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Published: 2016-05-12 07:00:00 CEST
Quarterly report

2016 first quarter consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the first quarter 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 31 March 2016 31 December  2015
Current assets    
Cash and cash equivalents 4,236 6,332
Trade and other receivables 19,006 17,503
Prepayments 1,422 1,599
Inventories 23,151 23,603
Total current assets 47,815 49,037
Non-current assets
Investments in equity-accounted investees 1,298 1,179
Other investments 26 26
Trade and other receivables 10,654 10,516
Investment property 4,929 4,929
Property, plant and equipment 9,403 9,623
Intangible assets 14,614 14,609
Total non-current assets 40,924 40,882
TOTAL ASSETS 88,739 89,919
Current liabilities    
Loans and borrowings 15,687 15,715
Trade payables 20,997 22,538
Other payables 7,777 5,475
Deferred income 1,713 3,233
Provisions 721 825
Total current liabilities 46,895 47,786
Non-current liabilities
Loans and borrowings 4,793 5,098
Trade payables 104 104
Other payables 96 96
Provisions 905 768
Total non-current liabilities 5,898 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 1,646 1,358
Retained earnings 10,400 10,970
Total equity attributable to owners of the parent 34,257 34,539
Non-controlling interests 1,689 1,528
TOTAL EQUITY 35,946 36,067


Condensed consolidated interim statement of comprehensive income

EUR ‘000   Q1 2016 Q1 2015 2015
Revenue    27,731  27,113 145,515
Cost of sales   -26,578 -26,704 -136,484
Gross profit   1,153 409 9,031
Marketing and distribution expenses   -103 -118 -412
Administrative expenses   -1,292 -1,109 -5,026
Other operating income   41 104 464
Other operating expenses   -12 -38 -124
Operating loss/profit   -213 -752 3,933
Finance income   124 165 655
Finance costs   -439 -671 -4,383
Net finance costs   -315 -506 -3,728
Share of profit/loss of equity-accounted investees    119  -96 226
Loss/profit before income tax   -409 -1,354 431
Income tax expense   0 0 -257
Loss/profit for the year   -409 -1,354 174
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   288 524 587
Total other comprehensive income   288 524 587
Loss/profit attributable to:        
- Owners of the parent   -570 -1,284 179
- Non-controlling interests   161 -70 -5
Loss/profit for the year   -409 -1,354 174
Total comprehensive expense/income attributable to:        
- Owners of the parent   -282 -760 766
- Non-controlling interests   161 -70 -5
Total comprehensive expense/income for the year   -121 -830 761
Earnings per share attributable to owners of the parent:        
Basic earnings per share (EUR)   -0.02 -0.04 0.01
Diluted earnings per share (EUR)   -0.02 -0.04 0.01


Condensed consolidated interim statement of cash flows

EUR ‘000 Q1 2016 Q1 2015
Cash flows from operating activities    
Cash receipts from customers1 29,588 35,789
Cash paid to suppliers2 -27,505 -34,416
VAT paid -951 -1,239
Cash paid to and for employees -3,950 -4,069
Income tax paid 0 -37
Net cash used in operating activities -2,818 -3,972
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -103 -275
Proceeds from sale of property, plant and equipment 28 34
Acquisition of investments in associates 0 -1
Loans provided -18 -19
Repayment of loans provided 2 40
Dividends received 3 103
Interest received 0 6
Net cash used in investing activities -88 -112
Cash flows from financing activities    
Proceeds from loans received 1,562 331
Repayment of loans received -201 -2,350
Finance lease principal paid -395 -313
Interest paid -158 -157
Dividends paid 0 -30
Net cash from/used in financing activities 808 -2,519
Net cash flow -2,098 -6,603
Cash and cash equivalents at beginning of year 6,332 8,802
Effect of movements in foreign exchange rates 2 -1
Decrease in cash and cash equivalents -2,098 -6,603
Cash and cash equivalents at end of year 4,236 2,198

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 quarter of 2016 with a gross profit of 1,153 thousand euros (Q1 2015: 409 thousand euros) and a gross margin of 4.2% (Q1 2015: 1.5%). Despite increasing competition, we succeeded in improving the gross margin compared with a year ago. The profit was generated by the Buildings segment which raised its gross margin from 6 to 11%. The results of the Infrastructure segment remained expectedly modest with the loss incurred growing considerably year over year.  The loss is mainly attributable to the fact that during the winter season there is a lack of operations that could be performed with own resources (major earthworks) and, thus, a large share of the segment’s fixed costs remains uncovered.

We are aware that growth in input prices poses a risk for long-term contracts and continue to prioritise a contract’s expected profitability over revenue growth.

Our administrative expenses for the first quarter of 2016 totalled 1,292 thousand euros. Compared with the same period last year, administrative expenses increased slightly  (Q1 2015: 1,109 thousand euros), primarily due to our expansion to the Swedish market. The ratio of administrative expenses to revenue (12 months rolling) was 3.6% (Q1 2015: 3.4%). Our cost-control measures continue to be effective: we have been able to keep administrative expenses below the target ceiling, i.e., 4% of revenue.

