English Estonian
Published: 2013-08-08 15:30:00 CEST
Half Year financial report

2013 II quarter and 6 months consolidated interim report (unaudited)

Nordecon publishes 2013 II quarter and 6 months consolidated interim report

Tallinn, Estonia, 2013-08-08 15:30 CEST -- Announcement includes Nordecon AS’s consolidated financial statements for the second quarter and six months of 2013 (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 OMX Tallinn and Nordecon’s web page (http://www.nordecon.com/root/en/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/root/en/for-investor/investor-presentations).


Condensed consolidated interim statement of financial position

EUR '000 30 June 2013 31 December 2012
Current assets    
Cash and cash equivalents 4,423 10,231
Trade and other receivables 52,580 42,896
Prepayments 2,187 1,840
Inventories 23,999 26,243
Total current assets 83,189 81,210
Non-current assets
Investments in equity-accounted investees 547 202
Other investments 26 26
Trade and other receivables 382 1,554
Investment property 4,930 4,930
Property, plant and equipment 9,573 8,851
Intangible assets 14,808 14,857
Total non-current assets 30,266 30,420
TOTAL ASSETS 113,455 111,630
Current liabilities    
Loans and borrowings 29,672 27,185
Trade payables 37,616 31,968
Other payables 4,971 5,014
Deferred income 4,333 11,404
Provisions 334 521
Total current liabilities 76,926 76,092
Non-current liabilities
Loans and borrowings 4,154 3,671
Trade payables 259 259
Other payables 96 96
Provisions 1,096 1,210
Total non-current liabilities 5,605 5,236
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -437 -404
Retained earnings 6,686 6,039
Total equity attributable to owners of the parent 28,460 27,846
Non-controlling interests 2,464 2,456
TOTAL EQUITY 30,924 30,302


Condensed consolidated interim statement of comprehensive income

EUR '000 Q2 2013 Q2 2012 6M 2013 6M 2012 2012
Revenue 48,416 40,445 75,497 62,920 159,422
Cost of sales -45,736 -38,293 -72,224 -60,732 -151,205
Gross profit 2,680 2,152 3,273 2,188 8,217
Marketing and distribution expenses -77 -114 -139 -190 -389
Administrative expenses -1,091 -1,274 -2,327 -2,504 -5,385
Other operating income 6 253 206 366 810
Other operating expenses -22 31 -59 -57 -566
Operating profit/loss 1,496 1,048 954 -197 2,687
Finance income 182 196 383 341 622
Finance costs -257 -255 -558 -539 -1,248
Net finance costs -75 -59 -175 -198 -626
Share of profit/loss of equity-accounted investees 86 73 77 49 -79
Profit/loss before income tax 1,507 1,062 856 -346 1,982
Income tax expense -43 -44 -44 -44 -56
Profit/loss for the period 1,464 1,018 812 -390 1,926
Other comprehensive income/expense:          
Exchange differences on translating foreign operations 20 -114 -33 -53 59
Total other comprehensive income/expense for the period 20 -114 -33 -53 59
Profit/loss attributable to:          
- Owners of the parent 1,401 873 728 -491 1,477
- Non-controlling interests 63 145 84 101 449
Profit/loss for the period 1,464 1,018 812 -390 1,926
Total comprehensive income/expense attributable to:          
- Owners of the parent 1,421 759 695 -544 1,536
- Non-controlling interests 63 145 84 101 449
Total comprehensive income/expense 1,484 904 779 -443 1,985
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) 0.05 0.03 0.02 -0.02 0.05
Diluted earnings per share (EUR) 0.05 0.03 0.02 -0.02 0.05


Condensed consolidated interim statement of cash flows

EUR '000 6M 2013 6M 2012
Cash flows from operating activities    
Cash receipts from customers1 70,286 65,346
Cash paid to suppliers2 -68,190 -62,528
VAT paid -1,024 -2,079
Cash paid to and for employees -9,026 -7,809
Income tax paid -1 -11
Net cash used in operating activities -7,955 -7,081
Cash flows from investing activities    
Purchase of property, plant and equipment -228 -836
Proceeds from sale of property, plant and equipment and intangible assets 102 363
Acquisition of associates -350 0
Loans provided -349 -376
Repayment of loans provided 196 19
Dividends received 4 0
Interest received 357 0
Net cash used in investing activities -268 -830
Cash flows from financing activities    
Proceeds from loans received 7,002 6,334
Repayment of loans received -3,266 -1,322
Payment of finance lease liabilities -848 -1,090
Interest paid -471 -587
Net cash from financing activities 2,417 3,335
Net cash flow -5,806 -4,576
Cash and cash equivalents at beginning of period 10,231 9,908
Effect of exchange rate fluctuations -2 0
Decrease  in cash and cash equivalents -5,806 -4,576
Cash and cash equivalents at end of period 4,423 5,332

