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Published: 2018-08-09 16:00:00 CEST
Half Year financial report

2018 II quarter and 6 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the second quarter and six months of 2018 (unaudited), overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.
Interim report is attached to the announcement and is also published on NASDAQ Tallinn and Nordecon’s web page (http://www.nordecon.com/for-investor/financial-reports/interim-reports).
Period’s investor presentation are attached to the announcement and are also published on Nordecon’s web page (http://www.nordecon.com/for-investor/investor-presentations).

Condensed consolidated interim statement of financial position

EUR ‘00030 June 201831 December 2017
Current assets  
Cash and cash equivalents7,9858,915
Trade and other receivables46,64635,193
Total current assets81,40268,980

Non-current assets
Investments in equity-accounted investees1,8831,888
Other investments2626
Trade and other receivables9,0938,950
Investment property3,5494,929
Property plant and equipment12,95112,566
Intangible assets14,65414,639
Total non-current assets42,15642,998
TOTAL ASSETS123,558111,978
Current liabilities  
Trade payables47,21235,926
Other payables8,5325,654
Deferred income5,1273,651
Total current liabilities82,93162,092

Non-current liabilities
Trade payables9898
Other payables7171
Total non-current liabilities9,27815,397
Share capital18,26318,263
Own (treasury) shares-1,278-1,349
Share premium589589
Statutory capital reserve2,5542,554
Translation reserve1,9321,992
Retained earnings8,69811,089
Total equity attributable to owners of the parent30,75833,138
Non-controlling interests5911,351
TOTAL EQUITY31,34934,489

Condensed consolidated interim statement of comprehensive income

EUR ‘000 H1 2018Q2 2018H1 2017Q2 20172017





Cost of sales -102,459-59,250-100,362-59,382-222,692
Gross profit 3,199 2,746 3,1392,5158,695
Marketing and distribution expenses -331-158-334-221-623
Administrative expenses -3,386-1,715-3,078-1,621-6,936
Other operating income 2192025412107
Other operating expenses -761-107-19-141
Operating loss/profit  -3751,076-3266661,102
Finance income 3852502041012,901
Finance costs -586-282-428-259-1,570
Net finance costs/income -201-32-224-1581,331
Share of profit of equity-accounted investees  





Loss/profit before income tax -1241,559-3576542,918
Income tax expense -400-200-540-465-1,193
Loss/profit for the period  -5241,359-8971891,725
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations -60-12812675446
Total other comprehensive expense/income -60-12812675446
Loss/profit attributable to:      
- Owners of the parent -5321,274-8901971,388
- Non-controlling interests 885-7-8337
Loss/profit for the period  -5241,359-8971891,725
Total comprehensive expense/income attributable to:      
- Owners of the parent -5921,146-7642721,834
- Non-controlling interests 885-7-8337
Total comprehensive expense/income
for the period
Earnings per share attributable to owners of the parent:      
Basic earnings per share (EUR) -0.020.04-
Diluted earnings per share (EUR) -0.020.04-

Condensed consolidated interim statement of cash flows

EUR ‘000H1 2018H1 2017
Cash flows from operating activities  
Cash receipts from customers1115,243111,059
Cash paid to suppliers2-100,279-102,900
VAT paid-2,874-2,029
Cash paid to and for employees-10,480-10,997
Income tax paid-305-200
Net cash from/used in operating activities1,305-5,067
Cash flows from investing activities  
Paid on acquisition of property, plant and equipment-252-147
Paid on acquisition of intangible assets0-3
Proceeds from sale of property, plant and
Loans provided-17-34
Repayment of loans provided720
Dividends received249147
Interest received527
Net cash from investing activities1410
Cash flows from financing activities  
Proceeds from loans received1,4117,399
Repayment of loans received-168-496
Finance lease principal paid-888-1,149
Interest paid-366-376
Dividends paid-2,243-2,007
Net cash used in/from financing activities-2,2543,371
Net cash flow-935-1,686
Cash and cash equivalents at beginning of period8,9169,786
Effect of movements in foreign exchange rates41
Decrease in cash and cash equivalents-935-1,686
Cash and cash equivalents at end of period7,9858,101