We ended the first quarter of 2016 with an operating loss of 213 thousand euros (Q1 2015: an operating loss of 752 thousand euros). EBITDA was positive at 233 thousand euros (Q1 2015: negative at 285 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 12%, 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 291 thousand euros (Q1 2015: 516 thousand euros). The same movements in the exchange rate increased the translation reserve in equity by 288 thousand euros (Q1 2015: 524  thousand euros) and the net effect of exchange differences on our net assets was a loss of 3 thousand euros (Q1 2015: a gain of 8 thousand euros). Although exchange losses continue to undermine our net result, the weakening of the Ukrainian hryvnia has started to slow and exchange losses have become consistently smaller.

Due to the above factors, the period ended in a net loss of 409 thousand euros (Q1 2015: a net loss of 1,354 thousand euros), of which net loss attributable to owners of the parent, Nordecon AS, amounted to 570 thousand euros (Q1 2015: 1,284 thousand euros).

Cash flows

In the first quarter of 2016, operating activities resulted in a net cash outflow of 2,818 thousand euros (Q1 2015:  an outflow of 3,972 thousand euros). Negative operating cash flow is typical of the first quarter and stems from the cyclical nature of the construction business. Larger fixed costs and preparations made for more active construction operations in the second quarter cause outflows to exceed inflows. In addition, operating cash flow continued to be influenced by a mismatch in settlement terms: the ones agreed with customers are relatively long and in the case of public procurement mostly extend from 30 to 56 days while subcontractors generally have to be paid within 21 to 45 days.

Investing activities gave rise to a net cash outflow of 88 thousand euros (Q1 2015: an outflow of 112 thousand euros). Cash flow was mainly influenced by payments for property, plant and equipment which totalled 103 thousand euros (Q1 2015: 275 thousand euros). Dividends received amounted to 3 thousand euros (Q1 2015: 103 thousand euros).

Financing activities generated a net cash inflow of 808 thousand euros (Q1 2015: an outflow of 2,519 thousand euros). Our financing cash flow is strongly influenced by loan and lease transactions. Proceeds from loans received amounted to 1,562 thousand euros, consisting of use of overdraft facilities and development loans (Q1 2015: 331 thousand euros). Loan repayments totalled 201 thousand euros. In the comparative period, loan repayments amounted to 2,350 thousand euros, resulting mainly from changes in overdraft balances. Compared with a year ago, there was also slight growth in finance lease payments which totalled 395 thousand euros (Q1 2015: 313 thousand euros).

At 31 March 2016, the Group’s cash and cash equivalents totalled 4,236 thousand euros (31 March 2015: 2,198 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 Q1 2016 Q1 2015 Q1 2014 2015
Revenue (EUR ’000) 27,731 27,113 23,544 145,515
Revenue change 2.3% 15.2% -13.1% -9.8%
Net loss/profit (EUR ’000) -409 -1,354 -1,026 174
Net loss/profit attributable to owners of the parent (EUR ’000) -570 -1,284 -1,074 179
Weighted average number of shares 30,756,726 30,756,726 30,756,726 30,756,728
Earnings per share (EUR) -0.02 -0.04 -0.03 0.01
Administrative expenses to revenue 4.7% 4.1% 4.8% 3.5%
Administrative expenses to revenue (rolling) 3.6% 3.4% 2.9% 3.5%
EBITDA (EUR ’000) 233 -285 297 5,769
EBITDA margin 0.8% -1.1% 1.3% 4.4%
Gross margin 4.2% 1.5% 5.0% 6.2%
Operating margin -0.8% -2.8% -0.7% 2.7%
Operating margin excluding gain on asset sales -0.8% -3.1% -0.8% 2.4%
Net margin -1.5% -5.0% -4.4% 0.1%
Return on invested capital -0.5% -2.0% -1.4% 2.1%
Return on equity -1.1% -3.8% -3.0% 0.5%
Equity ratio 40.5% 38.8% 38.5% 40.1%
Return on assets -0.5% -1.4% -1.1% 0.2%
Gearing 28.8% 35.5% 31.7% 25.5%
Current ratio 1.02 1.01 1.01 1.03
  31 March 2016 31 March 2015 31 March 2014 31 Dec 2015
Order book (EUR ’000) 120,702 72,689 83,864 125,698 
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 quarter of 2016, Nordecon earned around 7% of its revenue outside Estonia compared with 5% in the same period last year.

  Q1 2016 Q1 2015 Q1 2014 2015
Estonia 93% 95% 92% 96%
Sweden 3% 0% 0% 0%
Ukraine 3% 3% 1% 3%
Finland 1% 2% 7% 1%

The contribution of the Ukrainian market where we are performing two large building construction contracts has stabilised. Revenues generated in Sweden where we are building a five-storey apartment building have levelled with those earned in Ukraine. Finnish revenues result from concrete works in the building construction segment.

