COMMENTARY FROM MANAGEMENT
Merko Ehitus sales revenue in the first quarter was EUR 68.4 million and net profit EUR 3.0 million. The sales revenue for the 3 months of 2022 increased by 14% compared to the same period of previous year and net profit decreased by 11%.
According to the management of Merko Ehitus, the situation on the construction market continues to be extremely complicated due to global supply chain problems and a rise in the cost of materials. The rapid price rise of construction inputs last year was exacerbated by the war in Ukraine and sanctions imposed on Russia, and a price shock. These are unforeseen circumstances whose impact on performance of construction contracts is yet to become apparent. In today’s situation, mutual cooperation of all counterparties, including the customers, will be very important to resolve challenges of a construction project.
On the apartment market, the supply of new apartments has been in a declining trend for some time now, while apartment prices have grown quickly due to the rise in construction prices. The war in Ukraine has amplified these developments even further. Accelerating inflation reduces purchasing power on one hand, but on the other hand it encourages home buying and investment into real estate for those with capital and lending capacity. According to the management, Merko’s goal is to continue to provide a high-quality product and service to enable such investments.
In the first quarter, Merko delivered 126 apartments and one commercial area to buyers. Most of the apartments to be delivered this year will be completed in the H2. As of the end of the quarter, close to 1,700 apartments due to be completed in 2022 and 2023 are under construction in Estonia, Latvia and Lithuania. Of the apartments already finished, only a few are unsold and over half of the ones in progress have already been reserved under preliminary sale contracts. The largest apartment developments were Noblessner, Uus-Veerenni, Odra, Metsatuka and Lahekalda in Tallinn; Erminurme in Tartu; Viesturdārzs and Mežpilsēta in Riga, and Vilneles Skverai in Vilnius.
Although the need for new buildings and infrastructure remains, adapting to the rapid growth of construction prices will take time and some of the planned investments will be put on pause. Nor are construction companies prepared to enter into longer-term contracts at a fixed price given the current situation. The development of new supply chains takes time and it is unclear when and at what price levels a certain stabilization could take place. Preference is given to customers who are prepared to offer flexibility the construction company in covering the price increase of input prices, to focus on the functionality of the object under construction and on timely completion, and not only on keeping the cost to a minimum.
In the first quarter of this year, the group’s companies entered into construction contracts worth EUR 171 million, of which the 100-million-euro contract for the construction of the Arter quarter in Tallinn was the biggest. The secured order-book balance grew to EUR 376 million by the end of the quarter, and three-quarters of the portfolio was made up by private sector orders. In Q1, Merko increased its holding in the network construction company AS Connecto Eesti from 35% to 50%.
In the first quarter of 2022, the largest objects in operation in Estonia were the third phase of the third development phase of the Mustamäe medical campus of the North-Estonia Medical Centre, the Tallinn School of Music and Ballet, St John’s School and the Arter quarter, and also the construction of infrastructure segments of the Republic of Estonia’s southeast land border. In Latvia, the Orkla wafer and biscuit production plant, GUSTAVS business centre, Elemental Skanste office buildings, NATO facilities in Ādaži and the Kauguri city park and youth house were in progress; and in Lithuania, infrastructure for a number of wind farms a car service centre in Vilnius and the Continental Automotive production building in Kaunas.
OVERVIEW OF THE 3 MONTHS RESULTS
PROFITABILITY
2022 3 months’ pre-tax profit was EUR 3.5 million (3M 2021: EUR 3.7 million), which brought the pre-tax profit margin to 5.1% (3M 2021: 6.2%).
Net profit attributable to shareholders for 3 months 2022 was EUR 3.0 million (3M 2021: EUR 3.4 million) and 3 months net profit margin was 4.4% (3M 2021: 5.6%).
REVENUE
2022 3 months’ revenue was EUR 68.4 million (3M 2021: EUR 60.1 million). 3 months’ revenue increased by 13.8% compared to same period last year. The share of revenue earned outside Estonia in 3 months 2022 was 56.2% (3M 2021: 36.9%).
SECURED ORDER BOOK
As of 31 March 2022, the group’s secured order book was EUR 376.1 million (31 March 2021: EUR 281.2 million). In 3 months 2022, group companies signed contracts in the amount of EUR 171.2 million (3M 2021: EUR 97.4 million).
REAL ESTATE DEVELOPMENT
In 3 months 2022, the group sold a total of 126 apartments; in 3 months 2021, the group sold 90 apartments. The group earned a revenue of EUR 15.5 million from sale of own developed apartments in 3 months 2022 and EUR 14.8 million in 3 months 2021.