1 Line item Cash receipts from customers includes VAT paid by customers.

2 Line item Cash paid to suppliers includes VAT paid.

Financial review
Financial performance
Nordecon Group ended the first half of 2018 with a gross profit of 3,199 thousand euros (H1 2017: 3,139 thousand euros) and a gross margin of 3% (H1 2017: 3%). In an environment of continuously stiff competition, the Group’s gross margin for the first six months remained at the same level as in the same period last year. However, the gross margin for the second quarter improved, rising to 4.4% (Q2 2017: 4.1%). We are satisfied with the profitability of the Infrastructure segment, which has improved considerably compared with last year: its gross margins for the first half and second quarter of 2018 were 3.7% and 8.5% respectively while the corresponding figures for 2017 were 0.5% and 5.4%. However, we would like to see better results in the Buildings segment whose gross margin has dropped from 4.1% for the first half and second quarter of 2017 to 3.3% for the first half and second quarter of 2018. The profitability of the Buildings segment continues to be influenced by the fact that the Group earns a large share of its revenue from the construction of apartment buildings where the ongoing rise in subcontracting prices, particularly labour costs, has the most tangible effect. We closely monitor the proportions of different segments in the Group’s portfolio in order to better manage the risks resulting from changes in input prices.
The Group’s administrative expenses for the first half of 2018 amounted to 3,386 thousand euros. Compared with the same period in 2017, administrative expenses grew by around 10% (H1 2017: 3,078 thousand euros) but the ratio of administrative expenses to revenue (12 months rolling) remained practically the same, amounting to 3.1% (H1 2017: 3.0%). Expenses increased in connection with changes made to the Group’s management and the payment of termination benefits to a member of the parent company’s board (see also the chapter Employees). However, our cost-control measures continue to produce good results and we have been able to keep administrative expenses below the target ceiling of 4% of revenue.
The Group’s operating loss for the first half of 2018 amounted to 375 thousand euros (H1 2017: a loss of 326 thousand euros). EBITDA was positive at 606 thousand euros (H1 2017: positive at 664 thousand euros).
Finance income and costs for the period continued to be influenced by exchange rate fluctuations in the Group’s foreign markets. Although the Ukrainian hryvnia strengthened against the euro by 9.6% and the Group recognised an exchange gain of 243 thousand euros (H1 2017: an exchange loss of 121 thousand euros) on the translation of a loan provided to a Ukrainian subsidiary in euros, the Swedish krona weakened against the euro by around 6% and the Group recognised an exchange loss of 154 thousand euros (H1 2017: nil euros) on the translation of a loan provided to the Swedish subsidiary in euros.
The Group’s net loss amounted to 524 thousand euros (H1 2017: a net loss of 897 thousand euros), of which the net loss attributable to owners of the parent, Nordecon AS, was 532 thousand euros (H1 2017: a net loss of 890 thousand euros).
Cash flows
In the first half of 2018, operating activities produced a net cash inflow of 1,305 thousand euros (H1 2017: an outflow of 5,067 thousand euros). Positive net operating cash flow is attributable to growth in the volume of the Group’s own development operations and the collection of the contractual retentions (5-10% of the contract price) of major construction projects which have been completed. Although the Group’s personnel expenses grew, cash paid to employees decreased year on year because the results of the previous financial year were modest and the performance bonuses paid in the first half of 2018 were smaller than in the comparative period.
Operating cash flow continues to be strongly influenced by the fact that the contracts signed with public and private sector customers do not require them to make advance payments while we have to make prepayments to subcontractors, materials suppliers, etc. Cash inflow is also lowered by contractual retentions, which extend from 5 to 10% of the contract price and are released at the end of the construction period only.
Investing activities of the first half-year produced a net cash inflow of 14 thousand euros (H1 2017: an inflow of 10 thousand euros). The largest items were payments for property, plant and equipment of 252 thousand euros (H1 2017: 147 thousand euros) and dividends received of 249 thousand euros (H1 2017: 147 thousand euros).
Financing activities generated a net cash outflow of 2,254 thousand euros (H1 2017: an inflow of 3,371 thousand euros). The largest items were loan, finance lease and dividend payments. Proceeds from loans received amounted to 1,411 thousand euros, consisting of development loans and overdraft facilities used (H1 2017: 7,399 thousand euros). Loan repayments totalled 168 thousand euros (H1 2017: 496 thousand euros) consisting of scheduled repayments of long-term investment and development loans. Finance lease payments amounted to 888 thousand euros (H1 2017: 1,149 thousand euros). Dividends paid in the first half of 2018 totalled 2,243 thousand euros (H1 2017: 2,007 thousand euros).
At 30 June 2018, the Group’s cash and cash equivalents totalled 7,985 thousand euros (30 June 2017: 8,101 thousand euros). Management’s commentary on liquidity risks is presented in the chapter Description of the main risks.

