," chairman of the management board of Merko Ehitus Andres Trink said in a press release.

"However, the profitability of providing construction services to customers is under pressure, as the construction market is still facing challenges in the rise of input prices and the lack of design development and subcontracting resources. Above all, this has an effect on the profitability of the general contracting construction companies, increases contractual risk and forces to continuously seek greater internal efficiency.  This year, the volume of new orders for road and engineering works fell short of the management's expectations and as a whole, we were unable to compete with the prices bid at public procurements," Trink said.

Merko Ehitus sold 106 apartments in the fourth quarter and 392 apartments over the course of 12 months, the revenue figures were 13.3 million euros and 47.1 million euros without VAT, respectively. In 2017, Merko companies launched the construction of around 500 new apartments and invested 48 million euros into the development projects launched this year and projects already in progress. In addition, the group acquired new immovable properties in the amount of approximately 9 million euros.

"The apartment market in the Baltics has generally been good, although the supply of new apartments on the market has grown and a stabilization of the number of sales transactions has been seen for some time now. In the management's assessment, we cannot be satisfied with the pace at which building permits and planning documents are processed, as this is keeping the Merko group from bringing more development projects to market faster. Demand for Merko apartments is strong. Apartment development is a central business line for Merko Ehitus and depending on obtaining building permits, Merko Ehitus plans to invest more than 50 million euros into this area in 2018," Trink said.

Merko Ehitus in the fourth quarter of 2017 posted a revenue of 103 million euros, while EBITDA totaled 11.2 million euros, profit before taxes was 10.6 million euros and net profit 8.1 million euros.  

Sales revenue in 2017 was 317.6 million euros, EBITDA was 22.2 million euros, profit before taxes was 18.8 million euros and net profit totaled 14.7 million euros. In the 12 months of 2017, the group entered into new contracts with a total volume of 335 million euros and 31 million euros in the fourth quarter, including the 21 Toom-Kuninga apartment building, Viimsi State Gymnasium and Tallink office building in Estonia, as well as performance of additional works on the Z-Towers complex in Latvia.

As of 31 December 2017, Merko Ehitus had a secured order-book of 344.4 million euros compared to 269.6 million euros in the same period of the previous year.

Among larger projects in progress in the fourth quarter in Estonia were the construction of the T1 Mall of Tallinn shopping center, the Maakri Kvartal business complex, Opiku Maja's building B, the Noblessner residential quarter, 22 Parnu Road office building, expansion of the Wendre production facility, and the embassy of the People's Republic of China. In Latvia, the larger projects in progress were the Akropole and Alfa shopping centers, the Z-Towers complex and the Ventspils music school and concert hall. In Lithuania, larger projects included the Radisson Blu Hotel Lietuva expansion, the Philip Morris plant, and the Rinktines Urban development project. In Norway, the biggest projects in progress in the fourth quarter were the addition to the Blakstad hospital building and 8 Akersgata office building in Oslo.

As discussed with the supervisory board, the management board proposes to pay 17.7 million euros or 1.0 euros per share in dividends to shareholders at the expense of retained earnings, with the dividend rate for 2017 thus amounting to 120%. The management board bases the proposal to pay dividends more than the last year's earnings and above that of the dividend policy rate mainly on the rather high equity level of the group, and modest debt level. In the light of low margins in the construction services segment, which limits the group's profitability and return on equity, one of the group's goals is to make the usage of shareholders' capital more efficient. The group continues to invest in apartment development.

"We have decided not to increase the equity of Merko Ehitus, but to moderately decrease it as the company in the given market situation is too well capitalized. We are planning a 10-12% increase in investments in apartment construction and at the same time we are reducing the volume of unprofitable tender works, which meaninglessly involve the company's human and financial capital," chairman of the supervisory board of Merko Ehitus Toomas Annus said.