English Estonian
Published: 2014-08-07 17:43:37 CEST
Half Year financial report

CORRECTION: 2014 II quarter and 6 months consolidated interim report (unaudited)

CORRECTION has been made due to the inaccuracy in the number of shares belonging to AS Nordic Contractors, published in the files attached to the last announcement. No other amendments in the text of the announcement nor in the files attached were made.

This announcement includes Nordecon AS’s consolidated financial statements for the second quarter and six months of 2014 (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 2014 31 December 2013
Current assets    
Cash and cash equivalents 9,103 12,575
Trade and other receivables 27,744 28,101
Prepayments 2,134 1,923
Inventories 25,805 23,785
Total current assets 64,786 66,384
Non-current assets
Investments in equity-accounted investees 588 566
Other investments 26 26
Trade and other receivables 11,137 10,645
Investment property 3,553 3,549
Property, plant and equipment 9,295 9,030
Intangible assets 14,590 14,494
Total non-current assets 39,189 38,310
TOTAL ASSETS 103,975 104,694
Current liabilities    
Loans and borrowings 22,588 23,875
Trade payables 29,522 26,372
Other payables 6,340 7,982
Deferred income 1,492 6,102
Provisions 525 913
Total current liabilities 60,467 65,244
Non-current liabilities
Loans and borrowings 7,015 3,303
Trade payables 155 156
Other payables 96 96
Provisions 1,057 969
Total non-current liabilities 8,323 4,524
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve 512 -298
Retained earnings 9,979 10,681
Total equity attributable to owners of the parent 32,702 32,594
Non-controlling interests 2,483 2,332
TOTAL EQUITY 35,185 34,926


Condensed consolidated interim statement of comprehensive income

EUR’000 Q2 2014 Q2 2013 6M 2014 6M 2013 2013  
Revenue 43,900 48,416 67,444 75,497 173,651  
Cost of sales -40,858 -45,736 -63,232 -72,224 -162,342  
Gross profit 3,042 2,680 4,212 3,273 11,309  
Marketing and distribution expenses -95 -77 -344 -139 -452  
Administrative expenses -1,347 -1,091 -2,471 -2,327 -4,922  
Other operating income 109 6 174 206 464  
Other operating expenses -35 -22 -64 -59 -1,096  
Operating profit 1,674 1,496 1,507 954 5,303  
Finance income 162 182 326 383 668  
Finance costs -262 -257 -1,222 -558 -1,027  
Net finance costs -100 -75 -896 -175 -359  
Share of profit/loss of equity-accounted investees 83 86 22 77 -170  
Profit before income tax 1,657 1,507 633 856 4,774  
Income tax expense -179 -43 -179 -44 -135  
Profit for the period 1,478 1,464 454 812 4,639  
Other comprehensive income/expense        
Items that may be reclassified subsequently to profit or loss        
Exchange differences on translating foreign operations 89 20 810 -33 106  
Total other comprehensive income/expense 89 20 810 -33 106  
TOTAL COMPREHENSIVE INCOME 1,567 1,484 1,264 779 4,745  
Profit attributable to:            
- Owners of the parent 1,294 1,401 221 728 4,642  
- Non-controlling interests 184 63 233 84 -3  
Profit for the period 1,478 1,464 454 812 4,639  
Total comprehensive income attributable to:            
- Owners of the parent 1,383 1,421 1,031 695 4,748  
- Non-controlling interests 184 63 233 84 -3  
Total comprehensive income for the period 1,567 1,484 1,264 779 4,745  
Earnings per share attributable to owners of the parent:            
Basic earnings per share (EUR) 0.04 0.05 0.01 0.02 0.15  
Diluted earnings per share (EUR) 0.04 0.05 0.01 0.02 0.15  

