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Published: 2016-08-11 15:30:00 CEST
Half Year financial report

2016 II quarter and 6 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the second quarter and first half 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/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 2016 31 December 2015
Current assets    
Cash and cash equivalents 5,336 6,332
Trade and other receivables 28,914 17,503
Prepayments 1,768 1,599
Inventories 25,853 23,603
Total current assets 61,871 49,037
Non-current assets
Investments in equity-accounted investees 1,516 1,179
Other investments 26 26
Trade and other receivables 10,764 10,516
Investment property 3,549 4,929
Property, plant and equipment 11,642 9,623
Intangible assets 14,621 14,609
Total non-current assets 42,118 40,882
TOTAL ASSETS 103,989 89,919
Current liabilities    
Borrowings 17,786 15,715
Trade payables 31,678 22,538
Other payables 6,497 5,475
Deferred income 2,296 3,233
Provisions 595 825
Total current liabilities 58,852 47,786
Non-current liabilities
Borrowings 8,012 5,098
Trade payables 104 104
Other payables 126 96
Provisions 986 768
Total non-current liabilities 9,228 6,066
Share capital 20,692 20,692
Own (treasury) shares -1,582 -1,582
Share premium 547 547
Statutory capital reserve 2,554 2,554
Translation reserve 1,470 1,358
Retained earnings 10,473 10,970
Total equity attributable to owners of the parent 34,154 34,539
Non-controlling interests 1,755 1,528
TOTAL EQUITY 35,909 36,067


Condensed consolidated interim statement of comprehensive income

EUR ‘000   First half 2016 Second quarter
First half 2015 Second quarter
Full year 2015
Revenue    73,829  46,098  69,211  42,098 145,515
Cost of sales   -69,676 -43,098 -66,140 -39,436 -136,484
Gross profit   4,153 3,000 3,071 2,662 9,031
Marketing and distribution expenses   -218 -115 -222 -104 -412
Administrative expenses   -2,782 -1,490 -2,224 -1,115 -5,026
Other operating income   97 56 253 149 464
Other operating expenses   -460 -448 -74 -36 -124
Operating profit   790 1,003 804 1,556 3,933
Finance income   235 111 325 160 655
Finance costs   -466 -27 -662 9 -4,383
Net finance income/costs   -231 84 -337 169 -3,728
Share of profit of equity-accounted investees    484  365  33  129 226
Profit before income tax   1,043 1,452 500 1,854 431
Income tax expense   -245 -245 -257 -257 -257
Profit for the period   798 1,207 243 1,597 174
Other comprehensive income/expense
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   112 -176 331 -193 587
Total other comprehensive income/expense   112 -176 331 -193 587
TOTAL COMPREHENSIVE INCOME   910 1,031 574 1,404 761
 Profit/loss attributable to:            
- Owners of the parent   426 996 397 1,681 179
- Non-controlling interests   372 211 -154 -84 -5
Profit for the period   798 1,207 243 1,597 174
Total comprehensive income/expense attributable to:            
- Owners of the parent   538 820 728 1,488 766
- Non-controlling interests   372 211 -154 -84 -5
Total comprehensive income for the period   910 1,031 574 1,404 761
Earnings per share attributable to owners of the parent:            
Basic earnings per share (EUR)   0.01 0.03 0.01 0.05 0.01
Diluted earnings per share (EUR)   0.01 0.03 0.01 0.05 0.01


Condensed consolidated interim statement of cash flows

EUR ‘000 First half 2016 First half 2015
Cash flows from operating activities    
Cash receipts from customers1 74,740 73,141
Cash paid to suppliers2 -66,264 -67,292
VAT paid -2,480 -1,898
Cash paid to and for employees -9,831 -10,977
Income tax paid -170 -37
Net cash used in operating activities -4,005 -7,063
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -103 -380
Paid on acquisition of intangible assets -18 0
Proceeds from sale of property, plant and equipment 28 238
Acquisition of investments in associates 0 -1
Disposal of a subsidiary 6 0
Loans provided -35 -27
Repayment of loans provided 31 55
Dividends received 153 103
Interest received 0 5
Net cash from/used in investing activities 62 -7
Cash flows from financing activities    
Proceeds from loans received 5,703 6,909
Repayment of loans received -470 -1,797
Finance lease principal paid -894 -875
Interest paid -321 -348
Dividends paid -1,068 -1,091
Net cash from financing activities 2,950 2,798
Net cash flow -993 -4,272
Cash and cash equivalents at beginning of year 6,332 8,802
Effect of movements in foreign exchange rates -3 -1
Decrease in cash and cash equivalents -993 -4,272
Cash and cash equivalents at end of year 5,336 4,529