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’s gross profit for the first half of 2013 amounted to 3,273 thousand euros (HY1 2012: 2,188 thousand euros) and gross margin was 4.3% (HY1 2012: 3.5%).

In previous interim reports we have described the work done to restore the Group’s profitability. The measures applied, including extensive internal restructuring and decisive cost cuts, have been effective but their effect on each subsequent year’s profit is inherently limited. Moreover, in interpreting the results, it should be noted that the profits of long-term construction contracts are earned gradually, based on the stage of completion of contract activity.

The external environment has supported improvements in the Group’s profitability. The previous year’s market growth and relatively stable materials and subcontracting prices have created a solid basis for a rise in the projects’ average profit margin. Another factor that has facilitated growth in profitability has been a rise in the proportion of contracts signed with the private sector. However, competition for public procurement contracts to be signed this year will be fierce, as companies expect a decrease in the work procured by the public sector due to the depletion of resources in the current EU financial framework that is coming to an end in 2013. This will intensify competition and pricing pressure in all segments of the construction market. The Group is aware that long-term construction contracts involve the risk of growth in input prices and remains committed to prioritizing the profitability of contracts secured over increasing or maintaining its revenue figures.

The Group’s administrative expenses for the first half of 2013 totalled 2,327 thousand euros, reflecting a certain decrease compared with a year ago (HY1 2012: 2,504 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 3.0% (HY1 2012: 3.2%). Our cost-control measures continue to yield strong results, allowing us to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

Operating profit for the first half of 2013 was 954 thousand euros (HY1 2012: an operating loss of 197 thousand euros) and EBITDA was positive at 1,965 thousand euros (HY1 2012: 925 thousand euros).

The Group ended the first half-year with a net profit of 813 thousand euros (HY1 2012: a net loss of 389 thousand euros). The profit attributable to owners of the parent, Nordecon AS, was 729 thousand euros (HY1 2012: a loss of 491 thousand euros).

Cash flows

Operating activities of the first half of 2013 resulted in a net cash outflow of 7,955 thousand euros (HY1 2012: a net outflow of 7,081 thousand euros). Negative operating cash flow in the first half-year is attributable to the cyclical nature of construction activity. Higher fixed costs and preparations made for launching more active construction operations in the second quarter cause outflows to exceed inflows. Our operating cash flows are also influenced by differences in settlement terms: the payment terms agreed with customers are long and in the case of public procurement generally extend from 45 to 56 days while subcontracts ordinarily have to be paid within 21 to 45 days. We use factoring to counteract the impacts of cyclicality and overdraft facilities to raise working capital.

Cash flows from investing activities resulted in a net outflow of 268 thousand euros (HY1 2012: a net outflow of 830 thousand euros). We continued to invest in property, plant and equipment although not as extensively as a year ago. The volume of loans to associates was similar to the previous year but we received more loan repayments. In addition, we made a contribution of 350 thousand euros to restore an associate’s negative equity.

Financing activities resulted in a net cash inflow of 2,417 thousand euros (HY1 2012: 3,335 thousand euros). The net amount of loan receipts and repayments was positive at 3,736 thousand euros compared with 5,012 thousand euros for the first half of 2012. The Group borrowed more working capital because business volumes have increased compared with the previous year. However, loan repayments, which were mostly made to meet commitments under refinancing agreements, were larger as well.