CASH POSITION
At the end of the reporting period, the group had EUR 29.9 million in cash and cash equivalents, and equity of EUR 170.3 million (50.0% of total assets). Comparable figures as of 31 March 2021 were EUR 54.8 million and EUR 156.6 million (58.1% of total assets), respectively. As of 31 March 2022, the group’s net debt was EUR 23.6 million (31 March 2021: negative EUR – 22.4 million).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
unaudited
in thousand euros
| 2022 3 months | 2021 3 months | 2021 12 months | |
| Revenue | 68,426 | 60,107 | 339,375 |
| Cost of goods sold | (60,554) | (53,133) | (292,563) |
| Gross profit | 7,872 | 6,974 | 46,812 |
| Marketing expenses | (1,115) | (947) | (3,611) |
| General and administrative expenses | (3,723) | (2,715) | (13,925) |
| Other operating income | 686 | 675 | 3,508 |
| Other operating expenses | (61) | (54) | (582) |
| Operating profit | 3,659 | 3,933 | 32,202 |
| Finance income/costs | (160) | (184) | (75) |
| incl. finance income/costs from associates and joint venture | (2) | 7 | 799 |
| interest expense | (162) | (146) | (681) |
| foreign exchange gain (loss) | 52 | – | (8) |
| other financial income (expenses) | (48) | (45) | (185) |
| Profit before tax | 3,499 | 3,749 | 32,127 |
| Corporate income tax expense | (421) | (429) | (3,104) |
| Net profit for financial year | 3,078 | 3,320 | 29,023 |
| incl. net profit attributable to equity holders of the parent | 3,006 | 3,368 | 29,140 |
| net profit attributable to non-controlling interest | 72 | (48) | (117) |
| Other comprehensive income, which can subsequently be classified in the income statement | |||
| Currency translation differences of foreign entities | 16 | 23 | 33 |
| Comprehensive income for the period | 3,094 | 3,343 | 29,056 |
| incl. net profit attributable to equity holders of the parent | 3,020 | 3,392 | 29,163 |
| net profit attributable to non-controlling interest | 74 | (49) | (107) |
| Earnings per share for profit attributable to equity holders of the parent (basic and diluted, in EUR) | 0.17 | 0.19 | 1.65 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
unaudited
in thousand euros
| 31.03.2022 | 31.03.2021 | 31.12.2021 | |
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 29,881 | 54,792 | 44,930 |
| Trade and other receivables | 57,331 | 35,362 | 55,484 |
| Prepaid corporate income tax | 53 | 320 | 114 |
| Inventories | 187,848 | 126,748 | 160,593 |
| 275,113 | 217,222 | 261,121 | |
| Non-current assets | |||
| Investments in associates and joint ventures | 9,377 | 2,361 | 7,703 |
| Other long-term loans and receivables | 23,878 | 20,457 | 24,079 |
| Deferred income tax assets | 793 | 623 | 622 |
| Investment property | 13,803 | 13,897 | 13,828 |
| Property, plant and equipment | 16,966 | 14,484 | 16,350 |
| Intangible assets | 653 | 721 | 669 |
| 65,470 | 52,543 | 63,251 | |
| TOTAL ASSETS | 340,583 | 269,765 | 324,372 |
| LIABILITIES | |||
| Current liabilities | |||
| Borrowings | 11,554 | 13,626 | 11,636 |
| Payables and prepayments | 103,801 | 63,196 | 90,054 |
| Income tax liability | 956 | 1,429 | 681 |
| Short-term provisions | 6,825 | 5,366 | 7,976 |
| 123,136 | 83,617 | 110,347 | |
| Non-current liabilities | |||
| Long-term borrowings | 41,938 | 18,767 | 41,001 |
| Deferred income tax liability | 3,159 | 3,032 | 3,112 |
| Other long-term payables | 2,244 | 3,570 | 2,900 |
| 47,341 | 25,369 | 47,013 | |
| TOTAL LIABILITIES | 170,477 | 108,986 | 157,360 |
| EQUITY | |||
| Non-controlling interests | (153) | 4,159 | (227) |
| Equity attributable to equity holders of the parent | |||
| Share capital | 7,929 | 7,929 | 7,929 |
| Statutory reserve capital | 793 | 793 | 793 |
| Currency translation differences | (777) | (790) | (791) |
| Retained earnings | 162,314 | 148,688 | 159,308 |
| 170,259 | 156,620 | 167,239 | |
| TOTAL EQUITY | 170,106 | 160,779 | 167,012 |
| TOTAL LIABILITIES AND EQUITY | 340,583 | 269,765 | 324,372 |
Interim report is attached to the announcement and is also published on NASDAQ Tallinn and Merko’s web page (group.merko.ee).