Condensed consolidated interim statement of cash flows

EUR’000 6M 2014 6M 2013
Cash flows from operating activities    
Cash receipts from customers1 73,297 70,286
Cash paid to suppliers2 -66,917 -68,190
VAT paid -2,478 -1,024
Cash paid to and for employees -10,195 -9,026
Income tax paid 0 -1
Net cash used in operating activities -6,293 -7,955
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -360 -228
Proceeds from sale of property, plant and equipment 111 102
Acquisition of a subsidiary -180 0
Acquisition of investments in associates 0 -350
Loans provided -268 -349
Repayment of loans provided 95 196
Dividends received 4 4
Interest received 1 357
Net cash used in investing activities -597 -268
Cash flows from financing activities    
Proceeds from loans received 9,695 7,002
Repayment of loans received -4,255 -3,266
Payment of finance lease liabilities -706 -848
Interest paid -391 -471
Dividends paid -923 0
Net cash from financing activities 3,420 2,417
Net cash flow -3,470 -5,806
Cash and cash equivalents at beginning of period 12,575 10,231
Effect of exchange rate fluctuations on cash and cash equivalents -2 -2
Decrease  in cash and cash equivalents -3,470 -5,806
Cash and cash equivalents at end of period 9,103 4,423

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 2014 with a gross profit of 4,212 thousand euros (H1 2013: 3,273 thousand euros) and a gross margin of 6.2% (H1 2013: 4.3%). The period’s profit was earned in the second quarter when performance was not undermined by adverse weather conditions and the fixed costs of a technological standstill that typically characterise the first quarter. We succeeded in maintaining or improving the profitability of long-term contracts secured in 2013 and the margins of contracts secured in the current year also met expectations.

Future revenue composition will be increasingly impacted by contracts secured in the current market and competitive environment. The Group’s management highlighted the expected fall in demand and rise in competitive pressure in previous periods already (see also the chapters Order book, Description of the main risks, and Outlooks of the Group’s geographical markets) and has enforced measures for maintaining and, possibly, improving profitability in a situation where volumes decrease. We remain aware that rises in input prices pose a risk for long-term contracts and continue to prioritize profitability over revenue growth or retention.

The Group’s administrative expenses for the first half of 2014 totalled 2,471 thousand euros, 6% up on a year ago (H1 2013: 2,327 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 3.1% (H1 2013: 3.0%). Our cost-control measures continue to yield strong results – administrative expenses remain below the target ceiling, i.e. 4% of revenue.

Operating profit for the first half-year amounted to 1,507 thousand euros (H1 2013: 954 thousand euros) while EBITDA grew to 2,455 thousand euros (H1 2013: 1,965 thousand euros).

Adverse movements in the euro/hryvna exchange rate gave rise to exchange losses that were significantly larger than those of previous periods. The Ukrainian hryvna weakened by around 31%, which meant that Group entities whose functional currency is the hryvna had to re-measure their euro-denominated liabilities. The Group’s exchange losses, which are reported within finance costs, totalled 854 thousand euros (H1 2013: an exchange gain of 41 thousand euros). The same exchange loss gave rise to a positive 808 thousand-euro change in the translation reserve reported in equity (H1 2013: a negative change of 33 thousand euros) and the net effect of the exchange loss on the Group’s net assets was 46 thousand euros (H1 2013: a gain of 9 thousand euros).

As a result, the Group’s net profit amounted to 454 thousand euros (H1 2013: 812 thousand euros) of which the profit attributable to owners of the parent, Nordecon AS, was 221 thousand euros (H1 2013: 728 thousand euros).

Cash flows

Operating activities for the first half of 2014 resulted in a net cash outflow of 6,293 thousand euros (H1 2013: a net outflow of 7,955 thousand euros). Negative operating cash flow is typical of the first half-year and stems from the cyclical nature of the construction business. Projects completed in the previous year with higher than expected profit margins resulted in larger performance bonuses and accompanying tax charges. Similarly to previous periods, operating cash flows were influenced by a mismatch in settlement terms: the ones agreed with customers are long and in the case of public procurement mostly extend from 45 to 56 days while subcontractors generally have to be paid within 21 to 45 days.

Investing activities resulted in a net cash outflow of 597 thousand euros (H1 2013: a net outflow of 268 thousand euros). The largest one-off outflows resulted from a loan of 250 thousand euros to an entity of AS Nordic Contractors group (see note 14) and  a payment of 180 thousand euros made to purchase the remaining shares in the subsidiary AS Eston Ehitus from the non-controlling shareholders (see note 15).

Financing activities resulted in a net cash inflow of 3,420 thousand euros (H1 2013: a net inflow of 2,417 thousand euros). Loan receipts exceeded loan repayments by 5,440 thousand euros while a year ago loan receipts exceeded loan repayments by 3,736 thousand euros. The change is mainly attributable to changes in the Group’s overdraft balances as well as financing of own housing development projects. Finance lease payments declined slightly year over year. Dividends distributed in the first half of 2014 totalled 923 thousand euros (H1 2013: nil euros).