At 30 June 2013, the Group’s cash and cash equivalents totalled 4,423 thousand euros (30 June 2012: 5,332 thousand euros). Management’s comments on liquidity risks are presented in the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio 6M 2013 6M 2012 6M 2011 2012
Revenue (EUR’000) 75,497 62,920 54,429 159,422
Revenue growth 20% 16% 46% 7.9%
Net profit/loss (EUR’000) 812 -390 -3,716 1,926
Profit/loss attributable to owners of the parent (EUR’000) 728 -491 -3,652 1,477
Weighted average number of shares 30,756,727 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.02 -0.02 -0.12 0.05
Administrative expenses to revenue 3.1% 4.0% 3.9% 3.4%
Administrative expenses to revenue (rolling) 3.0% 3.2% 4.1% 3.4%
EBITDA (EUR’000) 1,965 925 -2,278 4,833
EBITDA margin 2.6% 1.5% -4.2% 3.0%
Gross margin 4.3% 3.5% -2.6% 5.2%
Operating margin 1.3% -0.3% -6.4% 1.7%
Operating margin excluding gains on asset sales 1.1% -0.7% -6.8% 1.4%
Net margin 1.1% -0.6% -6.8% 1.2%
Return on invested capital 2.2% 0.3% -5.0% 5.2%
Return on equity 2.7% -1.4% -11.7% 6.6%
Equity ratio 27.3% 25.0% 26.8% 27.1%
Gearing 45.4% 48.5% 40.8% 33.7%
Current ratio 1.08 1.05 1.19 1.08
  30 June 2013 30 June 2012 30 June 2011 31 Dec 2012
Order book (EUR’000) 103,230 166,367 140,234 127,259


Revenue growth = (revenue for the reporting period/ revenue for the previous period) – 1*100
Earnings per share (EPS) = net profit 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 + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA/revenue)*100
Gross margin = (gross profit/revenue)*100
Operating margin = (operating profit/revenue)*100
Operating margin excluding gains on asset sales = ((operating profit -  gains on sale of property, plant and equipment - gains on sale of investment properties and real estate held for sale)/revenue) *100
Net margin = (net profit for the period/revenue)*100
Return on invested capital = ((profit before tax + interest expense)/ the period’s average (interest-bearing liabilities + equity))*100
Return on equity = (net profit for the period/ the period’s average total equity)*100
Equity ratio = (total equity/ total liabilities and equity)*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

In the first half of 2013, around 2% of the Group’s revenue was generated outside Estonia compared with 1% in the first half of 2012.

  6M 2013 6M 2012 6M 2011 2012
Estonia 98% 99% 96% 98%
Finland 2% 1% 1% 2%
Belarus 0% 0% 3% 0%

Finnish revenues comprise revenue from concrete works. We expect the contribution of foreign markets to remain at a similar level throughout the year.

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive concentration on a single market. Although in the long term our strategy foresees increasing foreign operations, in the short term the Group will focus on the Estonian market that it knows best and which entails fewer known market risks. The Group’s vision of its future operations in foreign markets is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

The core business of Nordecon group is general contracting and project management in the field of building and infrastructure construction. The Group is involved in the construction of commercial and industrial buildings and facilities, road construction and maintenance, specialist and environmental engineering, concrete works and real estate development.

The Group’s revenue for the first six months of 2013 was 75,497 thousand euros, a 20% improvement on the 62,920 thousand euros generated in the first six months of 2012.

The Group aims to maintain the revenues of its operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing operations under stressed circumstances when one segment experiences shrinkage. The Group has set a strategic ceiling for revenue from the construction of apartment buildings, which has to remain below 20% of total sales.

Segment revenues

In the first half of 2013, our two main operating segments, Buildings and Infrastructure, generated revenue of 30,796 thousand euros and 42,638 thousand euros respectively. The corresponding figures for the previous year were 28,360 thousand euros and 32,769 thousand euros (see note 8). The rise in the contribution and absolute figures of the Infrastructure segment (also compared with the previous year) is mostly attributable to the performance of major road construction projects. 

Operating segments * 6M 2013 6M 2012 6M 2011 2012
Buildings 41% 46% 46% 42%
Infrastructure 59% 54% 54% 58%

* In Directors’ report the Ukrainian buildings segment and the EU buildings segment, which are disclosed separately in the financial statements as required by IFRS 8 Operating Segments, are presented as a single segment.

In 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 financial statements, allocation is based on the subsidiaries’ main field of activity (as required by IFRS 8 Operating Segments). In the financial statements, the results of a subsidiary that is primarily engaged in infrastructure construction are presented in the Infrastructure segment. In 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 have been allocated in both parts of the interim report based on the nature of the work.

