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Published: 2017-02-09 08:00:00 CET
Quarterly report

2016 fourth quarter and twelve months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the fourth quarter and twelve months of 2016 (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/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’000 31 December 2016 31 December 2015
Current assets    
Cash and cash equivalents 9,786 6,332
Trade and other receivables 21,055 17,503
Prepayments 1,644 1,599
Inventories 22,992 23,603
Total current assets 55,477 49,037
Non-current assets
Investments in equity-accounted investees 1,640 1,179
Other investments 26 26
Trade and other receivables 10,816 10,516
Investment property 4,929 4,929
Property plant and equipment 11,111 9,623
Intangible assets 14,623 14,609
Total non-current assets 43,145 40,882
TOTAL ASSETS 98,622 89,919
Current liabilities    
Borrowings 6,297 15,715
Trade payables 28,905 22,538
Other payables 6,295 5,475
Deferred income 4,128 3,233
Provisions 753 825
Total current liabilities 46,378 47,786
Non-current liabilities
Borrowings 13,102 5,098
Trade payables 98 104
Other payables 117 96
Provisions 881 768
Total non-current liabilities 14,198 6,066
Share capital 19,720 20,692
Own (treasury) shares -1,550 -1,582
Share premium 564 547
Statutory capital reserve 2,554 2,554
Translation reserve 1,549 1,358
Retained earnings 13,091 10,970
Total equity attributable to owners of the parent 35,928 34,539
Non-controlling interests 2,118 1,528
TOTAL EQUITY 38,046 36,067


Condensed consolidated interim statement of comprehensive income

EUR’000   Q4 2016 Q4 2015  2016 2015
Revenue    49,759  31,962  183,329 145,515
Cost of sales   -47,371 -29,232 -172,350 -136,484
Gross profit   2,388 2,730 10,979 9,031
Marketing and distribution expenses   -134 -138 -413 -412
Administrative expenses   -1,477 -1,608 -6,106 -5,026
Other operating income   214 175 362 464
Other operating expenses   -75 -41 -614 -124
Operating profit   916 1,118 4,208 3,933
Finance income   127 164 463 655
Finance costs   -303 -3,418 -1,088 -4,383
Net finance costs   -176 -3,254 -625 -3,728
Share of loss/profit of equity-accounted investees    -108  -8  609 226
Profit/loss before income tax   632 -2,144 4,192 431
Income tax expense   -14 0 -259 -257
Profit/loss for the period   618 -2,144 3,933 174
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   -51 197 191 587
Total other comprehensive expense/income   -51 197 191 587
 Profit/loss attributable to:          
- Owners of the parent   607 -2,315 3,044 179
- Non-controlling interests   11 171 889 -5
Profit/loss for the period   618 -2,144 3,933 174
Total comprehensive income/expense attributable to:          
- Owners of the parent   556 -2,118 3,235 766
- Non-controlling interests   11 171 889 -5
Total comprehensive income/expense for the period   567 -1,947 4,124 761
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR)   0.02 -0.08 0.10 0.01
Diluted earnings per share (EUR)   0.02 -0.08 0.10 0.01


Condensed consolidated interim statement of cash flows

EUR’000 2016 2015
Cash flows from operating activities    
Cash receipts from customers1 214,871 179,119
Cash paid to suppliers2 -179,312 -151,004
VAT paid -7,217 -5,407
Cash paid to and for employees -20,208 -19,921
Income tax paid -197 -103
Net cash from operating activities 7,937 2,684
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -148 -480
Paid on acquisition of intangible assets -25 -21
Proceeds from sale of property, plant and
160 337
Acquisition of a subsidiary -15 -8
Cash acquired on acquisition of a subsidiary 0 9
Acquisition of an investment in an associate 0 -355
Disposal of a subsidiary 6 0
Loans provided -81 -291
Repayment of loans provided 55 124
Dividends received 153 108
Interest received 2 366
Net cash from/used in investing activities 107 -220
Cash flows from financing activities    
Proceeds from loans received 2,847 2,099
Repayment of loans received -2,262 -3,449
Finance lease principal paid -2,478 -1,726
Interest paid -695 -767
Dividends paid -1,068 -1,091
Reduction of share capital -923 0
Net cash used in financing activities -4,579 -4,934
Net cash flow 3,465 -2,470
Cash and cash equivalents at beginning of year 6,332 8,802
Effect of movements in foreign exchange rates -11 0
Increase/decrease in cash and cash equivalents 3,465 -2,470
Cash and cash equivalents at end of year 9,786 6,332