At 30 June 2014, the Group’s cash and cash equivalents totalled 9,103 thousand euros (30 June 2013: 4,423 thousand euros). Management’s comments on liquidity risks are presented in the chapter Description of the main risks.


Key financial figures and ratios

  Figure/ratio 6M 2014 6M 2013 6M 2012 2013
  Revenue (EUR’000) 67,444 75,497 62,920 173,651
  Revenue change -11% 20% 16% 8.9%
  Net profit/loss (EUR’000) 454 812 -390 4,639
  Profit/loss attributable to owners of the parent (EUR’000) 221 728 -491 4,642
  Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
  Earnings per share (EUR) 0.01 0.02 -0.02 0.15
  Administrative expenses to revenue 3.7% 3.1% 4.0% 2.8%
  Administrative expenses to revenue (rolling) 3.1% 3.0% 3.2% 2.8%
  EBITDA (EUR’000) 2,455 1,965 925 7,639
  EBITDA margin 3.6% 2.6% 1.5% 4.4%
  Gross margin 6.2% 4.3% 3.5% 6.5%
  Operating margin 2.2% 1.3% -0.3% 3.1%
  Operating margin excluding gains on sale of real estate 2.1% 1.1% -0.7% 2.9%
  Net margin 0.7% 1.1% -0.6% 2.7%
  Return on invested capital 1.6% 2.2% -0.3% 9.5%
  Return on equity 1.3% 2.7% -1.4% 14.2%
  Equity ratio 33.8% 27.3% 25.0% 33.4%
  Return on assets 1.4% 0.8% -0.2% 4.3%
  Gearing 31.6% 45.4% 48.5% 23.5%
  Current ratio 1.07 1.08 1.05 1.02
  As at 30 June 2014 30 June 2013 30 June 2012 31 Dec 2013
  Order book (EUR’000) 87,236 103,230 166,367 64,286
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 gains on sale of real estate = ((operating profit -  gains on sale of non-current assets – gains on sale 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 2014, around 7% of the Group’s revenue was generated outside Estonia compared with 2% in the first half of 2013.

  6M 2014 6M 2013 6M 2012 2013
Estonia 93% 98% 99% 95%
Finland 6% 2% 1% 5%
Ukraine 1% 0% 0% 0%

Finnish revenues comprise revenue from concrete works delivered in the building construction segment. The contribution of the Finnish market has increased year over year through growth in Finnish revenues, which has been amplified by a decrease in the Group’s total revenue. Still, foreign revenues for the year as a whole will probably not prove significantly larger than those of 2013 and the contributions of the markets are not likely to change.

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive concentration on a single market. Our strategy foresees increasing foreign operations in the longer term; for further information, see the chapter Strategic agenda for 2014-2017. Our vision of the Group’s operations in foreign markets is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

Segment revenues

The Group strives to maintain the revenues of its operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing operations under stressed circumstances when one segment experiences shrinkage.

The Group’s revenue for the first half of 2014 amounted to 67,444 thousand euros, an 11% decrease from the 75,497 thousand euros generated in the first half of 2013. A year ago, we were working on three large road construction projects of around 70 million euros whose contribution to the half-year revenue was considerable. Also, a year ago the volume of projects supported by the EU structural funds was larger. We drew attention to the fact that the volume of such projects would decline last year already. The revenues of the Buildings segment increased as expected through a rise in both the number of contracts secured and their average cost.

Consequently, the revenues of the two main operating segments, Buildings and Infrastructure, for the first half of 2014 amounted to 47,826 thousand euros and 17,936 thousand euros respectively. The corresponding figures for the first half of 2013 were 30,796 thousand euros and 42,638 thousand euros (see note 8). The change in the revenue structure is also reflected in our order book where at period-end 67% of the contracts (in terms of value) belonged to the Buildings segment (H1 2013: 48%).