Sub-segment revenues

Last year’s rise in private sector investments triggered rapid revenue growth in the commercial buildings sub-segment. The Group’s projects in progress include several commercial buildings in Tallinn and Tartu. New contracts secured during the year include an extension to the ASTRI shopping centre in Narva (a contract of over 15 million euros) and the Stroomi shopping centre (a contract of over 9 million euros, secured in the month following the reporting period). We expect the investment activity of private sector customers to remain robust and the contribution of the sub-segment to remain substantial through 2013.

The revenues of the public buildings sub-segment have decreased because we do not have any major projects comparable to those performed a year ago. The competitive situation in this market segment is particularly challenging: it is hard to win a procurement tender without taking excessive risks but our current policy is to avoid such risks. No major procurement tenders are expected to be announced in this sub-segment in 2013 and, thus, volumes will probably not expand. Our largest ongoing projects are the construction of the Translational Medicine Centre of the University of Tartu and Phase V of St Paul’s Church in Tartu.

In the industrial and warehouse facilities sub-segment most of the revenue resulted from the construction of buildings procured by the agricultural sector. However, the volume of such work was smaller than in the previous years because the current EU budget period is coming to an end and thus allocations from the EU structural funds that co-finance the projects are decreasing. Shrinkage in the sub-segment’s revenues has been counterbalanced by private sector investments in new industrial and production buildings.  

The revenues of the apartment buildings sub-segment resulted from general contracting, not development. In the second half-year the contribution of the apartment buildings sub-segment should increase because in May we won a contract of around 10 million euros for the construction of an apartment building at Pirita tee 26 in Tallinn (our recent years’ largest contract for the construction of an apartment building). 

Revenue distribution within Buildings segment 6M 2013 6M 2012 6M 2011 2012
Commercial buildings 45% 19% 6% 26%
Industrial and warehouse facilities 34% 28% 38% 35%
Public buildings 19% 49% 54% 36%
Apartment buildings 2% 4% 2% 3%


As expected, the main revenue source for the Infrastructure segment was road construction. We are currently working on several large projects that involve not only seasonally restricted operations such as asphalt-laying but also various kinds of earthwork and construction of structures, which could also be carried out in the winter weather of the beginning of the year. Since most of the work relating to projects in progress will be performed in 2013, the contribution of the sub-segment should remain high.

In specialist engineering, we continued our work at Sillamäe port and Kärdla guest harbour. The contribution of the sub-segment has decreased compared with the previous year because most of the construction work at Sillamäe port was completed in 2012. We do not expect any major public or private sector investments in specialist engineering projects to be announced in the second half of the year.

In 2012 Nordecon secured a number of environmental engineering contracts. Most of the work relating to those contracts will be performed in 2013. In addition, in the reporting period we signed a contract of 6.4 million euros for the reconstruction of the wastewater treatment plant of the town of Paide. Thus, the contribution of environmental engineering will probably remain larger than in the previous year, with some of the rise resulting from shrinkage in the construction of water and wastewater networks (other engineering). The decrease in the latter is consistent with general market developments. The current year is the last one in the EU financial framework that is coming to an end and most of the work to be conducted with the support of allocated funds has already been tendered.

Revenue distribution within Infrastructure segment 6M 2013 6M 2012 6M 2011 2012
Road construction and maintenance 54% 40% 46% 51%
Specialist engineering (including hydraulic engineering) 8% 16% 1% 15%
Other engineering 27% 38% 37% 27%
Environmental engineering 11% 6% 16% 7%


Order book

At 30 June 2013, our order book stood at 103,230 thousand euros, a 38% decrease compared with a year ago.

The largest decrease in our order book (backlog of contracts signed but not yet performed) occurred in road construction (approx. 75%) where in recent years we have been working on three large public procurement projects: (the Aruvalla-Kose section on the Tallinn-Tartu motorway, Tartu western bypass and Tartu eastern ring road). New national investments in large-scale road construction projects have been practically non-existent. In 2013, the state will probably select contractors for two large road construction projects but the total volume of the contracts will be less than 15 million euros. The order book for the construction of outdoor utility (water and wastewater) networks has shrunk too, because such work is typically procured with the support of the EU structural funds but in the last year of the EU budget period relevant allocations are expectedly smaller.