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 ended 2016 with a gross profit of 10,979 thousand euros (2015: 9,031 thousand euros) and a gross margin of 6.0% (2015: 6.2%). Due to increasingly stiffer competition, the Group’s gross margin decreased slightly year on year. The margin weakened due to a sharp fall in the gross margin of the Infrastructure segment which could not be offset by a rise in the gross margin delivered by the Buildings segment. In 2016, the gross margin of the Infrastructure segment was 3.6% and that of the Buildings segment 7.5%. The respective figures for 2015 were 8.6% and 6.7%. Although we anticipated a downtrend in the margins of the Infrastructure segment already in the middle of the financial year, the result is far from satisfactory. The key reasons for the margin decline are the facts that during the winter season there is a lack of demand for the segment’s services (major earthworks, etc.) and that due to its business logic the share of the segment’s fixed costs is large. Another factor, which had an impact, was the wintry weather in November and December which caused quite a large volume of work which originally should have been completed in 2016 to be postponed to 2017. In response to continuously fierce competition (and bleaker prospects) in the infrastructure market, we decided to restructure our operations: at the end of 2016 and the beginning of 2017 we merged Hiiu Teed OÜ, Järva Teed AS and Nordecon AS’s road maintenance and machinery division to improve the Infrastructure segment’s operating efficiency and the Group’s overall competitiveness.

Administrative expenses for 2016 totalled 6,106 thousand euros. Compared with the year before, administrative expenses grew (2015: 5,026 thousand euros) but the ratio of administrative expenses to revenue was 3.3% (2015: 3.5%), remaining below the target ceiling of 4% of revenue. The rise in administrative expenses is mainly attributable to Nordecon’s expansion to the Swedish market

Operating profit for the period was influenced by the write-down of other receivables by 409 thousand euros (see note 12) due to the entry into force of the final judgement on the Group’s dispute with Teede REV-2 AS over the performance of the Koidula border crossing point contract in 2010 when our then venture partner ceased to fulfil its obligations and we had to complete the contract on our own. Although in essence the outcome of the litigation which ended in June was positive for Nordecon, some of our claims were dismissed. We ended the year with an operating profit of 4,208 thousand euros (2015: 3,933 thousand euros), which is an improvement on 2015 but below the strategic target for the year. EBITDA for 2016 amounted to 6,017 thousand euros (2015: 5,769 thousand euros).

Although in 2016 exchange losses recognised due to adverse movements in the euro/Ukrainian hryvnia exchange rate were smaller than a year earlier, their impact on our net profit was still noticeable. During the period, the Ukrainian currency weakened by around 8%, which meant that Group entities whose functional currency is the hryvnia had to restate their euro-denominated liabilities. Exchange losses reported in finance costs totalled 195 thousand euros (2015: 574 thousand euros). The same movements in the exchange rate increased the translation reserve in equity by 191 thousand euros (2015: 587  thousand euros) and the net effect of the exchange differences on the Group’s net assets was a loss of 4 thousand euros (2015: a gain of 13 thousand euros).

Thus, the Group’s net profit amounted to 3,933 thousand euros (2015: 174 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, was 3,044 thousand euros (2015: 179 thousand euros).

Cash flows

In 2016, our operating activities generated a net cash inflow of 7,937 thousand euros (2015:  an inflow of 2,684 thousand euros). The factors which have the strongest impact on our operating cash flow are a mismatch between the settlement terms agreed with customers and subcontractors and the fact that neither public nor private sector customers are required to make advance payments while we have to make prepayments to subcontractors, materials suppliers, etc. We deal actively with equalising the settlement terms agreed with customers and suppliers, mostly through factoring. In addition to factoring accounts receivable, we have concluded a frame agreement for factoring accounts payable, which also enables our subcontractors who do not have sufficient credit standing to obtain a factoring limit from a financing institution to use our factoring facility. 