Key financial figures and ratios

 Figure/ratio for the periodH1 2018H1 2017H1 20162017
 Revenue (EUR ‘000)105,658103,50173,829231,387
 Revenue change2%40%7%26.2%
 Net profit/loss (EUR ‘000)-524-8977981,725
 Net profit/loss attributable to owners of the parent
(EUR ‘000)
 Weighted average number of shares30,986,58530,756,72830,756,72830,913,031
 Earnings per share (EUR)-0.02-
 Administrative expenses to revenue3.2%3.0%3.8%3.0%
 Administrative expenses to revenue (rolling)3.1%3.0%3.7%3.0%
 EBITDA (EUR ‘000)6066641,7143,123
 EBITDA margin0.6%0.6%2.3%1.3%
 Gross margin3.0%3.0%5.6%3.8%
 Operating margin-0.4%-0.3%1.1%0.5%
 Operating margin excluding gain on asset sales-0.4%-0.3%1.0%0.5%
 Net margin-0.5%-0.9%1.1%0.7%
 Return on invested capital0.5%-0.1%2.3%5.9%
 Return on equity-1.6%-2.4%2.2%4.8%
 Equity ratio25.4%29.0%34.5%30.8%
 Return on assets-0.4%-0.8%0.8%1.6%
 Current ratio0.981.021.051.11
 As at30 June 201830 June 201730 June 201631 Dec 2017
 Order book (EUR ‘000)131,552130,601131,363144,122
Revenue change = (revenue for the reporting period / revenue for the previous period) – 1 * 100

Earnings per share (EPS) = net profit or loss attributable to owners of the parent / weighted average number of shares outstanding

Administrative expenses to revenue = (administrative expenses / revenue) * 100

Administrative expenses to revenue (rolling) = (past four quarters’ administrative expenses / past four quarters’ revenue) * 100

EBITDA = operating profit or loss + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA / revenue) * 100

Gross margin = (gross profit or loss / revenue) * 100
Operating margin = (operating profit or loss / revenue) * 100
Operating margin excluding gain on asset sales = ((operating profit or loss – gain on sales of non-current assets – gain on sales of real estate) / revenue) * 100

Net margin = (net profit or loss for the period / revenue) * 100

Return on invested capital = ((profit or loss before tax + interest expense) / the period’s average (interest-bearing liabilities + equity)) * 100

Return on equity = (net profit or loss for the period / the period’s average total equity) * 100

Equity ratio = (total equity / total liabilities and equity) * 100
Return on assets = (net profit or loss for the period / the period’s average total assets) * 100
Gearing = ((interest-bearing liabilities – cash and cash equivalents) / (interest-bearing liabilities + equity)) * 100
Current ratio = total current assets / total current liabilities

Performance by geographical market
The contribution of the Group’s foreign markets has remained stable in the past three years. In the first half of 2018, revenue earned outside Estonia accounted for 7% of our total revenue.

 H1 2018H1 2017H1 20162017

The share of the Group’s Ukrainian revenues has grown substantially compared with the same period last year. In Ukraine, we are providing general contractor’s services under one infrastructure and two building construction contracts and the share of concrete works performed in the building construction segment has also increased significantly. The share of Swedish revenues has decreased year on year. During the period, we provided services under one construction contract secured as a general contractor. Our Finnish revenues result from concrete works in the building construction segment.
Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on one market. However, conditions in some of our chosen foreign markets are also volatile and affect our current results. Increasing the contribution of foreign markets is one of Nordecon’s strategic targets. Our vision of the Group’s foreign operations is described in the chapter Outlooks of the Group’s geographical markets.

Performance by business line
Segment revenues
We strive to maintain the revenues of our operating segments (Buildings and Infrastructure) as balanced as possible because this helps diversify risks and provides better opportunities for continuing construction operations in more challenging market conditions where the volumes of one or several sub-segments decline substantially.
Nordecon’s revenues for the first half of 2018 totalled 105,658 thousand euros, a roughly 2% increase on the 103,501 thousand euros generated in the first half of 2017. Revenue growth resulted from growth in the business volumes of the Infrastructure segment. Compared with the same period last year, the revenue of the Infrastructure segment increased by around 32% while the revenue of the Buildings segment decreased by 4%. Despite year-on-year revenue growth, the contribution of the Infrastructure segment to the Group’s total revenue remains modest. In the first half of 2018, our Buildings and Infrastructure segments generated revenue of 80,827 thousand euros and 24,587 thousand euros respectively. The corresponding figures for the first half of 2017 were 83,834 thousand euros and 18,607 thousand euros (see note 8). The current revenue structure is also reflected in our order book where building construction contracts continue to prevail.