On the other hand, the order books of the commercial buildings and environmental engineering sub-segments have increased. In the commercial buildings sub-segment this has occurred thanks to growth in private sector investments and in the environmental engineering sub-segment thanks to the Group’s successful bidding and, partly, because in the past year EU-supported investments in environmental facilities have increased.

The order book no longer includes the remaining balance of the Tivoli housing development project in Tallinn city centre (30 June 2012: 13,048 thousand euros). Nordecon published a stock exchange announcement on the termination of the contract on 13 June 2013.   

As at the end of 6M 2013 6M 2012 6M 2011 2012
Order book (EUR’000) 103,230 166,367 140,234 127,259

Because of the general situation in the construction market, infrastructure contracts account for a larger proportion of the order book than building construction contracts. However, compared with a year ago, the lead of the Infrastructure segment has decreased significantly. At the reporting date, infrastructure contracts accounted for 52% of the order book (30 June 2012: 69%). 

Between the reporting date (30 June 2013) and the date of release of this report, Group companies have secured additional construction contracts of approximately 15,290 thousand euros.



Staff and personnel expenses

In the first half of 2013, the Group (the parent and the subsidiaries) employed, on average, 774 people including 362 engineers and technical personnel (ETP). The number of staff did not increase substantially compared with a year ago.

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

  6M 2013 6M 2012 6M 2011 2012
ETP 362 371 352 367
Workers 412 400 379 397
Total average 774 771 731 764

The Group’s personnel expenses for the first half of 2013 including all taxes totalled 8,582 thousand euros, 20% up on the comparative period when personnel expenses were 7,143 thousand euros. Personnel expenses have increased through growth in operating volumes and performance bonuses paid in a situation of improved profitability. Selective increases in basic salaries have had less impact.

In the first half of 2013, the service fees of the members of the council of Nordecon AS amounted to 71 thousand euros and associated social security charges totalled 23 thousand euros (HY1 2012: 71 thousand euros and 23 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 101 thousand euros and associated social security charges totalled 33 thousand euros (HY1 2012: 147 thousand euros and 49 thousand euros respectively including the remuneration of the member of the board that was removed on 30 April 2012).

Labour productivity and labour cost efficiency

In recent years, the number of the Group’s employees has been relatively stable and thus the rise in nominal labour productivity stems mostly from revenue growth. Nominal labour cost efficiency for the period was weakened by the larger amount of performance bonuses paid because of profitable operation in the previous year. In previous years, the proportion of performance bonuses in the Group’s total personnel expenses was smaller. Basic salaries have not been substantially increased.

In measuring operating efficiency, the Group uses the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses paid:

  6M 2013 6M 2012 6M 2011 2012
Nominal labour productivity (rolling), (EUR’000) 224.6 208.6 155.9 208.7
Change against the comparative period 7.7% 33.8% 25.0% 3.2%
Nominal labour cost efficiency (rolling), (EUR’000) 9.4 10.6 8.2 9.5
Change against the comparative period -11.3% 29.1% 30.9% -8.6%


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)


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. In addition, in the region where the Group operates construction operations are influenced by seasonality caused by the change of seasons.

The Group acknowledges the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices tend to rise involves as high risk because the contract may quickly start generating a loss.

In the next periods, the Estonian construction market will depend mainly on public sector investments. A significant proportion of those investments will be funded with the assistance of the EU structural funds. The availability of EU support is certain until the end of the current budget period (2007-2013). However, the allocations remaining for the last year of the budget period are smaller than in the previous years, which means, that in 2013 the number of new, starting projects will decrease significantly. The expenditures of the EU financial framework 2014-2020 that will be designated for investments involving construction work are still unclear. Although the amounts allocated to Estonia under the cohesion policy programmes will increase, national priorities may have changed. Nevertheless, the planned investments will have a significant and direct impact on the business volumes of construction companies.

The impacts of seasonality are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, earthwork, etc). In order to disperse the risk, the Group has secured road maintenance contracts that generate year-round business. According to its business strategy, the Group counteracts seasonal fluctuations in its infrastructure operations with building construction operations that are less exposed to seasonality. Thus, the Group endeavours to keep the operating volumes of the two segments in balance (see also the chapter Performance by business line). In addition, Group companies consistently seek new technical solutions that would yield greater efficiency under changeable weather 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 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 payable until the completion of the contract. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 30 June 2013, the Group’s warranties provisions (including current and non-current ones) totalled 1,150 thousand euros. At 30 June 2012, the corresponding figure was 1,103 thousand euros.