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

2 Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon Group ended the first half of 2016 with a gross profit of 4,153 thousand euros (first half 2015: 3,071 thousand euros) and a gross margin of 5.6% (first half 2015: 4.4%). Despite increasing competition, we succeeded in improving the gross margin compared with the same period last year. Most of the profit was earned by the Buildings segment which raised its gross margin from 6% to 9%. The performance of the Infrastructure segment, however, proved less than satisfactory – the profit generated in the second quarter was not sufficient to cover the loss incurred at the beginning of the year due to the usual seasonal factors and thus the Infrastructure segment ended the first half-year with a loss. The weak result is mainly attributable to lack of self-performed projects (such as major earthworks) during the winter season and a large proportion of uncovered fixed costs. Taking into account the market situation where the so-called EU projects are still in the start-up phase and competition in road construction is exceptionally stiff, we expect that in 2016 the profitability of the Infrastructure segment will remain lower than in the previous year.

Hence, on securing long-term contracts we remain alert to the risks resulting from growth in input prices and strive to prioritise, where possible, the contracts’ expected profitability over revenue growth.

Administrative expenses for the first half of 2016 totalled 2,782 thousand euros. Compared with the same period last year, administrative expenses increased somewhat (first half 2015: 2,224 thousand euros), primarily due to the Group’s expansion to the Swedish market. The ratio of administrative expenses to revenue (12 months rolling) was 3.7% (first half 2015: 3.3%), which is below the target ceiling of 4% of revenue.

Operating profit for the period was influenced by the write-down of other receivables by 409 thousand euros (see note 12) in connection with the entry into force of the final judgement in the Group’s dispute with Teede REV-2 AS over the performance of the Koidula border crossing point contract in 2010 where our then venture partner ceased to fulfil its obligations and we had to complete the contract on our own. Although the litigation which ended in June had an essentially successful outcome for the Group, some of our claims were rejected. Accordingly, Nordecon ended the first half of 2016 with an operating profit of 790 thousand euros (first half 2015: 804 thousand euros). EBITDA for the period amounted to 1,714 thousand euros (first half 2015: 1,732 thousand euros).

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange losses that were smaller than a year earlier. During the period, the Ukrainian currency weakened by around 5%, 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 115 thousand euros (first half 2015: 316 thousand euros). The same movements in the exchange rate increased the translation reserve in equity by 112 thousand euros (first half 2015: 331 thousand euros) and the net effect of exchange differences on our net assets was a loss of 3 thousand euros (first half 2015: a gain of 15 thousand euros). Although exchange losses continue to undermine the Group’s net profit, the weakening of the Ukrainian hryvnia has slowed and exchange losses have become consistently smaller.

The Group’s net profit was 798 thousand euros (first half 2015: 243 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, amounted to 426 thousand euros (first half 2015: 397 thousand euros).

Cash flows

In the first half of 2016, operating activities resulted in a net cash outflow of 4,005 thousand euros (first half 2015:  an outflow of 7,063 thousand euros). Although cash receipts from customers exceeded cash paid to suppliers, operating cash flow proved negative due to VAT paid and payments to and for employees. Negative operating cash flow is typical of the first half-year and stems from the cyclical nature of the construction business. Operating cash flow is also strongly affected by the fact that neither public nor private sector customers are required to make advance payments while the Group has to make prepayments to subcontractors, materials suppliers, etc. In addition, cash inflow is reduced by retentions which extend from 5 to 10% of the contract price and are released at the end of the construction period only.

Investing activities produced a net cash inflow of 62 thousand euros (first half 2015: an outflow of 7 thousand euros). The largest line items were payments made for property, plant and equipment of 103 thousand euros (first half 2015: 380 thousand euros) and dividends received of 153 thousand euros (first half 2015: 103 thousand euros).