Operating segments* 6M 2014 6M 2013 6M 2012 2013
Buildings 71% 41% 46% 41%
Infrastructure 29% 59% 54% 59%

* 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

In the revenue structure of the Buildings segment, the contribution of public buildings has decreased while that of apartment buildings has increased. The contributions of commercial buildings and industrial and warehouse facilities have remained at the same level as in the comparative period. The segment’s main revenue contributors are contracts on the construction of commercial buildings in Tallinn (the Stroomi shopping centre) and Narva (an extension to the ASTRI shopping centre). Reconstruction of Estonia Spa in Pärnu is awaiting commencement. We expect the investment activity of private sector customers to remain robust and the contribution of the sub-segment to remain at a similar or even higher level throughout the year.

In the industrial and warehouse facilities sub-segment there has been a structural shift. In previous years, on account of EU investment support, most of the revenue resulted from contracts secured from the agricultural sector. By 2014 the proportion of EU-supported projects has decreased visibly and the main contributors are warehouse facilities and logistics centres (e.g. the Smarten logistics centre). The work done for companies engaged in heavy industry has increased as well. Estonia’s economic growth is slowing but this has not yet had a negative impact on the long-cycle investment plans launched by companies in 2012 and 2013. Accordingly, we expect the revenues of the sub-segment to remain stable.

The competitive situation in the public buildings sub-segment is particularly challenging: it is hard to win a contract without taking excessive risks but our current policy is to avoid such risks. The largest projects of the period were the construction of the Translational Medicine Centre of the University of Tartu, the academic building of the NCO School of the Estonian National Defence College, and phase V of St Paul’s Church in Tartu. The first two were completed by the end of the first half-year. If competition remains fierce, the contribution of the sub-segment is likely to decline.

Our apartment building revenues resulted mostly from general contracting. The main contributor was the construction of an apartment building at Pirita tee 26 in Tallinn which we won last year. In 2014 we secured and began building phase I in the construction of the Tondi residential quarter in Tallinn. We have also been successful in selling the last apartments and office premises in our own Tigutorn development project. Only one Tigutorn apartment is still for sale. Sale of apartment ownerships in phase I in our Magasini 29 development project (www.magasini.ee) has started well and we have started building phase II. We have also re-launched real estate development in Tartu where two new buildings with a total of 35 apartments will be completed in Tammelinn by the end of 2014 (www.tammelinn.ee).

Revenue distribution within Buildings segment 6M 2014 6M 2013 6M 2012 2013
Commercial buildings 49% 45% 19% 45%
Industrial and warehouse facilities 33% 34% 28% 29%
Public buildings 6% 19% 49% 21%
Apartment buildings 12% 2% 4% 5%


In the first half of 2014, the main revenue source in the Infrastructure segment was road construction. The average cost of the sub-segment’s contracts has fallen and operating volumes are not going to rise to the level of 2013 but the contribution of the sub-segment will remain the strongest, partly thanks to road maintenance services delivered under long-term contracts in the Järva and Hiiu counties and the Keila maintenance area.

In specialist engineering, a noteworthy project was the construction of the Sõpruse bridge boat harbour in Tartu. There is currently no information about any major projects that might require hydraulic engineering work this year. The revenues of the sub-segment may increase through other complex engineering work but relevant revenue flows are likely to be irregular.

The decline in EU support due to the change of budget periods has had a strong impact on our environmental engineering and utility network construction (other engineering) revenues, which have decreased more rapidly than the revenues of other sub-segments. It is likely that the contributions of the two sub-segments will see further contraction because a relatively large portion of their revenue for the first half-year resulted from long-term contracts secured in the previous period. Most new contracts are small.

Revenue distribution within Infrastructure segment 6M 2014 6M 2013 6M 2012 2013
Road construction and maintenance 74% 54% 40% 54%
Specialist engineering (including hydraulic engineering) 4% 8% 16% 8%
Other engineering 7% 27% 38% 26%
Environmental engineering 15% 11% 6% 12%

Order book

At 30 June 2014, our order book (backlog of contracts signed but not yet performed) stood at 87,236 thousand euros, a 15% decrease compared with a year ago.

The order book of the Infrastructure segment contracted by around 46% year over year. The largest decrease occurred in contracts signed for the construction of utility networks (other engineering sub-segment) and environmental engineering as in the last year of the EU 2007-2013 budget period allocations of relevant investment support were expectedly smaller. The backlog of hydraulic engineering work decreased as well.