Operating segments*H1 2018H1 2017H1 20162017

* In the Directors’ report, projects have been allocated to operating segments based on their nature (i.e. building or infrastructure construction). In the segment reporting presented in the consolidated financial statements, allocation is based on the subsidiaries’ main field of activity (as required by IFRS 8 Operating Segments). In the consolidated financial statements, the results of a subsidiary that is primarily engaged in infrastructure construction are presented in the Infrastructure segment. In the Directors’ report, the revenues of such a subsidiary are presented based on their nature. The differences between the two reports are not significant because in general Group entities specialise in specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in both building and infrastructure construction. The figures for the parent company are allocated in both parts of the interim report based on the nature of the work.

Sub-segment revenues
In the Buildings segment, the largest revenue source is the commercial buildings sub-segment. In the first half of 2018, its revenue grew significantly, by around 38% year on year. The period’s largest projects were the Omniva logistics centre and the Møller Auto sales and service centre in Rae parish near Tallinn. In Tallinn, we continued to build a 14-floor commercial and residential building in the WoHo quarter at Mustamäe tee 3 and a multi-storey car park at Sepise 8 in Ülemiste City. During the period, we completed the construction of an office building at Lõõtsa 12 in Ülemiste City in Tallinn. On the basis of the order book, we expect that in 2018 the revenue generated by the commercial buildings sub-segment will increase compared with 2017.
The volumes of the public buildings sub-segment remained comparable to the same period last year. The results of the sub-segment continue to be strongly influenced by investments made in national defence. During the period, we continued to build infrastructure for armoured vehicles and two barracks at the defence forces’ base at Tapa. Work also continued on the Estonian Academy of Security Sciences building in Tallinn and the Abja Health Centre.
The proportion of revenue generated by the apartment buildings sub-segment decreased year on year. In Estonia, a substantial share of our apartment building projects is located in Tallinn. In the period under review, the largest of them were the Meerhof 2.0 apartment building complex at Pirita tee 20a and apartment buildings at Sõjakooli 12 (phases II and III) and Lesta 10. Foreign markets continue to contribute a major share of the sub-segment’s revenue. During the period, we continued the construction of a residential quarter in the city of Brovary in the Kiev region in Ukraine and the design and construction of an eight-floor apartment building in the city of Stockholm in Sweden.
We continue to carry out our own housing development projects (reported in the apartment buildings sub-segment) in Tartu and Tallinn. During the period, we completed phase VII and continued to build phase VIII (the last phase) in the Tammelinn project in Tartu (www.tammelinn.ee). In Tallinn, we began construction work in a new development project at Nõmme tee 97 where we are going to build a four-floor apartment building with 21 apartments (www.nommetee.ee). We continue to sell apartments in the above development projects in Tartu and Tallinn as well as in the projects completed in 2017 at Magasini 29 (www.magasini.ee) and Hane 2 and 2a (www.hane.ee) in Tallinn. The period’s housing development revenues totalled 3,228 thousand euros (H1 2017: 1,102 thousand euros). In carrying out development activities, we monitor closely potential risks in the housing development market that stem from rapid growth in the supply of new housing and relative growth in input prices.
The largest projects in the industrial and warehouse facilities sub-segment were the construction of the Metsä Wood plywood factory in Pärnu, a robotic farm at Mätliku and a grain terminal at Lähtru, and the reconstruction (phase IV) of the fattening unit of the pig farm of Rakvere Farmid AS (EKSEKO).

Revenue breakdown in the Buildings segmentH1 2018H1 2017H1 20162017
Commercial buildings36%25%15%25%
Public buildings26%26%35%19%
Apartment buildings23%31%31%30%
Industrial and warehouse facilities15%18%19%26%

For a long time, the Infrastructure segment has been dominated by the road construction and maintenance sub-segment whose relative importance has been increasing year by year. During the period, a significant portion of its revenue resulted from major projects performed under contracts secured in 2017: the reconstruction of the Haabersti intersection in Tallinn, the reconstruction of a section of the Tallinn ring road (km 0.6-2.8) and the construction of passing lanes for a 2+1 road on the Valmaotsa–Kärevere section of the Tallinn–Tartu–Võru–Luhamaa road. A substantial share of the period’s revenue also resulted from forest road improvement services provided to the State Forest Management Centre. We continued to render road maintenance services in Järva and Hiiu counties and the Kose maintenance area in Harju county. We expect that road construction will remain by far the largest revenue source in the Infrastructure segment through 2018.
The contracts signed by the environmental engineering and other engineering (utility network construction) sub-segments are small and significant growth in their revenues is unlikely.

