Pro Kapital Council approved Consolidated Interim Report for II Quarter and 6 Months of 2020 (Unaudited)

Pro Kapital

MANAGEMENT REPORT

Chairman’s summary 

The first six months of 2020 have been quite busy for us in spite of the slow-down of businesses in many sectors due to the influence of the worldwide spread of the SARS-CoV-2 virus and COVID-19.

In the first quarter we refinanced senior secured bonds 2015/2020 with the new bonds 2020/2024 – each denominated 100 000 euros, carrying a fixed rate coupon of 8.00 per cent and maturing in February 2024. The new bonds are available for trading on Nasdaq Stockholm since 9 July 2020.

After the reporting date, in July, the first tranche of refinancing of PKG1-PKG7 convertible bonds started. 2 925 641 convertible bonds with the total value of 8 191 794.80 euros were transferred to AS Pro Kapital Grupp. Convertible bonds received will be cancelled and new non-convertible bonds will be issued and distributed on 3 August. The new bonds are not secured non-convertibles, they carry an interest of 8% and the final date to redeem them is 31 October 2024.

Despite of the changed situation due to COVID-19, our ongoing construction works have been carried on as per our plans. In February we signed construction agreement for Ratsuri Houses project in Tallinn, Kristiine City. The former stable house will be renovated to accommodate unique apartments with high ceilings and a modern New Holland style residential house with semi-underground parking will be built next to the renovated house. The total of 39 apartments will be completed next spring. Construction of Kalaranna District in Tallinn is also continuing and going well so that we are looking forward to the completion of the buildings in 2021. Due to unpredictable situation, we had postponed our further development plans. However, we see that the market is recovering and we have started marketing and registering interest for our new project in Kristiine City – Kindrali Houses.

Currently, we have no ongoing constructions in Riga. The market has been slow in our segment also before COVID-19 pandemia. Today we see high interest, but customers are careful to take the final decision. The situation is complicated also due to the inflexible conditions of the banks towards their customers. Nevertheless, we continue selling apartments in River Breeze Residence, which has remained as the market leader in the premium segment. Also we prepare to proceed with the development of further phases of Kliversala Quarter. The technical projecting process for Tallinas residential quarter and Brivibas street business quarter are ongoing. We are making preparations to be ready to start construction of new projects, when the market conditions are more favourable.

In Vilnius, more than 84% of the five houses of Šaltiniu Namai Attico project which were completed last year have been sold already and customers have remained active even in the current economic conditions. Following the initial negative impact of COVID-19, the sales have recovered quite well and our project has been successful comparing to the competitors in higher class segment. In the nearest future we will decide about the timing of the start of construction of the following phase of Šaltiniu Namai project.

Due to the restrictions in Germany, PK Parkhotel Kurhaus in Bad Kreuznach has been closed since the end of March. There were no revenues during second quarter and the costs of the hotel were reduced to the minimum during the closure. The half-year impact of COVID-19 has been over 1 million euros in less hotel revenues and ca 0.5 million lower net result. After release from restrictions, the hotel was reopened on the 1 July. PK Parkhotel Kurhaus operating company has applied for a long-term government support loan in amount of 500 000 euros on favourable conditions: no guarantee is required from the company; 3% interest will be charged per annum. These funds will be used to support the reopening period.