The order book of the road construction sub-segment shrank too (by around 30%). In 2013 the sub-segment was involved in three major public procurement projects, which were all substantially completed by the year-end. The new national road management plan reflects a change in the structure of road construction investments. In particular, the proportion of large-scale projects will diminish. This means that companies engaged in road construction have to face a new reality – the average cost of road construction contracts is going to decrease, which will inevitably influence the competitive environment.

On the other hand, the order book of the Buildings segment grew by around 18%. The order books of the commercial buildings and industrial and warehouse facilities sub-segments showed strong growth, mostly thanks to a rise in private sector investments.

  6M 2014 6M 2013 6M 2012 2013
Order book (EUR’000) 87,236 103,230 166,367 64,286

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 67% and 33% of our order book respectively. This is a radical change compared with recent years when the figures for the two segments were more or less equal (30 June 2013: 48% and 52% respectively). It is likely that building construction contracts will dominate the order book for the next few years. In the current EU budget period (2014-2020) investments in infrastructure construction which to date have mostly been made with the support of the EU structural funds will not be as large as in 2007-2013. In particular, this applies to 2014, which is turning into a switchover year between the budget periods, where most efforts are directed at preparatory administrative activities required for enabling the investments. Hence, we expect the revenues of the Infrastructure segment to decline in 2014 (for further information, see the Business risks section of the chapter Description of the main risks).

We believe that in a situation where the market is expected to shrink, our priority cannot be increasing the Group’s revenue or maintaining it at the level of 2013. Instead, the main focus must be on improving profitability. We do not consider the present decline in the Group’s order book to be critical. Based on our historical experience, it is quite typical that a significant portion of budgeted operating volumes is secured through new contracts signed during the year. The beginning of the year has already partly confirmed this: since the end of 2013 our order book has grown by 36%.

Between the reporting date (30 June 2014) and the date of release of this report, Group companies have secured additional construction contracts in the region of 18,445 thousand euros.



Staff and personnel expenses

In the first half of 2014, the Group (the parent and the subsidiaries) employed, on average, 741 people including 353 engineers and technical personnel (ETP). Workforce has decreased compared with a year ago due to shrinkage in operating volumes. When operating volumes grew in 2013, we signed, where possible, fixed-term (project-based) contracts with the people that were additionally hired. This allowed us to respond flexibly in a situation where it was clear that the work flows of some sub-segments would decrease.

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

  6M 2014 6M 2013 6M 2012 2013
ETP 353 362 371 357
Workers 388 412 400 400
Total average 741 774 771 757

The Group’s personnel expenses for the first half of 2014 including all taxes totalled 8,904 thousand euros, 4% up on the comparative period when the figure was 8,582 thousand euros. The rise is mostly attributable to a salary increase and payment of project-based performance pay.

In the first half of 2014, the service fees of the members of the council of Nordecon AS amounted to 71 thousand euros and associated social security charges totalled 23 thousand euros (H1 2013: 71 thousand euros and 23 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 138 thousand euros and associated social security charges totalled 46 thousand euros (H1 2013: 101 thousand euros and 33 thousand euros respectively).

Labour productivity and labour cost efficiency

The period’s nominal labour productivity was lowered by a rise in performance bonuses paid in the context of improved profitability. In comparative periods, the proportion of performance bonuses in the Group’s personnel expenses was significantly smaller. 

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 paid:

  6M 2014 6M 2013 6M 2012 2013
Nominal labour productivity (rolling), (EUR’000) 224.1 224.6 208.6 229.4
Change against the comparative period -0.2% 7.7% 33.8% 9.9%
Nominal labour cost efficiency (rolling), (EUR’000) 7.9 9.4 10.6 8.4
Change against the comparative period -16.0% -11.3% 29.1% -11.6%


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


Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins, are competition in the construction market and changes in the demand for construction services.

Compared with a year ago, competition for public sector contracts has intensified visibly. The volume of public sector investments decreased in 2013 and the prospects of maintaining volumes in 2014 are not good. There is strong competitive pressure on builders’ bid prices although input prices mostly continue to climb. Competition is particularly fierce in the building construction segment. We acknowledge the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered noticeably and competition is fierce involves high risk, because the contract may quickly start generating a loss. Thus, in price-setting we currently prioritize profitability over increasing or retaining the revenue figure.