Revenue breakdown in the Infrastructure segmentH1 2018H1 2017H1 20162017
Road construction and maintenance90%84%82%86%
Other engineering7%12%14%8%
Environmental engineering3%4%4%6%

Order book
At 30 June 2018, the Group’s order book (backlog of contracts signed but not yet performed) stood at 131,552 thousand euros, a level similar to the end of the first half of 2017.

As at30 June 201830 June 201730 June 201631 Dec 2017
Order book (EUR ‘000)131,552130,601131,363144,122

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 73% and 27% of the Group’s total order book respectively (30 June 2017: 72% and 28% respectively). Compared with 30 June 2017, the order book of the Buildings segment has increased and the order book of the Infrastructure segment has decreased by around 2%.
In the Buildings segment, the order book of the commercial buildings sub-segment has grown substantially, by around 54% compared with the same period last year. Above all, its growth is driven large-scale projects in Tallinn: the construction of a 14-floor commercial and residential building at Mustamäe tee 3 in the WoHo quarter, the design and construction of an eight-floor accommodation building on the property at Liimi 1B, and the reconstruction and expansion of the building of terminal D in the Old City Harbour at Lootsi 13/4 that was secured in the second quarter of 2018. Growth in the sub-segment’s order book is also strongly supported by a large contract signed in the second half of 2017 in Ukraine for the construction of a seven-floor office building in the Unit City innovation park in Kiev. The order book of the public buildings sub-segment has grown as well. The largest items in its order book are contracts signed in the second half of 2017 for the construction of the Estonian Academy of Security Sciences building in Tallinn and infrastructure for armoured vehicles and two barracks at the defence forces’ base at Tapa. The order books of the industrial and warehouse facilities and the apartment buildings sub-segments have decreased.
The order book of the Infrastructure segment is strongly influenced by contracts signed by the road construction and maintenance sub-segment which account for around 88% of the Infrastructure segment’s order book. The road construction order book comprises the remaining portions of contracts signed in 2017 as well as two new contracts secured in 2018: one for the reconstruction of two sections (km 195.6-205.8 and 207.8-209.2) of the Riga-Pskov road (the Tsiiruli-Missoküla road section) and the other for the construction of the Veskitammi intersection on the border of Tallinn in Laagri. The Group continues to provide road maintenance services in three road maintenance areas: Järva, Hiiu and Kose. Although according to our projections in 2018 public investments will not increase substantially, our order book as at the reporting date allows us to expect that in 2018 the revenue of the Infrastructure segment will grow somewhat compared with 2017 (for further information, see the Business risks section of the chapter Description of the main risks).
Based on the Group’s order book and known developments in our chosen markets, we expect that the Group’s revenue for 2018 will remain at the same level as in 2017. In an environment of stiff competition, we avoid taking unjustified risks whose realisation in the contract performance phase would have an adverse impact on our results. Our preferred policy is to keep fixed costs under control and monitor critically market developments.
Between the reporting date (30 June 2018) and the date of release of this report, Group companies have secured additional construction contracts in the region of 22,873 thousand euros.

Employees and personnel expenses
In the first half of 2018, the Group (the parent and the subsidiaries) employed, on average, 694 people including 426 engineers and technical personnel (ETP). The number of employees, particularly workers, has decreased by around 6% year on year, mostly because the contract for providing road maintenance services in the Keila maintenance area expired.

Average number of the Group’s employees (at the parent and the subsidiaries)

 H1 2018H1 2017H1 20162017
Total average694737670735

The Group’s personnel expenses for the first half of 2018, including all taxes, totalled 10,566 thousand euros. In the same period of 2017, personnel expenses amounted to 9,945 thousand euros. The roughly 6% growth in personnel expenses is mainly attributable to pay rises.
The service fees of the members of the council of Nordecon AS for the first half of 2018 amounted to 94 thousand euros and associated social security charges totalled 31 thousand euros (H1 2017: 73 thousand euros and 24 thousand euros respectively).
The service fees of the members of the board of Nordecon AS amounted to 390 thousand euros and associated social security charges totalled 128 thousand euros (H1 2017: 199 thousand euros and 66 thousand euros respectively). The figures include termination benefits of 93 thousand euros paid to a member of the board and associated social security charges of 31 thousand euros.

