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Merko: Q1 results are in line with expectations in today’s market situation

08.05.2015

Quarterly sales revenue for Merko Ehitus was EUR 45.6 million and net profit EUR 0.8 million. In the first quarter, approximately 42% of sales revenue was earned outside Estonia; the percentage of revenue from Latvian sales reached 37% of the group’s total. The share of the real estate development sector rose to 24% of the group’s total revenue, and this year Merko is prepared to start establishing 450-500 new apartments in the Baltics. Due to the challenging situation faced by the Baltic construction market, the group’s focus is on comprehensive supply of design and construction services, flexibility and efficiency.

“The results posted by the Merko Ehitus group in the first quarter of 2015 are in line with expectations and reflect developments on the Baltic construction market in 2014 – a lower volume of orders and pressure on margins from price competition – which will continue to have an effect in 2015 and likely in 2016 as well,” said AS Merko Ehitus management board chairman Andres Trink. “The management of the group sees 2015 as challenging for construction companies as regards securing new orders, as growth is not forecasted in the near future on the construction market, preparation of new procurements takes a long time and companies are taking major risks in bidding for construction contracts. Growth prospects on the construction market may start improving from 2016, and thus flexibility and efficiency are very important for construction companies in the near future.”

The sales revenue of Merko Ehitus was EUR 45.6 million in the first quarter of 2015 (3 months of 2014: EUR 48.9 million), of which 41.8% was earned outside Estonia. The company says it is satisfied with the growth of sales revenue from construction services in Latvia; in the first three months of 2015 the share of sales revenue from Latvia increased to almost 37% of the group’s total. Sales of construction services in Lithuania stayed on par with the level of Q1 2014.

Group management expressed dissatisfaction with the volume of new construction contracts – in the first quarter, Merko Ehitus signed EUR 22.4 million in new construction contracts compared to EUR 48.6 million in the same period the year before. “Above all due to the interim period in announcement of public procurements funded by the EU and the uncertainty among private customers with regard to launching new developments, it is a great challenge for the group to maintain and grow its secured order book. The group continues to be focused on good cooperation and experience in the field of design services as well as comprehensive supply of design-build services to private customers. The low number of new orders has led to a bidding war on the market, which is putting pressure on margins and due to which greater risks are being taken in construction contracts by both builders and customers,” said Trink.

The gross margin for the first quarter was 7.8% (3 months of 2014: 8.1%) and profit before taxes was EUR 0.8 million (3 months of 2014: EUR 1.1 million). Net profit margin grew to 1.8% (3 months of 2014: 1.5%) and net profit for the first quarter of 2015 was EUR 0.8 million (3 months of 2014: EUR 0.7 million).

The share of revenue from the real estate development sector increased in the first quarter of 2015 to 24.3% of the group’s total income (3 months of 2014: 21.1%). In the first quarter of this year, the group has invested EUR 10.7 million into new and ongoing development projects, and the total investment planned for 2015 into apartment development projects in the Baltic states amounts to EUR 45-50 million, depending on the performance of the Baltic apartment market, currently supported by low interest rates. In 2015, the group is prepared to launch the construction of approximately 450-500 new apartments in the Baltic states.

In the first quarter, the group sold 62 apartments compared to 99 last year. “Apartments are recognised in the quarterly sales revenue in relation to the project completion deadline and the date on which possession is transferred to home buyers. As we delivered a greater number of apartments to buyers in Latvia back in the first quarter of 2014, the comparison base is high. We can be content with the level of the pre-sale agreements signed by the end of the last quarter – demand for Merko-developed and Merko-built apartments remains strong,” said Trink on apartment development activity.

Major projects in progress for Merko in the first quarter included the construction of Hilton Tallinn Park in Tallinn, the renovation of the Mustamäe blocks of the North Estonia Medical Centre in Tallinn, and the design and renovation of tram line no. 4 infrastructure. In addition, construction work on the Narva water treatment plant, a multipurpose concert centre in Liepaja, and the Polpaks NT manufacturing and logistics centre in Marupe, ABB high-voltage DC converter substation in Klaipeda, and recultivation and construction work of a landfill in Riga.