Investing activities produced a net cash inflow of 107 thousand euros (2015: an outflow of 220 thousand euros). The largest items were payments for property, plant and equipment and intangible assets of 173 thousand euros (2015: 501 thousand euros) and proceeds from sale of property, plant and equipment of 160 thousand euros (2015: 337 thousand euros). Dividends received amounted to 153 thousand euros (2015: 108 thousand euros).

Financing activities generated a net cash outflow of 4,579 thousand euros (2015: an outflow of 4,934 thousand euros). Our financing cash flow is strongly influenced by loan and lease transactions. Proceeds from loans received amounted to 2,847 thousand euros, consisting of use of overdraft facilities and development loans (2015: 2,099 thousand euros). Loan repayments totalled 2,262 thousand euros, consisting of scheduled repayments of long-term investment and development loans (2015: 3,449 thousand euros). Investments in road construction equipment and a new asphalt concrete plant increased finance lease payments which totalled 2,478 thousand euros (2015: 1,726 thousand euros). Dividends paid amounted to 1,068 thousand euros (2015: 1,091 thousand euros) and in connection with the reduction of Nordecon AS’s share capital shareholders were distributed a total of 923 thousand euros.

At 31 December 2016, the Group’s cash and cash equivalents totalled 9,786 thousand euros (31 December 2015: 6,332 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 2016 2015 2014
Revenue (EUR ’000) 183,329 145,515 161,289
Revenue change 26.0% -9.8% -7.1%
Net profit (EUR ’000) 3,933 174 2,298
Net profit attributable to owners of the parent (EUR ’000) 3,044 179 1,956
Weighted average number of shares 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.10 0.01 0.06
Administrative expenses to revenue 3.3% 3.5% 3.5%
EBITDA (EUR ’000) 6,017 5,769 5,585
EBITDA margin 3.3% 4.0% 3.5%
Gross margin 6.0% 6.2% 6.1%
Operating margin 2.3% 2.7% 2.5%
Operating margin excluding gain on asset sales 2.2% 2.4% 2.3%
Net margin 2.1% 0.1% 1.4%
Return on invested capital 8.5% 2.1% 5.8%
Return on equity 10.6% 0.5% 6.4%
Equity ratio 38.6% 40.1% 37.3%
Return on assets 4.2% 0.2% 2.3%
Gearing 16.7% 25.5% 24.8%
Current ratio 1.20 1.03 1.02
As at 31 December 2016 2015 2014
Order book (EUR ’000) 131,335 125,698 83,544

Revenue change = (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
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 gain on asset sales = ((operating profit – gain on sales of non-current assets – gain on sales of real estate) / 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
Return on assets = (net profit 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

In 2016, Nordecon earned around 7% of its revenue outside Estonia compared with 4% the year before. The contribution of foreign markets has increased through revenue generated in Sweden. The contribution of the Ukrainian market has remained relatively stable. Finnish revenues resulted from concrete works in the building construction segment.

  2016 2015 2014
Estonia 93% 96% 94%
Sweden 4% 0% 0%
Ukraine 2% 3% 2%
Finland 1% 1% 4%

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on a single market. However, conditions in some of our chosen foreign markets are also volatile and have a strong impact on our current results. Increasing the contribution of foreign markets is on Nordecon’s strategic agenda. Our vision of our 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) in balance as this helps disperse risks and provides better opportunities for continuing construction operations in more challenging circumstances where the operating volumes of some sub-segments may fall sharply.