Labour productivity and labour cost efficiency
We measure the efficiency of our operating activities using the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses incurred:

 H1 2018H1 2017H1 20162017
Nominal labour productivity (rolling), (EUR ‘000)327.4296.5222.9314.9
Change against the comparative period, %10.4%33.0%-1.3%17.6%
Nominal labour cost efficiency (rolling), (EUR)9.910.27.810.1
Change against the comparative period, %-2.1%30.3%-6.8%12.6%

Nominal labour productivity (rolling) = (past four quarters’ revenue) / (past four quarters’ average number of employees)
Nominal labour cost efficiency (rolling) = (past four quarters’ revenue) / (past four quarters’ personnel expenses)

The Group’s nominal labour productivity increased year on year, mainly through a decrease in headcount. Labour cost efficiency declined because the rise in personnel expenses outpaced revenue growth.

Description of the main risks
Business risks
The main factors which affect the Group’s business volumes and profit margins are competition in the construction market and changes in the demand for construction services.
Competition continues to be stiff in all segments of the construction market and in 2018 public investment is not expected to grow substantially compared with 2017. Thus, builders’ bid prices are under strong competitive pressure in a situation where the prices of construction inputs have been trending upwards moderately but consistently for several quarters. Bidders for contracts include not only rival general contractors but also former subcontractors. This is mainly attributable to the state and local governments’ policy to keep the qualification requirements of public procurement tenders low, which sometimes results in the sacrifice of quality and adherence to deadlines to the lowest possible price. We acknowledge the risks inherent in the performance of contracts signed in an environment of stiff competition and rising input prices. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered noticeably and competition is tough is risky because negative developments in the economy may quickly render the contract onerous. In setting our prices in such an environment, we focus on ensuring a reasonable balance between contract performance risks and tight cost control.
Demand for construction services continues to be strongly influenced by the volume of public investment, which in turn depends on the co-financing received from the EU structural funds. Total support allocated to Estonia during the current EU budget period (2014-2020) amounts to 5.9 billion euros. Although the amount exceeds the figure of the previous financial framework, the amounts earmarked for construction work are substantially smaller than in the previous budget period.
In the light of the above factors, we expect that in 2018 as a whole our business volumes will remain at the same level as in 2017. Our action plan foresees flexible resource allocation aimed at finding more profitable contracts and performing them effectively. According to its business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and in the current market situation particularly some infrastructure) segment.
Our business is also influenced by seasonal changes in weather conditions, which have the strongest impact on infrastructure construction where a lot of work is done outdoors (road construction, earthworks, etc.). To disperse the risk, we secure road maintenance contracts that generate year-round business. Our strategy is to counteract the seasonality of infrastructure operations with building construction that is less exposed to seasonal fluctuations. Our long-term goal is to be flexible and keep our two operating segments in relative balance (see also the chapter Performance by business line). Where possible, our entities implement different technical solutions that allow working efficiently also in changeable conditions.
Operational risks
To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific insurance contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount due until the contract has been completed. To remedy construction deficiencies which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 30 June 2018, the Group’s warranty provisions (including current and non-current ones) totalled 1,007 thousand euros (30 June 2017: 1,051 thousand euros).
In addition to managing the risks directly related to construction operations, in recent years we have also sought to mitigate the risks inherent in preliminary activities. In particular, we have focused on the bidding process, i.e. compliance with the procurement terms and conditions, and budgeting. The errors made in the planning stage are usually irreversible and, in a situation where the price is contractually fixed, may result in a direct financial loss.
Financial risks
Credit risk
During the period, the Group did not incur any credit losses. In the comparative period in 2017, credit losses totalled 30 thousand euros. The overall credit risk exposure of the portfolio of receivables is low because the solvency of prospective customers is evaluated, the share of public sector customers is large, and customers’ settlement behaviour is continuously monitored. The main indicator of the realisation of credit risk is settlement default that exceeds 180 days along with no activity on the part of the debtor that would confirm the intent to settle.
Liquidity risk
The Group remains exposed to higher than usual liquidity risk. At the reporting date, the Group’s current assets exceeded its current liabilities 0.98-fold (30 June 2017: 1.02-fold). The key factor which influences the current ratio is the classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities (particularly overdrafts) for a period exceeding twelve months.
Because the political and economic situation in Ukraine is still complicated, we believe that the Group’s Ukrainian investment properties cannot be realised in the short term. Accordingly, at the reporting date the Group’s loans to its Ukrainian associates of 8,642 thousand euros were classified as non-current assets.