There has been a significant influence of the Emergency State (which were declared in all countries of our operations) on retail business and consequently on T1 Mall of Tallinn shopping centre. The shopping centres in Estonia were closed since the end of March and reopened on 11 May. Meanwhile, only the food stores and pharmacies were allowed to remain open. AS Tallinna Moekombinaat (TMK), a subsidiary owning and operating T1 Mall of Tallinn, submitted an application to Harju County Court for commencement of reorganisation proceedings with the purpose to overcome temporary liquidity issues, reasonably reorganise liabilities and increase profitability. On 3 April 2020 Harju County Court initiated reorganisation proceedings. In co-operation with the reorganization advisor TMK has prepared and submitted a realistic and fair reorganization plan to the creditors. Although the most of the creditors voted in favour of the reorganisation plan, it was not enough to accept the plan as the major creditor, the lender, voted against it. TMK applied to the court to accept the plan through the expert procedures. The court has appointed two experts and requested to provide their opinion to the court by 22 July 2020. Opinions of the experts were in general supportive towards the reorganisation plan. As per Tallinn District Court instructions, Harju County Court is requested to make additional analysis about appointment of the experts. Harju County Court should take a decision on that request and also on approval of the reorganisation plan in the nearest future. The initiation of reorganisation proceedings shall not influence the day-to-day economic activities of the T1 Mall of Tallinn, its tenants and partners – it means that T1 Mall of Tallinn continues its operations. The purpose of reorganisation proceedings is to ensure continuation of normal daily business by safeguarding the rights and interests of investors, employees, creditors and all cooperation partners. The reorganisation process involves only AS Tallinna Moekombinaat and has no direct influence to any other group company of AS Pro Kapital Grupp. No group company has secured nor guaranteed liabilities of AS Tallinna Moekombinaat. In the worst-case scenario, if reorganization proceedings will fail and AS Tallinna Moekombinaat goes bankrupt, the group (AS Pro Kapital Eesti) will have to record the maximum losses of 27 million euros including loan amount of 22.2, unpaid interest balance 2.6 million euros, unpaid invoices 0.3 million euros and the portion of equity of TMK in the amount of 2.2 million euros as at 30 June 2020. However, it would not affect liquidity of the group nor the short-term cash flows. The situation would influence the long-term cash flows to the extent of loan and interest payments.

Our revenues from the sales of the real estate depend on the completion of the residential developments, as the revenues are recorded at the moment notary deeds of sale are concluded. The result of 2019 was influenced by completion of one new building in Kristina Houses project and five new buildings in Šaltiniu Namai. In 2020 we have been selling our remaining inventories. 2020 half-year results in general have exceeded our expectations. The sales revenues for the first half-year of 2020 were 9.1 million euros, which is a decrease of 60% compared to the 22.5 million euros during the same period last year. The operating profit for the first six months was 0.3 million euros comparing to 5.1 million euros during the same period in 2019. The net result was influenced by 5.9 million euros interest expenses related to T1 project. Consequently, the net result of the first half-year in 2020 was 7.9 million euros loss compared to 0.3 million euros loss during the same period in 2019.

In 2020 we do not foresee completion of any real estate projects and we concentrate on development and presales of ongoing projects, sell inventory, make preparations to start new projects and contribute to re-establishing normal activities in rental and hotel operations. Presales of new projects are going well, but they are not impacting profit and loss until the finals sales are concluded. Covid-19 has changed the world and the market. We are monitoring these changes in our field of activities and make considerations carefully in our future plans to find the right balance between the expectations and possibilities even in post-Covid-19 situation.

Paolo Michelozzi
CEO

Key financials

The total revenue of the Company in the first six month of 2020 was 9.1 million euros, which is a decrease of 60% compared to the reference period (2019 6M: 22.5 million euros). The total revenue of the second quarter was 3.2 million euros, a decrease of 74% compared to 12.1 million euros during the same period in 2019. The real estate sales revenues are recorded at the moment of handing over the premises to the buyer. Therefore, the revenues from sales of real estate depend on the completion of the residential developments. The real estate sales revenue was higher in the first six month in 2019 due to completion of apartment buildings in Kristina Houses and Šaltiniu Namai projects. In 2020, the Company continues with sales of completed developments – River Breeze Residence in Riga and Šaltinių Namai Attico development in Vilnius.

The gross profit in the first six month of 2020 decreased by 57% amounting to 3.5 million euros compared to 8.2 million euros during the same period in 2019. In the second quarter the gross profit figures were 1.4 million euros and 4.0 million euros respectively. Gross profit margin has increased by 6%.

The operating result in the first six month of 2020 was 0.3 million euros profit comparing to 5.1 million euros profit during the same period in 2019. The operating result of the second quarter was -0.1 million euros comparing to 2.5 million euros in 2019. The decrease in operating result is influenced by the lower total revenues and a slight increase in operating expenses.