In the next periods, demand for construction services will be driven by public sector investments. In previous years, a major share of investments was made with the assistance of allocations from the EU structural funds that were determined, both in terms of size and timing, by the EU financial framework 2007-2013. In general, the amounts allocated to Estonia under the next EU financial framework (2014-2020) are known (5.9 billion euros) but the volume and schedule of investments involving construction work have not yet been finalised. According to information released to date, the overall volume of construction-related investments is going to decline compared with the previous budget period and 2014 will become a so-called ‘gap’ year between the two budget periods, where most efforts are directed at preparatory administrative activities required for enabling the investments.

In light of the above, it is likely that in 2014 our business volumes will shrink, particularly in the Infrastructure segment where the proportion of public sector investments has been the largest. Our action plan foresees redirecting our resources (including some of the labour of the Infrastructure segment) to increasing the proportion of contracts secured from the private sector. According to our business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in only one narrow (particularly some infrastructure) segment.

Our primary goal is to maintain profitability even when construction volumes shrink. Thanks to decisions adopted in previous periods, we will not have to undertake any extensive restructuring when construction volumes change.

The Group’s business is also influenced by the fact that construction operations are seasonal. The impacts of seasonal fluctuations are the strongest in the Infrastructure segment 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 business strategy is to counteract seasonal fluctuations in infrastructure operations with building construction that is less exposed to seasonality. Thus, we endeavour to keep the two segments in balance (see also the chapter Performance by business line). In addition, where possible, our companies implement appropriate technical solutions that allow working efficiently even 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 contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount payable until the completion of the contract. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 30 June 2014, the Group’s warranty provisions (including current and non-current ones) totalled 1,199 thousand euros. The comparative figure for a year ago was 1,150 thousand euros.

In addition to managing risks directly related to construction operations, in recent years we have sought to mitigate the risks inherent in preliminary activities. In particular, we have focused on the bidding process, i.e. compliance with the procurement terms and conditions, and budgeting. The errors made in the planning stage are usually irreversible and, in a situation where the price is contractually fixed, may result in a direct financial loss.

Financial risks

Credit risk

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

In the first half of 2014, the Group had no impairment losses on receivables (H1 2013: a gain of 6 thousand euros on reversal of prior period impairment losses).

Liquidity risk

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

At the reporting date, the Group’s current assets exceeded its current liabilities 1.07-fold (30 June 2013: 1.08-fold). Factors influencing the ratio include reclassification of loans provided to the Group’s Ukrainian associates to non-current assets and the fact that generally banks do not refinance interest-bearing liabilities for a period exceeding 12 months.

The political situation in Ukraine remains tense and we believe that realization of our Ukrainian investment properties may take longer than originally expected. Accordingly, at the reporting date loan receivables from our Ukrainian associates of 10,512 thousand euros were classified as non-current assets.

Interest-bearing liabilities account for a significant proportion of our current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. To date, banks have refinanced the Group’s liabilities for periods not exceeding 12 months, which is why a substantial portion of loans are classified as current liabilities although it is probable that some borrowings (particularly overdraft facilities) will be refinanced again when the 12 months have passed.

At the reporting date, the Group’s cash and cash equivalents totalled 9,103 thousand euros (30 June 2013: 4,423 thousand euros).

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. At 30 June 2014, the Group’s interest-bearing loans and borrowings totalled 29,602 thousand euros, a decrease of 4,224 thousand euros year over year. Interest expense for the period amounted to 363 thousand euros, 169 thousand euros down from a year ago.

The main source of the Group’s interest rate risk is the possibility of a rapid upsurge in the base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In light of the Group’s relatively heavy loan burden this would cause a significant increase 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 the loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. The Group does not use derivative financial instruments to hedge its interest rate risk.

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e. in euros (EUR) and Ukrainian hryvnas (UAH).

The change in Ukraine’s political leadership at the beginning of 2014, economic difficulties and conflict with Russia over the autonomous region of Crimea caused the exchange rate of the hryvna to tumble. By the reporting date, the hryvna had weakened against the euro by around 31%. For the Group’s Ukrainian subsidiaries, this meant additional exchange losses on the translation of euro-denominated loan commitments into the local currency. Relevant exchange losses totalled 854 thousand euros (H1 2013: an exchange gain of 64 thousand euros).