Nordecon’s revenue for 2016 amounted to 183,329 thousand euros, a roughly 26% increase on the 145,515 thousand euros generated in 2015. The shrinkage of the infrastructure construction market also affected our revenue structure. As anticipated, the Buildings segment improved its revenue, posting growth of around 43%, primarily thanks contracts secured in the apartment buildings and the public buildings sub-segments. The revenue of the Infrastructure segment, which was mostly earned in the road construction and maintenance sub-segment, decreased by around 13% year on year.  The decline resulted from a lack of large-scale road construction projects with a reasonable estimated profit margin. In the comparative period, we had two major road construction projects which generated a substantial amount of revenue (construction package 5 of the Tartu western bypass and the Keila-Valkse section of national road no. 8 Tallinn-Paldiski, km 24.9-29.5). However, mostly thanks to a new asphalt concrete plant acquired at the beginning of the year, we were able to more than double our asphalt concrete sales. Revenue from the sale of asphalt concrete grew to 2,062 thousand euros (2015: 899 thousand euros).

In 2016, the Buildings segment and the Infrastructure segment generated revenue of 134,555 thousand euros and 41,447 thousand euros respectively. The corresponding figures for 2015 were 94,341 thousand euros and 47,628 thousand euros (see note 8). Our order book has a similar structure: at the year-end 76% of contracts secured but not yet performed was attributable to the Buildings segment (2015: 72%). Nordecon’s revenue structure reflects quite fairly the overall situation in the Estonian construction market.

Operating segments* 2016 2015 2014
Buildings 73% 64% 65%
Infrastructure 27% 36% 35%

* In the 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 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 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 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

Compared with the year before, the revenue structure of the Buildings segment  changed considerably. In 2016, the segment’s strongest revenue contributors were the apartment buildings and the public buildings sub-segments.

Most of our apartment building revenue results from general contracting. In Estonia, a substantial share of our apartment building projects is located in Tallinn. In 2016, the main revenue contributors were the three phases of the Pikksilma homes in Kadriorg and the Meerhof 2.0 apartment complex at Pirita tee 20a. The contributions of foreign markets sustain growth. In Ukraine, we continued to build the Lepse residential quarter in Kiev, which is close to completion, and a residential quarter in the city of Brovary in the Kiev region. In Sweden, we were building two apartment buildings in Stockholm.

The contribution of our own development projects in Tartu and Tallinn (reported in the apartment buildings sub-segment) continues to increase slowly but surely. In 2016, our development projects generated revenue of 5,216 thousand euros (2015: 4,216 thousand euros). We have completed 5 apartment buildings in the first four development phases of our Tammelinn project in Tartu and sales have been excellent. By the reporting date, only 2 completed apartments were still for sale. At the beginning of 2017, we began building phase V which comprises a four-floor apartment building with 24 apartments (www.tammelinn.ee). By the year-end, we had also sold 16 of the 20 apartments in the first three phases of our Magasini 29 development project in Tallinn, 5 of them in 2016 (www.magasini.ee). We continue to build the development’s fifth and last terraced house. In September 2016, we began building two apartment buildings with a total of 30 apartments in Hane street in Tallinn. In carrying out our development activities, we monitor potential risks in the housing development market that stem from rapid growth in the supply of new housing as well as a relative price increase with due care.

The key factor which influenced the performance of the public buildings sub-segment was growth in the state’s investment in national defence. In 2016, we completed the construction of the Piusa border guard station, a barracks at the Tapa military base, and a building complex at the Ämari air base. In addition, we delivered to the customer the new building of Järveküla school. We continue the design and construction of the Lintsi warehouse complex and the reconstruction of Ugala Theatre in Viljandi.

The volumes of the commercial buildings sub-segment, which used to dominate the Buildings segment for a long time, have declined considerably. We anticipated the shrinkage already at the end of 2015. In 2016, we completed and delivered on time the Veerenni office building and the retail and leisure complex Arsenali Keskus in Tallinn. We continue to build the office and retail complex Viimsi Äritare and renovate the machinery hall building of the historical Luther furniture factory and have started to build an office building at Lõõtsa 12 in Ülemiste City. Based on our order book, we expect the commercial buildings sub-segment to deliver certain revenue growth in 2017.

Our industrial and warehouse facilities revenues grew year on year. Private investment in industrial and warehouse buildings increased. During the period, our largest projects were the construction of a warehouse for Riigiressursside Keskus (the state resource centre) in Tallinn, a production facility for Vecta Design in Pärnu, KEVILI South Terminal (a cereals storage and handling complex) and an extension to the Smarten warehouse. We continue to build production and warehouse facilities for Harmet at Kumna, near Tallinn.        