For better cash flow management, we use overdraft facilities and factoring by which we counter the mismatch between the settlement terms agreed with customers and subcontractors. Under IFRS EU, borrowings have to be classified into current and non-current based on contract terms in force at the reporting date. At 30 June 2018, the Group’s short-term borrowings totalled 21,441 thousand euros.
At the reporting date, the Group’s cash and cash equivalents totalled 7,985 thousand euros (30 June 2017: 8,101 thousand euros).
Interest rate risk
The Group’s interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. During the period, interest-bearing borrowings grew by 433 thousand euros year on year. Factoring liabilities increased whereas loan and finance lease liabilities decreased (see also the section Liquidity risk). At 30 June 2018, interest-bearing borrowings totalled 29,388 thousand euros (30 June 2017: 28,955 thousand euros). Interest expense for the first half of 2018 amounted to 425 thousand euros (H1 2017: 304 thousand euros).
The main source of interest rate risk is a possible rise in the variable component of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In the light of the Group’s relatively heavy loan burden, this would cause a significant rise in interest expense, which would have an adverse impact on profit. We mitigate the risk by pursuing a policy of entering, where possible, into fixed-rate contracts when the market interest rates are low. As regards loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. We have signed a derivative contract to manage the risks resulting from changes in the interest rate of the finance lease contract of a new asphalt concrete plant acquired in 2016.
Currency risk
As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e. in euros (EUR), Ukrainian hryvnias (UAH), and Swedish kronas (SEK).
The exchange rate of the hryvnia is unstable because the political and economic environment in Ukraine continues to be strained due to the conflict between Ukraine and Russia which broke out at the beginning of 2014 and at the beginning of 2015 the National Bank of Ukraine decided to discontinue the determination of the national currency’s indicative exchange rate. In the first half of 2018, the hryvnia strengthened against the euro by around 9.6%. For the Group’s Ukrainian subsidiary that has to translate its euro-denominated loans into the local currency this meant additional foreign exchange gain of 243 thousand euros (H1 2017: an exchange loss of 121 thousand euros). Exchange gains and losses on financial instruments are recognised in Finance income and Finance costs respectively. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.
Our Ukrainian and non-Ukrainian entities’ reciprocal receivables and liabilities which are related to the construction business and denominated in hryvnias do not give rise to any exchange gains or losses. Nor do the loans provided to the Ukrainian associates in euros give rise to any exchange gains or losses to be recognised in the Group’s accounts.
In the first half of 2018, the Swedish krona weakened against the euro by around 6%. Due to adverse movements in the krona/euro exchange rate, the translation of operating receivables and payables resulted in an exchange loss of 71 thousand euros (H1 2017: 1 thousand euros). The exchange loss has been recognised in Other operating expenses. The translation of a loan provided to the Swedish subsidiary in euros into the local currency gave rise to an exchange loss of 154 thousand euros. The exchange loss has been recognised in Finance costs. In the comparative period, there was no exchange loss.
We have not acquired derivatives to hedge our currency risk.
Employee and work environment risks
Finding permanent labour is a serious challenge for the entire construction sector and one of the main factors that influences business results. The Group depends extensively on its subcontractors’ ability to ensure the availability of skilled labour. To strengthen Nordecon’s reputation as an employer and make sure that we can find employees also in the future, we collaborate with educational institutions.
As a construction company, we strive to minimise the occupational health and safety risks of people working on our construction sites including both our own employees and the teams of our subcontractors. The goal is to make sure that all measures required by law are applied in full. In addition, the parent company follows the requirements of international occupational health and safety management standard OHSAS 18001. Subcontractors must ensure that their employees follow applicable work safety requirements; the Group’s role is to work with them and create conditions that enable and foster compliance.
Environmental risks
Construction activities change landscapes and the physical environment of cities and settlements. The Group’s goal is to do its work and at the same time protect the natural environment as much as possible. Our assets and operations which have the strongest impact on the environment and, thus, involve the highest environmental risk are asphalt plants, quarries and road construction operations. To prevent leaks, spills, pollution, destruction of wildlife and other damage to the environment, we comply with legal requirements. All of our largest construction entities have implemented environmental management standard ISO 14001.
Corruption and ethical risks
As one of the leading construction companies in Estonia, we realise that it is important to be aware of the risks involved in the breach of honest and ethical business practices and to make sure that our entities’ management quality, organisational culture and internal communication emphasise zero tolerance for dishonest, unethical and corrupt behaviour.