In addition to managing the risks, which are directly related to construction operations, in recent years we have sought to mitigate the risks inherent in preliminary activities. In particular, we have focused on the bidding process, i.e. the Group’s 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

In the reporting period, the Group did not recognise any significant credit losses. The credit risk exposure of the Group’s receivables continued to be low because the proportion of public sector customers that receive their financing from the state and local governments as well as the EU structural funds continued to be high. The main indicator of the realisation of credit risk is settlement default that exceeds 180 days coupled with no activity on the part of the debtor that would confirm the intent to settle.

In the first half of 2013, reversals of prior period credit losses gave rise to a gain of 6 thousand euros (HY1 2012: a gain of 4 thousand euros).

The Group’s statement of financial position includes a trade receivable of approximately 2.4 million euros (includes a portion of late payment interest) due from the customer of the exhibition building of the Estonian Maritime Museum. Under the contract, determination of whether the claim has merit is at the discretion of the Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s management is convinced that the claim has merit and has therefore not written the receivable down. The case is expected to be ruled upon in the second half of 2013.

Liquidity risk

The Group remains exposed to higher than average liquidity risk resulting from a mismatch between the long settlement terms demanded by customers (mostly 45 to 56 days but sometimes up to 100 days) and increasingly shorter settlement terms negotiated by subcontractors (mostly 21 to 45 days). The Group counteracts the differences in settlement terms by using factoring where possible.

At the reporting date, the Group’s current assets exceeded its current liabilities 1.08-fold (30 June 2012: 1.05-fold). Interest-bearing liabilities account for a significant proportion of current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. To date, banks have refinanced the Group’s liabilities for periods not exceeding 12 months, which is why a substantial portion of loans are classified as current liabilities although it is probable that some borrowings (particularly overdraft facilities) will be refinanced again when 12 months have passed. In the first half of 2013, the Group refinanced loans of 13,415 thousand euros which at 31 December 2012 were recognised as current liabilities (at 30 June 2013 relevant loan balances totalled 16,013 thousand euros) and deferred their maturity dates to 2014.

At the reporting date, the Group’s cash and cash equivalents totalled 4,423 thousand euros (30 June 2012: 5,332 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. At 30 June 2013, the Group’s interest-bearing loans and borrowings totalled 33,826 thousand euros, a decrease of 2,719 thousand euros year over year. Interest expense for the first half of 2013 amounted to 532 thousand euros. Compared with the first half of 2012, interest expense increased by 28 thousand euros. The Group’s interest rate risk results mainly from a rise in the base rate for floating interest rates (Euribor/EONIA). The risk is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates.

The Group has not acquired any derivatives for hedging the risks arising from instruments with a floating interest rate.

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) and in Ukrainian hryvnas (UAH). In the first half of 2013, the exchange rate of the Ukrainian hryvna against the euro was stable. The Group’s net foreign exchange gain for the period was 64 thousand euros (HY1 2012: a net foreign exchange gain of 83 thousand euros).

Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s Finnish operations do not involve a currency risk. Nor does the Group have any currency risk in Lithuania where operations have been suspended. Currency risk is reduced by the fact that the prices of construction materials and services that the Group’s Estonian entities purchase from abroad are mostly denominated in euros.

The Group has not acquired any derivatives to hedge its currency risks.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market in 2013