The net result in the first six month of 2020 was 7.9 million euros loss and in the second quarter 3.9 million. In the comparable periods the net result was 0.3 million euros loss and 0.2 million euros loss. The net result of the reporting period was influenced by high interest expenses in AS Tallinna Moekombinaat.

Cash from operating activities during the first six month was -2.6 million euros comparing to 0.5 million euros of cash generated in operating activities during the same period in 2019. In the second quarter of 2020 cash used in operating activities was -4.6 million euros and 0.8 million euros generated during the same period in 2019.

Net assets per share on 30 June 2020 totalled to 1.12 euros compared to 1.77 euros on 30 June 2019.

Key performance indicators

2020 6M 2019 6M 2020 Q2 2019 Q2 2019 12M
Revenue, th EUR 9 053 22 512 3 180 12 140 55 276
Gross profit, th EUR 3 491 8 179 1 354 4 037 15 809
Gross profit, % 39% 36% 43% 33% 29%
Operating result, th EUR 250 5 121 -96 2 477 -15 178
Operating result, % 3% 23% -3% 20% -27%
Net result, th EUR -7 903 -276 -3 937 -163 -29 172
Net result, % -87% -1% -124% -1% -53%
Earnings per share, EUR -0.13 0.00 -0.07 0.00 -0.48
30.06.2020 30.06.2019 31.12.2019
Total Assets, th EUR 212 836 248 972 210 821
Total Liabilities, th EUR 149 173 148 510 139 255
Total Equity, th EUR 63 663 100 462 71 566
Debt / Equity * 2.34 1.48 1.94
Return on Assets, % ** -3.7% -0.1% -12.8%
Return on Equity, % *** -12.1% -0.3% -34.4%
Net asset value per share, EUR **** 1.12 1.77 1.26

*debt / equity = total debt / total Equity
**return on assets = net profit/loss / total average assets
***return on equity = net profit/loss / total average equity
****net asset value per share = net equity / number of shares

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated interim statement of financial position

in thousands of euros 30.06.2020 30.06.2019 31.12.2019
ASSETS
Current assets
Cash and cash equivalents 7 061 4 102 10 616
Current receivables 1 077 2 856 1 475
Inventories 45 381 57 935 41 031
Total current assets 53 519 64 893 53 122
Non-current assets
Non-current receivables 3 716 3 199 2 297
Property, plant and equipment 7 047 7 186 7 146
Right-of-use assets 438 597 519
Investment property 147 762 172 757 147 365
Intangible assets 354 340 372
Total non-current assets 159 317 184 079 157 699
TOTAL ASSETS 212 836 248 972 210 821
LIABILITIES AND EQUITY
Current liabilities
Current debt 83 162 39 788 111 759
Customer advances 6 059 4 932 3 974
Current payables 15 430 6 975 8 741
Tax liabilities 167 298 1 155
Short-term provisions 325 1101 267
Total current liabilities 105 143 53 094 125 896
Non-current liabilities
Long-term debt 41 179 92 360 10 871
Other non-current payables 1 416 1 118 1 013
Deferred income tax liabilities 1 289 1 827 1 348
Long-term provisions 146 111 127
Total non-current liabilities 44 030 95 416 13 359
TOTAL LIABILITIES 149 173 148 510 139 255
Equity attributable to owners of the Company
Share capital in nominal value 11 338 11 338 11 338
Share premium 5 661 5 661 5 661
Statutory reserve 1 216 1 134 1 134
Revaluation reserve 3 262 3 262 3 262
Retained earnings 49 661 76 663 76 725
Profit/ Loss for the period -7 554 -129 -26 981
Total equity attributable to owners of the Company 63 584 97 929 71 139
Non-controlling interest 79 2 533 427
TOTAL EQUITY 63 663 100 462 71 566
TOTAL LIABILITIES AND EQUITY 212 836 248 972 210 821