Revenue breakdown in Buildings segment 2016 2015 2014
Apartment buildings 34% 22% 18%
Public buildings 30% 16% 7%
Industrial and warehouse facilities 20% 12% 33%
Commercial buildings 16% 50% 42%

Similarly to previous years, in 2016 the main revenue source in the Infrastructure segment was road construction where we had mostly medium-sized and small projects. The largest road construction projects were the reconstruction of the Meoma-Alatskivi and the Rannamõisa-Kloogaranna road sections and the reconstruction of Majaka and Logi streets in Tallinn. Work on the latter will continue in 2017.  We continue to render road maintenance services in the Järva and Hiiu counties and the Keila and Kose maintenance areas of the Harju county. Kose is a new area, where work started in February 2016. We also provided the State Forest Management Centre with forest road improvement services. We believe that road construction will remain the main revenue source in the Infrastructure segment also in 2017 but it is unlikely that the sub-segment’s revenue would grow substantially compared to 2016.

The contracts secured by our environmental engineering and other engineering (utility network construction) sub-segments are small and growth of the sub-segments is unlikely. At present, there is no sign of any major hydraulic engineering projects to be announced in the specialist engineering sub-segment and demand for other complex engineering work also tends to be irregular.

Revenue breakdown in Infrastructure segment   2016 2015 2014
Road construction and maintenance   86% 81% 72%
Other engineering   9% 14% 19%
Environmental engineering   5% 4% 7%
Specialist engineering (including hydraulic engineering)   0% 1% 2%


Order book

At 31 December 2016, the Group’s order book (backlog of contracts signed but not yet performed) stood at 131,335 thousand euros, a 4% increase year on year. Altogether, in 2016 the Group secured new contracts of 158,152 thousand euros.

As at 31 December 2016 2015 2014
Order book (EUR ’000)  131,335 125,698 83,544

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 76% and 24% of the Group’s order book respectively (31 December 2015: 72% and 28% respectively).

Compared with 2015, the order book of the Buildings segment has grown by around 9%. The order book of the commercial buildings sub-segment has increased and the order book of the industrial and warehouse facilities sub-segment has decreased. The order books of the apartment buildings and the public buildings sub-segments have remained stable. The order book is the largest in the apartment buildings sub-segment where work secured but not yet performed includes not only Estonian projects but also projects secured in Ukraine and Sweden. We continue to build five apartment buildings in the city of Brovary in the Kiev region in Ukraine and two apartment buildings in Sweden. In Tallinn we continue to build the apartment buildings at Pirita tee 20a (phases I and II) and Virbi 10 and in the fourth quarter we secured a contract for the construction of phase I of an apartment complex at Sõjakooli 12. After some decline, the order book of the commercial buildings sub-segment has started to grow. During the year, we signed large-scale contracts for the construction of Viimsi Äritare, the renovation of the machinery hall building of the historical Luther furniture factory at Vana-Lõuna 39 and the construction of a commercial building in the Rotermann quarter in Tallinn. In the fourth quarter, we signed contracts for the construction of the Martens building in the centre of Pärnu and an office building at Lõõtsa 12 in Ülemiste City in Tallinn. A large share of the order book of the public buildings sub-segment is made up of the construction of a depot, armoured vehicle infrastructure, a canteen and a barracks at the Tapa military base and the reconstruction of Ugala Theatre in Viljandi.  The largest project in the order book of the industrial and warehouse facilities sub-segment is the construction of production and warehouse facilities for Harmet.

Compared with 2015, the order book of the Infrastructure segment has decreased by 8%. 90% of the segment’s order book is made up of work secured by the road construction and maintenance sub-segment whose order book has remained more or less stable compared with the year before. A significant project in the road construction portfolio is the contract signed for building a 2+1 road (a road with passing lanes) on the Ääsmäe-Kohatu section of the Tallinn-Pärnu-Ikla road which was secured in the fourth quarter. We continue to provide road maintenance services in four road maintenance areas: Keila, Järva, Hiiu, and Kose. According to our estimates, in 2017 the volume of public investments will not increase substantially, compared with 2016. Thus, we expect that in 2017 the revenue of the Infrastructure segment will remain more or less at the same level as in 2016 (for further information, see the Business risks section of the chapter Description of the main risks).