  • Construction volumes will be larger in the infrastructure segment but the segment’s lead over building construction will diminish. Private sector investments, which will grow compared with 2012, will mostly be made in the buildings segment. Moreover, the public sector will contribute to building construction through two major contracts – the construction of a new main building of the Estonian National Museum and the Maarjamõisa medical campus of Tartu University Hospital. The turnover of the infrastructure segment, on the other hand, will be undermined by the depletion of funds allocated from the EU budget for the period 2007-2013.  
  • The construction market will remain disproportionately reliant on public procurement and projects executed with the support of the EU structural funds. In the last year of the current EU budget period, the volume of new procurements will decrease. The volumes and timing of projects to be executed using the support of the next EU financial framework (2014-2020) are still unclear. The investment volumes of two large public sector customers, Riigi Kinnisvara AS (a state-owned real estate company) and the National Road Administration, are going to decline. It is more likely than not that this year growth of the Estonian construction market is going to decelerate and next year the market may see certain shrinkage.
  • The industry will see further consolidation, particularly in the field of general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is still too large, but the process will be slower than expected. Based on the past three years’ experience it is likely that stiff competition and insufficient demand will induce some general contractors to go slowly out of business or shrink in size rather than merge with another or exit the market. However, it will also become increasingly common that two to four smaller players that are seeking ways to remain in business will form a consortium to bid for major procurement contracts, meet tendering terms and secure the required funding.
  • Competition will intensify in all segments of the construction market. The average number of bidders for a contract has increased and there is already a notable gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when anticipation of a fall in demand caused a rapid decline in construction prices, which triggered a slide in the prices of many construction inputs. However, currently there are no massive decreases in the prices of construction inputs and companies that are banking on this in the bidding phase may run into difficulty. Profit margins are already under strong competitive pressure.
  • In new housing development, the success of a project will depend on the developer’s ability to control the input prices included in its business plan and thus to set an affordable sales price. Although the overall situation is improving steadily, the offering of new residential real estate cannot be increased dramatically because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict.  Similarly to the previous year, successful projects will include those that create or fill a niche.
  • The contracts signed with public sector customers will continue to impose tough conditions on construction companies: extensive obligations, strict sanctions, various financial guarantees, extremely long settlement terms, etc. Contractors cannot implement more optimal solutions identified in the construction phase that would reduce the construction or operating costs of the procured asset without sanctions because procurement terms do not allow this. In a situation where public procurement is based on underbidding, the above factors increase the risks of all market participants. Still, compared to two or three years ago, the situation has improved and in some respects procurement terms have become more reasonable for construction companies.
  • The prices of construction inputs will remain relatively stable. Local subcontracting prices may decrease due to weakening demand but, taking into account the subcontractors’ financial and human resources, the decline cannot be substantial or long-lasting. In some areas, price fluctuations are be unpredictable and, thus, notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).
  • There is a shortage of high-quality skilled labour (including project and site managers). The decline in local construction volumes may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and although those markets (particularly Finland) may also see some shrinkage, the number of job seekers that will return will not increase considerably. Accordingly, the basic wage of construction-sector employees will not decrease. Instead, the rise in the cost of living sustains pressure for a wage increase.

Latvia and Lithuania

In our opinion, the Latvian construction market, which was hit by a severe downturn a few years ago, has not regained sufficient stability and similarly to Estonia in 2013 it will probably see shrinkage in public sector demand. Therefore, the Group is not going to enter to the Latvian construction market permanently in 2013.

In the next few years we may undertake some projects in Latvia through our Estonian entities, involving partners where necessary. Execution of project-based business assumes that the projects can be performed profitably. The decision does not change our strategy for the future, i.e. the objective of operating in our neighbouring construction markets through local subsidiaries.

The operations of our Lithuanian subsidiary, Nordecon Statyba UAB, have been suspended. We are monitoring market developments and may resume our Lithuanian operations in the coming years on a project basis. Temporary suspension of operations does not cause any major costs for the Group and does not change our strategy for the future, i.e. the objective of operating in the Lithuanian construction market through local subsidiaries.


The Group operates in Ukraine as a general contractor and project manager in the segment of commercial buildings and production facilities, offering its services primarily to foreign private sector customers. In the past three years, there have been practically no private sector customers in that segment. Regardless of this, we will continue our business in Ukraine in 2013. There are some signs that investment activity in Ukraine will recover in 2013 to a certain extent although the economic and political risks do not allow us to expect any rapid changes. We continue to monitor the situation in the Ukrainian construction market closely and will restructure our operations as appropriate. We also continue to seek opportunities for exiting our two conserved real estate projects or signing a construction contract with a potential new owner.


In the Finnish market, we offer mainly subcontracting services in the field of concrete works but based on experience gained, we are going to deliver some more complex services in 2013. The local concrete works market provides opportunities for competing for projects where the customer wishes to purchase all concrete works from one reliable partner. Nevertheless, we will maintain a rational approach and will avoid taking excessive risks. We are not planning to penetrate any other segments of the Finnish construction market (general contracting, project management, etc).


Nordecon 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 and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2012 was 159.4 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.



         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: raimo.talviste@nordecon.com

Investor presentation_6m_2013.pdf