Outlooks of the Group’s geographical markets
Processes and developments characterising the Estonian construction market

  • In 2018, public investment should grow slightly. However, it is still unclear for companies in which segments of the construction market and to what extent the state will be able to realise its investment plans. Although in the 2014-2020 EU budget period the support allocated to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), the portion that will influence the construction market will not increase. Instead, compared with the previous period, there will be a rise in allocations to intangible areas.
  • In terms of the market in general, investments made by the largest public sector customers (e.g. the state-owned real estate company Riigi Kinnisvara AS and the National Road Administration) which will reach signature of a construction contract in 2018 will not increase substantially. The Ministry of Defence has been a positive exception for builders as its needs and activity in carrying out new procurement tenders and placing orders through a single agency, the centre for defence investment, have made a major contribution to market revival. Hence, the Estonian construction market as a whole (particularly infrastructure construction segments) will remain relatively stable.
  • Competition remains stiff across the construction market, intensifying in different segments in line with market developments. A continuously high number of bidders for a contract reflects this. It is clear that in an environment of rising input prices that has emerged in recent years, efficiency is the key to success.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in its business plan and thus set sales prices that are affordable for prospective buyers. Despite the market situation it is expected that the housing market, which accounts for a somewhat disproportionately large share of the total construction market and thus amplifies associated risks, will also sustain growth in 2018.
  • There is a growing contrast between the stringent terms of public contracts, which require the builder to agree to increasing obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and the modest participation requirements. Lenient qualification requirements and the precondition of making a low bid have made it relatively easy for an increasing number of builders to win a contract but have heightened the risks taken by customers in terms of funding, deadlines and quality during the contract performance phase and the subsequent warranty period.
  • Recent years have brought a rise in the prices of construction inputs, particularly in building construction. Initially, general contractors tried to absorb the cost increase by making margin concessions but their capacity for doing this has been practically exhausted. The construction market includes an increasing number of areas where changes in the environment (including materials producers’ rapid and successful entry into foreign markets) may trigger a sharp price increase. The rise in housing construction has lengthened the supply terms of various essential materials and services considerably, making it impossible to carry out all processes in the former optimistic timeframes. As a result, activities require more extensive planning or may need to be postponed.
  • The persisting shortage of skilled labour (including project and site managers) is restricting companies’ performance capacities and affecting different aspects of the construction process, including quality. Labour migration to the Nordic countries remains steady and it is not likely that workers who have left will return to the Estonian construction market in large numbers. Migrant workers that in turn have started moving to Estonia are not able to fill the gap. All of the above factors sustain pressure for a wage increase, particularly in the category of the younger and less experienced workforce whose mobility and willingness to change jobs is naturally higher.

In Ukraine, we mainly offer general contracting and project management services to private sector customers in the segment of building construction. Political and economic instability continues to restrict the adoption of business decisions but construction activity in Kiev and the surrounding area has picked up in recent years. In 2018, we will continue our Ukrainian operations primarily in the Kiev region. Based on our order book, it is possible that in 2018 our Ukrainian business volumes will increase compared with 2017. Despite the military conflict in eastern Ukraine, for Nordecon the market situation has improved compared with a year or two ago. Hard times have reduced the number of inefficient local (construction) companies and when the economy normalises we will have considerably better prospects for increasing our operations and profitability.
The Ukrainian government’s recent crackdown on cash-in-hand work is definitely a step in the right direction, which in the long term should improve our position in the Ukrainian construction market. We assess the situation in the Ukrainian market regularly and critically and are ready to restructure our operations as and when necessary. Should the crisis in eastern Ukraine spread (which at the date of release of this report is highly unlikely), we can suspend our operations immediately. We continue to seek opportunities for exiting our two real estate projects, which have been put on hold, or signing a construction contract with a prospective new owner.
In Finland, we have provided mainly subcontracting services in the concrete work segment but, based on experience gained, have started preparations for expanding into the general contracting market. The local concrete work market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. Our policy is to maintain a rational approach and avoid taking excessive risks.
We have been operating in Sweden since July 2015. In the Swedish market, we offer mainly the construction of residential and non-residential buildings in the central part of the country. On gaining experience in the new market, we have prioritised quality and adherence to deadlines over profitability. As regards our longer-term goals and the plan to build a viable and strong organisation that would compete successfully in the Swedish market, we are positive about the developments so far and see potential for further business growth and earning a profit in a large market when we have been able to stabilise our order book growth at the desired level.

Nordecon (www.nordecon.com) is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine, Finland and Sweden. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. The consolidated revenue of the Group in 2017 was 231 million euros. Currently Nordecon Group employs close to 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ Tallinn Stock Exchange.

Andri Hõbemägi
Nordecon AS
Head of Investor Relations
Tel: +372 6272 022
Email: andri.hobemagi@nordecon.com


Investor presentation 6m 2018.pdf