However, in the light of the size of our order book and developments in our chosen markets, we are moderately optimistic about our business volumes in 2017. In an environment of stiff competition, we pursue the policy of avoiding unjustified risks whose realisation in the contract performance phase would probably have an adverse impact on our results.  Instead, we prefer to keep costs under control and focus on projects with positive prospects.

Between the reporting date (31 December 2016) and the date of release of this report, Group companies have secured additional construction contracts in the region of 9,851 thousand euros.



Staff and personnel expenses

In 2016, the Group (the parent and the subsidiaries) employed, on average, 684 people including 381 engineers and technical personnel (ETP). The number of ETP has increased year on year in connection with growth in the Estonian operations of the Buildings segment and the Group’s expansion to Sweden. The number of workers has decreased due to shrinkage in the portfolio of self-performed work. The overall level of staff has remained stable year on year.

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

  2016 2015 2014
ETP 381 356 357
Workers 303 334 375
Total average 684 690 732

Our personnel expenses for 2016 including all taxes totalled 20,401 thousand euros (2015: 18,248 thousand euros), a roughly 12% increase year on year. The growth in personnel expenses is attributable to the Group’s expansion to the Swedish market, selective pay-rises, and performance bonuses.

The service fees of the members of the council of Nordecon AS for 2016 amounted to 138 thousand euros and associated social security charges totalled 45 thousand euros (2015: 139 thousand euros and 46 thousand euros respectively). The provision for the council members’ performance bonuses, made based on the Group’s performance indicators, amounted to 47 thousand euros and associated social security charges totalled 16 thousand euros (2015: 37 thousand euros and 12 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 350 thousand euros and associated social security charges totalled 116 thousand euros (2015: 322 thousand euros and 106 thousand euros respectively). The provision for the board members’ performance bonuses, made based on the Group’s performance indicators, amounted to 243 thousand euros and associated social security charges totalled 80 thousand euros (2015: 188 thousand euros and 62 thousand euros respectively).


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:

                                          2016 2015 2014
Nominal labour productivity (rolling), (EUR ’000) 267.8 210.9 220.4
Change against the comparative period 27% -4.3% -4.0%
Nominal labour cost efficiency (rolling), (EUR) 9.0 8.0 8.0
Change against the comparative period 12.7% -0.6% -4.8%

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)

Nominal labour productivity and labour cost efficiency increased year on year, mainly through 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 2017 public investment is not likely to grow substantially compared with 2016. Thus, builders’ bid prices are under strong competitive pressure while the prices of construction inputs on the whole have not changed noticeably. Even though unhealthily aggressive competition in building construction has started to recede thanks to growth in the volume of projects put out to tender, the slump in infrastructure construction is fuelling fierce competition for the limited number of contracts. Bidders increasingly include not only well-known general contractors but also former subcontractors, a trend attributable to the state and local governments’ policy to lower the qualification requirements of public procurement tenders, which sometimes results in the sacrifice of quality to the lowest possible price. We acknowledge the risks inherent in the performance 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 cannot be lowered significantly 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 of 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, exceeding the figure of the previous financial framework, but the amounts earmarked for construction work are substantially smaller. In the construction sector, the allocations of the current EU budget period began to have a limited impact in the second half of 2016 only but in subsequent periods the process is expected to accelerate.