Financing activities generated a net cash inflow of 2,950 thousand euros (first half 2015: an inflow of 2,798 thousand euros). Our financing cash flow is strongly influenced by loan and lease transactions. Proceeds from loans received amounted to 5,703 thousand euros, consisting of use of overdraft facilities and development loans (first half 2015: 6,909 thousand euros). Loan repayments totalled 470 thousand euros consisting of scheduled repayments of long-term investment and development loans. In the comparative period, loan repayments amounted to 1,797 thousand euros, resulting largely from changes in overdraft balances. Compared with a year ago, there has been slight growth in finance lease payments which totalled 894 thousand euros (first half 2015: 875 thousand euros). Dividends paid amounted to 1,068 thousand euros (first half 2015: 1,091 thousand euros).

At 30 June 2016, the Group’s cash and cash equivalents totalled 5,336 thousand euros (30 June 2015: 4,529 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 First half 2016 First half 2015 First half 2014 Full year 2015
Revenue (EUR ’000) 73,829 69,211 67,444 145,515
Revenue change 7% 3% -11% -9.8%
Net profit (EUR ’000) 798 243 454 174
Net profit attributable to owners of the parent (EUR ’000) 426 397 221 179
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.01 0.01 0.01 0.01
Administrative expenses to revenue 3.8% 3.2% 3.7% 3.5%
Administrative expenses to revenue (rolling) 3.7% 3.3% 3.1% 3.5%
EBITDA (EUR ’000) 1,714 1,732 2,455 5,769
EBITDA margin 2.3% 2.5% 3.6% 4.0%
Gross margin 5.6% 4.4% 6.2% 6.2%
Operating margin 1.1% 1.2% 2.2% 2.7%
Operating margin excluding gain on asset sales 1.0% 0.8% 2.1% 2.4%
Net margin 1.1% 0.4% 0.7% 0.1%
Return on invested capital 2.3% 1.3% 1.6% 2.1%
Return on equity 2.2% 0.7% 1.3% 0.5%
Equity ratio 34.5% 33.8% 33.8% 40.1%
Return on assets 0.8% 0.2% 0.4% 0.2%
Gearing 33.2% 39.6% 31.6% 25.5%
Current ratio 1.05 1.03 1.07 1.03
  30 June 2016 30 June 2015 30 June 2014 31 Dec 2015
Order book (EUR ’000) 131,363 70,837 87,236 125,698
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
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 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 the first half of 2016, Nordecon earned around 7% of its revenue outside Estonia compared with 4% in the same period last year. The contribution of foreign markets has increased through revenue generated in Sweden where the Group has a contract for the construction of a five-floor apartment building. The contribution of the Ukrainian market where we are performing two large building construction contracts has remained relatively stable.  Finnish revenues result from concrete works in the building construction segment.

  First half 2016 First half 2015 First half 2014 Full year 2015
Estonia 93% 96% 93% 96%
Sweden 4% 0% 0% 0%
Ukraine 2% 3% 1% 3%
Finland 1% 1% 6% 1%

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 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 one sub-segment may experience noticeable shrinkage.

Nordecon’s revenue for the first half of 2016 totalled 73,829 thousand euros, a roughly 7% increase on the 69,211 thousand euros generated in the same period last year. The overall downturn in the infrastructure construction market is also affecting our revenue structure. The revenue of the Buildings segment grew as anticipated, primarily thanks to contracts secured from the private sector, while the revenue of the Infrastructure segment decreased by around 30% compared with the same period last year. In the comparative period, we were carrying out two major road construction projects that 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). In the first half of this year, we did not have projects of a similar size.

During the period, Buildings and Infrastructure generated revenue of 58,317 thousand euros and 13,026 thousand euros respectively. The corresponding figures for the first half of 2015 were 49,154 thousand euros and 18,543 thousand euros (see note 8). Our order book has a similar structure: at period-end 71% of contracts secured but not yet performed was attributable to the Buildings segment (first half 2015: 63%).

Operating segments* First half 2016 First half 2015 First half 2014 Full year 2015
Buildings 79% 68% 71% 64%
Infrastructure 21% 32% 29% 36%

* 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 last year, the revenue structure of the Buildings segment has changed considerably. In the period under review, the largest revenue source was the public buildings sub-segment where growth was underpinned by the state’s increasing investment in national defence. We completed the construction of the Piusa border guard station and a barracks for the Tapa military base. We continue the construction of a building complex for the Ämari air base and the Järveküla school as well as the design and construction of the Lintsi warehouse complex and the reconstruction of Ugala Theatre in the city of Viljandi.