Consolidated interim statements of profit and loss and ohter comprehensive income

in thousands of euros 2020 6M 2019 6M 2020 Q2 2019 Q2 2019 12M
CONTINUING OPERATIONS
Operating income
Revenue 9 053 22 512 3 180 12 140 55 276
Cost of goods sold -5 562 -14 333 -1 826 -8 103 -39 467
Gross profit 3 491 8 179 1 354 4 037 15 809
Marketing expenses -287 -294 -126 -152 -728
Administrative expenses -2 950 -2 775 -1 388 -1 422 -6 013
Other income 70 50 67 23 95
Other expenses -74 -39 -3 -9 -24 341
Operating profit 250 5 121 -96 2 477 -15 178
Financial income 2 2 1 1 4
Financial expense -8 076 -5 572 -3 832 -2 815 -14 019
Profit / loss before income tax -7 824 -449 -3 927 -337 -29 193
Income tax -79 173 -10 174 21
Profit / loss for the period -7 903 -276 -3 937 -163 -29 172
Attributable to:
Equity holders of the parent -7 554 -129 -3 768 -86 -26 981
Non-controlling interest -349 -147 -169 -77 -2 191
Total comprehensive income / loss for the year -7 903 -276 -3 937 -163 -29 172
Attributable to:
Equity holders of the parent -7 554 -129 -3 768 -86 -26 981
Non-controlling interest -349 -147 -169 -77 -2 191
Earnings per share for the period (EUR) -0.13 0.00 -0.07 0.00 -0.48

Consolidated interim statements of cash flows

in thousands of euros 2020 6M 2019 6M 2020 Q2 2019 Q2 2019 12M
Cash flows from operating activities
Profit/loss for the period -7 903 -276 -3 937 -163 -29 172
Adjustments for:
  Depreciation, amortisation of non-current assets 208 194 104 100 399
  Gain from disposal of property, plant, equipment 0 0 0 0 -3
  Gain from disposal of investment property 0 0 0 0 6
  Change in fair value of property, plant, equipment 0 0 0 0 -15
  Change in fair value of investment property 0 0 0 0 24 236
  Finance income and costs 8 074 5 570 3 831 2 814 14 016
  Changes in deferred tax assets and liabilities -59 -177 -32 -177 -656
  Other non-monetary changes (net amounts) 1 50 1 20 419
Changes in working capital:
  Trade receivables and prepayments -980 -959 -570 -2 531 -630
  Inventories -4 350 1 411 -5 053 1 993 18 276
  Liabilities and prepayments 2 348 -5 368 1 012 -1 223 -6 412
  Provisions 19 24 10 14 -51
Net cash used/ generated in operating activities -2 642 469 -4 634 847 20 413
Cash flows from investing activities
Payments for property, plant and equipment -12 -166 -3 -135 -226
Payments for intangible assets -2 -25 0 -24 -74
Payments for investment property -397 -4 637 -95 -1 104 -6 019
Proceeds from disposal of investment property 0 0 0 0 2 170
Interests received 2 2 0 1 4
Net cash used in investing activities -409 -4 826 -98 -1 262 -4 145
Cash flows from financing activities
Net proceeds from secured bonds 28 500 0 0 0 0
Redemption of non-convertible bonds -28 000 -300 0 -300 -500
Proceeds from borrowings 2 857 13 388 2 757 5 818 16 461
Repayment of borrowings -656 -7 576 -8 -3 733 -21 551
Repayment of lease liabilities -84 -85 -36 -49 -192
Interests paid -3 121 -2 008 -379 -1 384 -6 910
Deposited amount related to loan obligations 0 -2 000 0 -2 000 0
Net cash used/ generated by financing activities -504 1 419 2 334 -1 648 -12 692
Net change in cash and cash equivalents -3 555 -2 938 -2 398 -2 063 3 576
Cash and cash equivalents at the beginning 10 616 7 040 9 459 6 165 7 040
Cash and cash equivalents at the end of the period 7 061 4 102 7 061 4 102 10 616

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