In the light of the above factors, we see some opportunities for achieving year-on-year business growth in 2017: a certain improvement in our Estonian operations is increasingly supported by positive developments in our chosen foreign markets. Our action plan foresees using our resources (including some of the labour released by the Infrastructure segment) to increase the share of contracts secured from the private sector. 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 and port construction, earthwork, 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 appropriate technical solutions that allow working efficiently also in 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 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 31 December 2016, the Group’s warranty provisions (including current and non-current ones) totalled 1,212 thousand euros (31 December 2015: 1,184 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, we recognised credit losses of 547 thousand euros of which 138 thousand euros resulted from the write-down of trade receivables and 409 thousand euros from the write-down of other receivables (see also the chapter Financial performance). In the comparative period, we did not incur any credit losses. The overall credit risk exposure of receivables is low because the solvency of all prospective customers is evaluated, the share of public sector customers is large and customers’ settlement behaviour is consistently 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

At the reporting date, the Group’s current assets exceeded its current liabilities 1.2-fold (31 December 2015: 1.03-fold). Although the current ratio has improved compared with the previous year-end, the Group remains exposed to higher than usual liquidity risk. The key factor which influences the current ratio is the classification of the Group’s loans to its Ukrainian associates as non-current assets.

Due to the strained political and economic situation in Ukraine, we believe that the Group’s Ukrainian investment properties cannot be realised in the short term. Accordingly, as at the reporting date the Group’s loans to its Ukrainian associates of 8,637 thousand euros are 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 31 December 2016, short-term borrowings totalled 6,297 thousand euros (31 December 2015: 15,715 thousand euros). The figure consists of overdraft liabilities of 3,591 thousand euros (31 December 2015: 11,388 thousand euros), which account for around a half of short-term borrowings, and loans which will probably be refinanced at maturity.

At the reporting date, the Group’s cash and cash equivalents totalled 9,786 thousand euros (31 December 2015: 6,332 thousand euros).

Interest rate risk

Our 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. Compared with 2015, interest-bearing borrowings declined by 1,414 thousand euros. Loan and factoring liabilities decreased (by 2,472 thousand euros) while finance lease liabilities increased (by 1,058 thousand euros). The growth in finance lease liabilities is mainly attributable to the acquisition of a new asphalt concrete plant. At 31 December 2016, interest-bearing borrowings totalled 19,399 thousand euros (31 December 2015: 20,813 thousand euros). Interest expense for 2016 amounted to 681 thousand euros (2015: 770 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 entered into a derivative contract to hedge the risks resulting from changes in the interest rates of the finance lease contract underlying the acquisition of the new asphalt concrete plant.

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 hryvnia has been weakening 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 determination of the national currency’s indicative exchange rate. In 2016, the hryvnia weakened against the euro by around 8%. For our Ukrainian subsidiaries, this meant additional foreign exchange losses on the translation of their euro-denominated loans into the local currency. Relevant exchange losses totalled 195 thousand euros (2015: 574 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.

The reciprocal receivables and liabilities of our Ukrainian and non-Ukrainian entities which are connected with the construction business and denominated in hryvnias do not give rise to exchange losses. Nor do the loans provided to the  Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s accounts.

Due to movements in the Swedish krona/euro exchange rate in 2016, translation of operating receivables and payables resulted in an exchange gain of 18 thousand euros (2015: nil euros). The exchange gain has been recognised in Other operating income.