Most of our apartment building revenue resulted from general contracting. In Estonia, a major share of apartment buildings we are working on is located in Tallinn. The period’s main revenue contributors were phase III of the Tondi residential quarter, the three phases of the Pikksilma homes in Kadriorg and the Meerhof 2.0 building complex at Pirita tee 20a. The contributions of foreign markets continue to grow. In Ukraine, we continue to build the Lepse street residential quarter in Kiev and five apartment buildings in the city of Brovary in Kiev region. In Sweden, we are building a five-floor apartment building in Stockholm.

The contribution of our own development projects in Tartu and Tallinn continues to increase as well. In the first three development phases of the Tammelinn project in Tartu we have completed 4 apartment buildings. Sales have been highly successful: by period-end, only 6 of the 75 apartments were still for sale. In March, we began building phase IV which comprises a five-floor apartment building with 25 apartments. By the reporting date, around 70% of the apartments were already sold or reserved (www.tammelinn.ee). By period-end, we had also sold 14 of the 20 apartment ownerships in the first three phases of our Magasini 29 development project in Tallinn (www.magasini.ee). We continue to build the development’s fifth and last terraced house. 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 relative price increases with due care.

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 last year. During the period, we completed and delivered on time the Veerenni business building in Tallinn. The largest project in progress is the office and retail complex Arsenali Keskus in Tallinn.

The volumes of the industrial and warehouse facilities sub-segment have grown compared with the same period last year. Private investment in industrial and warehouse buildings has increased. The period’s largest projects were the construction of a warehouse for Riigiressursside Keskus OÜ in Tallinn and a production building for Vecta Design OÜ in Pärnu. Work continued on the construction of the KEVILI South Terminal (a cereals storage and handling complex) and an extension to the Smarten warehouse.                        

Revenue breakdown in Buildings segment First half 2016 First half 2015 First half 2014 Full year 2015
Public buildings 35% 13% 6% 16%
Apartment buildings 31% 18% 12% 22%
Commercial buildings 15% 59% 49% 50%
Industrial and warehouse facilities 19% 10% 33% 12%


Similarly to previous years, in the first half of 2016 the main revenue source in the Infrastructure segment was road construction where we had mostly medium-sized and small projects. 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. During the period, we also provided the State Forest Management Centre with forest road improvement services. We expect that road construction will remain the main revenue source in the Infrastructure segment through 2016 but its volume will decrease compared with the previous year.

Although the contribution of other engineering (utility network construction) has increased compared with a year ago, the contracts secured are small and continuing growth of the sub-segment is unlikely. Contraction in the EU support continues to have an adverse impact on our environmental engineering volumes and we do not expect the sub-segment to grow. In specialist engineering, there is no sign of major hydraulic engineering investments in the current year and addition of other complex engineering projects is also likely to be irregular.

Revenue breakdown in Infrastructure segment First half 2016 First half 2015 First half 2014 Full year 2015
Road construction and maintenance                     82% 82% 74% 81%
Other engineering 14% 10% 7% 14%
Environmental engineering 4% 7% 15% 4%
Specialist engineering (including hydraulic engineering) 0% 1% 4% 1%


Order book

At 30 June 2016, the Group’s order book (backlog of contracts signed but not yet performed) stood at 131,363 thousand euros, an 85% increase year over year. Order books grew in both the Buildings and the Infrastructure segment. In the second quarter, Group companies secured new contracts of 47,622 thousand euros.

  30 June 2016 30 June 2015 30 June 2014 31 December 2015
Order book (EUR ’000) 131,363 70,837 87,236 125,698

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 71% and 29% of the Group’s order book respectively (30 June 2015: 63% and 37% respectively).

