Construction, Estonia, Good for Business, Real Estate

Nordecon Group ended the year with a gross profit of 8.7 million euros, while gross profit in 2016 totaled approximately 11 million euros. The company's gross margin was 3.8% in 2017, while the margin stood at 6% in 2016. The weakening of the gross margin resulted mainly from the buildings segment where gross margin dropped to 4.0%, compared to 7.5% in 2016. Above all, the year-on-year decrease in gross margin was attributable to growth in input prices, particularly materials and labor, Nordecon told the stock exchange.

The company said that its performance is increasingly influenced by the insufficient availability of skilled labor and, consequently, the shortage of subcontractors in the building construction segment. In particular, this applies to housing construction, where the number of assets being built is high for the Estonian market. The situation enables subcontractors to raise their prices, which puts pressure on general contractors' profit margins. The decline in the group's gross margin is also attributable to the loss of the Swedish subsidiary that incurred some interior work costs in the final stage of its first construction contract which could not be sufficiently accurately estimated in the new market.

The sales revenue of the group rose approximately 26.2% on year to 231.3 million euros in 2017. Although revenues increased in both the buildings and the infrastructure segment, the main growth driver was the buildings segment where growth was underpinned by a rise in the volume of contracts secured from the private sector.  

In 2017, Nordecon earned around 6% of its revenue outside Estonia, compared with 7% in 2016. In terms of foreign markets, the strongest revenue contributor was Sweden where the company provided general contractor's services under three contracts. The share of Ukrainian revenues remained stable. In Ukraine, the company is providing general contractor's services under three building construction contracts and one infrastructure construction contract. Nordecon's Finnish revenues resulted from concrete works in the building construction segment.

At the beginning of the year, Nordecon finalized the merger of two subsidiaries engaged in the infrastructure business, Jarva Teed AS and Hiiu Teed OU, and Nordecon AS's road maintenance and machinery division. The restructuring, undertaken to streamline the company's infrastructure operations and increase the group's overall competitiveness, has justified itself and helped the infrastructure segment improve its profitability and deliver revenue growth, Nordecon said.

Despite stiff competition and the continuing rise in input prices, the company expects that in 2018 the group's profitability will improve compared to 2017. Nordecon said it strives to maintain the revenues of its operating segments in balance as this helps disperse risks and provides better opportunities for continuing construction operations in more challenging circumstances, for example when the operating volumes of a sub-segment decline sharply.

The performance of the infrastructure segment improved compared to 2016, its gross margin rising to 4.1% compared to 3.9% in 2016. Administrative expenses for 2017 totaled 6.9 million euros compared to 6.1 million euros in 2016. Compared to 2016, administrative expenses grew substantially, mainly through the termination benefits paid to two members of the board of Nordecon AS that stepped down and the council's decision to increase the number of the company's board members.

The aim of the group is to keep administrative expenses below the target ceiling of 4% of revenue. The ratio of administrative expenses to revenue was 3% in 2017 compared to 3.3% the year before. Operating profit for 2017 amounted to 1.1 million euros, compared to 4.2 million euros in 2016. EBITDA amounted to 3.1 million euros, compared to 6.1 million euros in 2016.

Finance income for the year amounted to 2.9 million euros. A significant share of finance income resulted from the sale of investments in the joint venture Unigate OU and the subsidiaries Paekalda 2 OU, Paekalda 3 OU, Paekalda 7 OU and Paekalda 9 OU, which generated a gain of 2.5 million euros.

Net profit was also influenced by the write-down of loans related to two Ukrainian real estate development projects by 448,000 euros, recognized in the fourth quarter within finance costs. The investments were written down in connection with the weakening of the hryvnia.

The group's net profit amounted to 1.7 million euros, of which net profit attributable to owners of the parent, Nordecon AS, was approximately 1.4 million euros.