Exchange gains and losses on financial instruments are reported within Finance income and Finance costs in the statement of comprehensive income. Translation of receivables and liabilities related to operating activities did not give rise to any exchange gains or losses.

The reciprocal receivables and liabilities of the Group’s Ukrainian and non-Ukrainian entities (items connected with the construction business) do not give rise to any material exchange losses. Nor do the loans provided to the Group’s Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s financial statements.

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


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2014 public investment will decrease in connection with the change of the EU budget periods because implementation of measures requires time. Although during the 2014-2020 financial framework allocations to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), support payments from the structural funds that influence the construction market will not increase significantly. Instead, compared with the previous budget period, there will be an increase in allocations to projects not related to tangible assets.
  • Investments made by the largest public sector customers (state-owned real estate company Riigi Kinnisvara AS and the National Road Administration), which will reach the stage of conclusion of a construction contract in 2014 will either not increase significantly or may even decrease. As a result, the Estonian construction market (particularly segments related to infrastructure construction) will shrink. The situation will be somewhat alleviated by private customers’ increasing investment in building construction.
  • The construction market will see further consolidation, particularly in the field of general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is still too large, but the process will be slower than expected. Based on the past three years’ experience it is likely that stiff competition and insufficient demand will induce some general contractors to go slowly out of business or shrink in size rather than merge with another or exit the market. However, it is also increasingly common that two to four smaller players that are seeking ways to remain in business will form a consortium to bid for major procurement contracts, meet tendering terms and secure the required funding.
  • Competition will increase in all segments of the construction market. We see a rise in the average number of bidders for a contract and there is already a notable gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when anticipation of a fall in demand caused a rapid decline in construction prices, which triggered a slide in the prices of many construction inputs. However, there are currently no massive decreases in input prices and companies that are banking on this in the bidding phase may run into difficulty. Construction prices and thus also profit margins are under strong competitive pressure.
  • 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 to set an affordable sales price. Although the overall situation is improving steadily, the offering of new residential real estate cannot be increased dramatically because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict.  Similarly to previous periods, successful projects include those that create or fill a niche.
  • The contracts signed with public sector customers continue to impose tough conditions on construction companies: extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc. Contractors cannot implement more optimal solutions identified in the construction phase that would reduce the construction or operating costs of the asset without sanctions because procurement terms do not allow this. In a situation where public procurement is based on underbidding, the above factors increase the risks of all market participants. Still, compared to two or three years ago, the situation has improved and in some respects procurement terms have become more reasonable for construction companies.
  • The prices of construction inputs will remain relatively stable. In the short term, weakening demand may lower local subcontracting prices. However, taking into account the subcontractors’ financial and human resources, the decline cannot be substantial or long-lasting. In some areas, price fluctuations are be unpredictable and, thus, notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).
  • Shortage of skilled labour (including project and site managers) will persist. This will undermine not so much the companies’ performance capabilities as the quality of carrying out the construction process, i.e. delivering the service. Shrinkage in construction volumes in Estonia may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and although those markets (particularly Finland) may also shrink, the number of job seekers that will return will not increase considerably. Accordingly, the basic wage of construction-sector employees will not decrease. Instead, the rise in the cost of living is creating pressure for a wage increase.

Latvia and Lithuania

In our opinion, the Latvian construction market, which was hit by a severe downturn a few years ago, has not regained sufficient stability and similarly to the Estonian market in 2014 it will probably see shrinkage in public sector demand. Accordingly, it is unlikely that we will enter the Latvian construction market permanently in 2014.

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

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


The Group operates in Ukraine as a general contractor and project manager in the segment of commercial buildings and production facilities, offering its services primarily to foreign private sector customers. In the past three years, there have been practically no private sector customers in that segment. The political situation in Ukraine is worrying and undoubtedly affects adoption of business decisions by construction market participants. Regardless of this, we will continue our business in Ukraine in 2014. Compared with the previous year, our current Ukrainian order book is somewhat larger. We continue to monitor the situation in the Ukrainian construction market closely and will restructure our operations as appropriate. We also continue to seek opportunities for exiting our two conserved real estate projects or signing a construction contract with a potential new owner.


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


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2013 was 174 million euros and net profit 4.6 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

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

Investor presentation_6m_2014.pdf