Compared with a year ago, the order book of the Buildings segment has grown more than two-fold. Major growth has been posted in all sub-segments. The order book is the largest in the apartment buildings sub-segment where growth is attributable to large contracts signed at the end of 2015, including those for the construction of the Meerhof 2.0 building complex at Pirita tee 20a in Tallinn, five apartment buildings in the city of Brovary in the Kiev region in Ukraine and a five-floor apartment building in Stockholm, Sweden. In the first half of 2016, we also secured contracts for the construction of phase III in the Pikksilma homes development in Kadriorg and apartment buildings at Kopli 4a and 6, phase II of the development at Pirita tee 20a and Virbi 10 in Tallinn.  Growth in the order book of the public buildings sub-segment is mostly attributable to the construction of the Järveküla school and a depot for the Tapa military base, the design and construction of the Lintsi warehouse complex and the reconstruction of Ugala Theatre in Viljandi. The growth in the order book of the industrial and warehouse facilities sub-segment is supported by the construction of a warehouse for Riigiressursside Keskus OÜ and an extension to the Smarten warehouse. After some decline, the order book of the commercial buildings sub-segment has also started to grow. In the second quarter, we signed large-scale contracts for the design and construction of the office premises complex Viimsi Äritare and the non-renovated part of the historical Luther furniture factory and the accompanying outdoor facilities at Vana-Lõuna 39 in Tallinn. Construction work under both contracts will begin in the third quarter.

Compared with a year earlier, the order book of the Infrastructure segment has grown by 49%. The rise is largely underpinned by growth in the road construction sub-segment, which is supported by the contracts secured for the provision of road maintenance services in the Järva, Hiiu, and Kose road maintenance areas in the period 2016-2021. The order book of the road construction sub-segment is also influenced by the reconstruction of Logi street and the construction of new checkpoints and waiting areas in the north-western part of the Old City Harbour in Tallinn as well as the reconstruction of km 67.1-75.3 of the Mustvee bypass. The order book of the environmental engineering sub-segment, where we continue to perform a contract for the design and construction of an extension to the Kohtla-Järve wastewater treatment plant, has also grown somewhat. The order books of other Infrastructure sub-segments have decreased. According to our estimates, in 2016 the volume of public investments will not increase substantially compared with 2015 and the new EU financial framework (2014-2020) will not have a marked impact on the construction sector before the second half-year. Thus, it is more likely than not that in 2016 the revenue of the Infrastructure segment will decrease compared with a year earlier (for further information, see the Business risks section of the chapter Description of the main risks).

However, in the light of order book growth and developments in our chosen markets, we forecast overall volume growth for 2016. In an environment of stiff competition, we pursue the policy of avoiding unjustified risks whose realisation in the contract performance phase would 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 (30 June 2016) and the date of release of this report, Group companies have secured additional construction contracts in the region of 6,219 thousand euros.



Staff and personnel expenses

In the first half of 2016, Nordecon Group (the parent and the subsidiaries) employed, on average, 670 people including 365 engineers and technical personnel (ETP). Compared with the same period in 2015, the number of workers decreased by around 3% due to shrinkage in the portfolio of self-performed projects while the number of engineers and technical personnel grew slightly.

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

  First half 2016 First half 2015 First half 2014 Full year 2015
ETP 365 351 353 356
Workers 305 342 388 334
Total average 670 693 741 690

Our personnel expenses for the first half of 2016 including all taxes totalled 9,361 thousand euros (first half 2015: 8,329 thousand euros), a roughly 16% increase year over year. The growth in personnel expenses is attributable to the Group’s expansion to the Swedish market, selective pay-rises and projects’ performance bonuses.

The service fees of the members of the council of Nordecon AS for the first half of 2016 amounted to 69 thousand euros and associated social security charges totalled 23 thousand euros (first half 2015: 71 thousand euros and 23 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 178 thousand euros and associated social security charges totalled 59 thousand euros (first half 2015: 171 thousand euros and 56 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:

  First half 2016 First half 2015 First half 2014 Full year 2015
Nominal labour productivity (rolling), (EUR ’000) 222.9 225.8 224.1 210.9
Change against the comparative period -1.3% 0.7% -0.2% -4.3%
Nominal labour cost efficiency (rolling), (EUR) 7.8 8.4 7.9 8.0
Change against the comparative period -6.8% 5.8% -16.0% -0.6%
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)

Nominal labour productivity declined compared with the same period last year due to growth in personnel expenses (see the chapter Staff and 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.

Competition continues to be stiff in all segments of the construction market and in 2016 public investment is not likely to grow markedly. Thus, builders’ bid prices are under strong competitive pressure while the prices of construction inputs in the aggregate have not decreased 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 available. 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. 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. Thus, in price-setting we currently prioritise a reasonable balance of contract performance risks and tight cost control over revenue growth.

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. Moreover, the allocations are not expected to have an impact on the construction sector before the second half of 2016.