We do not use derivatives to hedge currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2017, public investments should grow slightly but the extent to which they can be realised is still unclear. 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.
  • Investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and the National Road Administration) which reach signature of a construction contract in 2017 will not increase substantially. The Ministry of Defence has been a positive exception for builders by carrying out procurements which have made a significant contribution to market revival. Hence, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. The situation is softened by the positive level of private investment in building construction.
  • The long and painful process of construction market consolidation will continue, albeit slowly. In particular, this applies to general contracting in building construction where the number of medium-sized general contractors (annual turnover of around 15-40 million euros) is too large. Based on recent years’ experience it is likely that stiff competition and insufficient demand will cause some general contractors to go slowly out of business or shrink in size rather than merge or exit the market. News about the difficulties of some construction companies, published at the end of 2016, show that the problems of weaker market players are escalating. According to our assessment, one reason why market consolidation has decelerated in recent years is customers’ (particularly public sector customers’) increasing desire to loosen tendering requirements to increase competition and lower the price even though this increases the risks related to security, quality, adherence to deadlines, and the builder’s liability.
  • Competition is tough in all segments of the construction market, intensifying in line with market developments. The rise in the average number of bidders for a contract reflects this. However, the gap between the lowest bids made by winners and the average ones is narrowing, which shows that the quality of procurement documents is gradually improving and bidders’ prices are evening up. It is clear that in the current market situation the prices of construction inputs are not going to decrease noticeably and in order to succeed companies need to be efficient. Regrettably, the number of materials producers, suppliers, and subcontractors that are trying to survive or succeed in a difficult environment by dishonest means, e.g., by supplying goods with concealed defects or considerably lower quality than the one recorded in the product certificate, has been increasing quite rapidly. If the trend continues, both construction service providers and end-customers will have to apply strict and substantive quality control measures to make sure that the outcome meets their expectations. Unfair competition is putting visible pressure on prices and the quality of the construction service. Unfortunately, the problem is also underpinned by the customers’ (including state institutions’ and state-owned companies’) increasing tendency to lower the bidders’ qualification requirements and prioritise quality more on paper than in practice.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in the business plan and, thus, set sales prices that are affordable for prospective buyers. Although new apartments are relatively expensive compared to the standard of living and the banks’ lending terms are strict, in 2016 the housing market grew rapidly. In the second half of the year, the increase in apartment prices decelerated and hopefully the market is going to stabilise. Similarly to previous periods, successful projects include those which are in an attractive location and fill a specific niche. In Tallinn and Tartu, the picture continues to be encouraging but in the rest of the country activity is still relatively sluggish.
  • There is a growing contrast between the stringent terms of public contracts, which require the builder to agree to extensive 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 easier for an increasing number of builders to win a contract but have heightened the contract performance risks taken by customers in terms of funding, deadlines and quality.
  • The input prices of the construction service have been relatively stable. However, in the second half of 2016, particularly in housing development, there emerged increasing pressure for a price increase. So far general contractors have been able to soften this by making margin concessions but their capacity for doing this is decreasing. The construction market includes an increasing number of areas where changes in the environment may trigger a sharp price increase (e.g. materials producers’ rapid and successful entry into foreign markets).              
  • The rise in housing construction has lengthened the supply periods 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.
  • Persisting shortage of skilled labour (including project and site managers) may start restricting companies’ performance capacities, which may affect different aspects of the construction process including quality. Labour migration to the Nordic countries will remain steady and the number of job seekers who return to the Estonian construction market is not likely to increase considerably. All of the above will 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 provide 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 not halted. In 2017, we will continue our operations in Ukraine primarily in the Kiev region. Based on our order book as at the end of 2016, we expect that in 2017 our operating volumes will remain at a level comparable to 2016. Despite the military conflict in eastern Ukraine, for Nordecon the market situation in Kiev has not deteriorated 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. We assess the situation in the Ukrainian construction market regularly and critically and are ready to restructure our operations as and when necessary. Should the crisis spread to Kiev (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 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.


In July 2015, Nordecon Group acquired a 100% stake in SWENCN AB, a company registered in the Kingdom of Sweden, and expanded to the Swedish market where we intend to offer mainly construction of residential and non-residential buildings, particularly in central Sweden. In 2015 we signed the first contract on the construction of a five-floor apartment building in Stockholm (with a cost of around 8.4 million euros) and in 2016 another, smaller contract. In January 2017, we signed the third contract of 6.3 million euros. We will sustain efforts aimed at increasing our operations in Sweden and are currently moderately optimistic about the developments.

Latvia and Lithuania

It is not likely that we will enter the Latvian or the Lithuanian construction market in the next few years.

However, we do not rule out the possibility of carrying out certain projects in Latvia through our Estonian entities, with the involvement of partners where necessary. Undertaking a project assumes that it can be performed profitably.

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba UAB, for the time being and are monitoring developments in the Lithuanian construction market. Temporary suspension of operations does not cause any major costs for us and does not change our interest to do business in the Lithuanian construction market on a project basis through a subsidiary operating in the local market.



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, Finland and Sweden. 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 unaudited revenue of the Group in 2016 was 183.3 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_12m_2016.pdf