Despite the above factors, we see opportunities for achieving overall year-on-year business growth in 2016: the rise in the Estonian building construction segment is increasingly supported by positive developments in our chosen foreign markets. Our action plan foresees using our resources (including some of the labour released from 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 30 June 2016, the Group’s warranty provisions (including current and non-current ones) totalled 1,122 thousand euros (30 June 2015: 1,036 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 424 thousand euros of which 15 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

The Group remains exposed to higher than usual liquidity risk.

At the reporting date, the Group’s current assets exceeded its current liabilities 1.05-fold (30 June 2015: 1.03-fold). The key factors which influence the current ratio are the classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities (particularly overdraft facilities) for a period exceeding twelve months.

Due to the strained political and economic situation in Ukraine, we believe that the Group’s investment properties in that country cannot be realised within a short term. Accordingly, as at the reporting date the Group’s loans to its Ukrainian associates of 8,498 thousand euros are classified as non-current assets.

Interest-bearing liabilities make up a significant share of our current liabilities. Under IFRS EU, loan commitments have to be classified into current and non-current based on contract terms in force at the reporting date. At 30 June 2016, short-term loan liabilities of 17,786 thousand euros included a significant amount of overdraft facilities (11,784 thousand euros) which will probably be refinanced after 12 months.

At the reporting date, the Group’s cash and cash equivalents totalled 5,336 thousand euros (30 June 2015: 4,529 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 the same period last year, interest-bearing liabilities declined by 5,179 thousand euros. Loan and factoring liabilities decreased (by 6,882 thousand euros) while finance lease liabilities increased (by 1,703 thousand euros). The growth in finance lease liabilities is mainly attributable to the acquisition of a new asphalt concrete plant. We use factoring to counteract the mismatch in the settlement terms agreed with customers and subcontractors.  At 30 June 2016, interest-bearing liabilities totalled 25,798 thousand euros (30 June 2015: 30,977 thousand euros). Interest expense for the first half of 2016 amounted to 314 thousand euros (first half 2015: 342 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 the first six months of 2016, the hryvnia weakened against the euro by around 5%. 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 115 thousand euros (first half 2015: 316 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, translation of operating receivables and payables resulted in an exchange loss of 13 thousand euros for the period (first half 2015: nil thousand euros). The exchange loss has been recognised in Other operating expenses.

We do not use derivatives to hedge our currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2016, public investments will not grow significantly and 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 National Road Administration) that reach signature of a construction contract in 2016 will not increase substantially. Even though the Ministry of Defence has been a positive exception for builders by carrying out procurements which have made a significant contribution to market revival, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. The situation is mitigated by the positive level of private investments 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 construction service intermediaries (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 intermediaries to go slowly out of business or shrink in size rather than merge or exit the market. According to our assessment, in recent years the process has decelerated due to customers’ (particularly public sector customers’) increasing desire to apply less stringent tendering requirements to increase competition and lower the price even though this increases their own 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 bid 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 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. The prices of new apartments are relatively high compared to the standard of living and the banks’ lending terms are strict. This has held back rapid growth of the housing market but since the second half of 2015 the supply of new housing has grown significantly, slowing down the sale of apartments with relatively high sales prices. Similarly to previous periods, successful projects include those that create or fill a niche. In Tallinn and Tartu, the picture is 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 tendering 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 prices of construction inputs will remain relatively stable but growth in housing development has made it unlikely that the prices charged by local subcontractors, particularly in building construction, will decline. Certainly there are areas where major changes in the environment may trigger more abrupt price movements. The rise in housing construction has lengthened the supply periods of various essential materials and services, making it impossible to carry out all processes in the former optimistic timeframes. As a result, activities require more extensive planning or need to be postponed. 
  • Persisting shortage of skilled labour (including project and site managers) may start restricting companies’ performance capacities, having an impact on 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 case of 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 2016, we will continue our operations in the Kiev region and our current Ukrainian order book is larger than a year ago. Despite the armed 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 that 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. Still, 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 October 2015, we signed the first contract on the construction of a five-floor apartment building in Stockholm. The cost of the work amounts to around 8.4 million euros. We will sustain efforts aimed at increasing our operations in Sweden and are currently moderately optimistic about the developments. Interesting tenders have been announced and at the end of the holiday season we hope to increase our contract portfolio.

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 revenue of the Group in 2015 was 145.5 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 OMX Tallinn Stock Exchange.


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

Investor presentation_6m_2016.pdf