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on a single market. However, economic 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 revenues for the first quarter of 2016 totalled 27,731 thousand euros, a roughly 2% increase on the 27,113 thousand euros generated in the same period last year. The overall downturn in infrastructure construction also left its mark on our revenue structure. The revenues of the Buildings segment grew as anticipated while those of the Infrastructure segment decreased almost two-fold. In the first quarter of 2016, Buildings and Infrastructure generated revenue of 24,411 thousand euros and 2,749 thousand euros respectively. The corresponding figures for the same period last year were 21,815 thousand euros and 4,914 thousand euros (see note 8). Our order book has a similar structure: at period-end 70% of contracts secured but not yet performed was attributable to the Buildings segment (Q1 2015: 62%).

Operating segments* Q1 2016 Q1 2015 Q1 2014 2015
Buildings 88% 78% 80% 64%
Infrastructure 12% 22% 20% 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 the same period last year, the revenue structure of the Buildings segment changed considerably. The largest revenue source was the public buildings sub-segment where growth was underpinned by the state’s increasing investment in national defence. During the period, we completed the construction of the Piusa border guard station and continued the construction of a building complex for the Ämari air base, a barracks for the Tapa military base and the Järveküla school as well as the design and construction of the Lintsi warehouse complex. In addition, we started 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, phases I and II of the Pikksilma homes in Kadriorg and the Meerhof 2.0 building complex at Pirita tee 20a. 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-storey apartment building in Stockholm. The contribution of our own development projects in Tartu and Tallinn continues to increase as well. In the first two development phases of the Tammelinn project in Tartu we have completed 3 apartment buildings. Sales have been highly successful: by period-end, only 1 of the 55 apartments was still for sale. In phase III, which is close to completion, 14 of the 20 apartments which will be finished in June have been sold or reserved. In March, we began building phase IV which comprises a five-storey apartment building with 25 apartments. By the reporting date, around a third of those apartments were already sold or reserved (www.tammelinn.ee). By period-end, we had also sold 11 of the 20 apartment ownerships in the first three phases of our Magasini 29 development project in Tallinn (www.magasini.ee). We have started building 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 an upswing in the supply of new housing as well as comparative price increases with due care.

The volumes of the commercial buildings sub-segment, which used to dominate the Buildings segment for a long time, declined considerably. We anticipated the shrinkage of the sub-segment already at the end of 2015. 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 grew 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 KEVILI South Terminal (a cereals storage and handling complex).      

Revenue breakdown in Buildings segment Q1 2016 Q1 2015 Q1 2014 2015
Public buildings 35% 12% 18% 16%
Apartment buildings 28% 19% 11% 22%
Commercial buildings 20% 58% 45% 50%
Industrial and warehouse facilities 17% 11% 26% 12%

Similarly to previous years, in the first quarter of 2016 the main revenue source in the Infrastructure segment was road construction. We continued to deliver road maintenance services in the Järva and Hiiu counties and the Keila and Kose maintenance areas in Harju county. Kose is a new maintenance area, where work started in February 2016. In addition, we performed some smaller road construction projects and did forest road improvement work for the State Forest Management Centre. We expect that road construction will remain the main revenue source in the Infrastructure segment through 2016 and that, similarly to the two previous years, most of the work will be done under small or medium-sized reconstruction and repair contracts.

Although the contribution of other engineering (utility network construction) has increased compared with a year ago, the contracts secured are small and sustained 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 any major hydraulic engineering investments in the current year and the addition of other complex engineering projects is also likely to be irregular.

Revenue breakdown in Infrastructure segment Q1 2016 Q1 2015 Q1 2014 2015
Road construction and maintenance 65% 79% 46% 81%
Other engineering 30% 15% 12% 14%
Environmental engineering 5% 5% 32% 4%
Specialist engineering (including hydraulic engineering) 0% 1% 10% 1%


Order book

At 31 March 2016, the Group’s order book (backlog of contracts signed but not yet performed) stood at 120,702 thousand euros, a 66% increase year over year. Order books grew in both the Buildings and the Infrastructure segment.

  31 March 2016 31 March 2015 31 March 2014 31 December 2015
Order book (EUR ’000)  120,702  72,689 83,864 125,698

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 70% and 30% of the Group’s order book respectively (31 March 2015: 62% and 38% respectively).

Compared with a year earlier, the order book of the Buildings segment grew by around 87%. Major growth was posted in all sub-segments except commercial buildings whose order book contracted by around 70% year over year. 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-storey apartment building in Stockholm, Sweden. At the beginning 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 in Tallinn.  Growth in the order book of the public buildings sub-segment is mostly attributable to the design and construction of the Järveküla school and the Lintsi warehouse complex and the reconstruction of the Ugala theatre in Viljandi. Slight growth in the order book of the industrial and warehouse facilities sub-segment results from the construction of  a warehouse for Riigiressursside Keskus OÜ and the South Terminal (a cereals storage and handling complex) for farmers’ cooperative KEVILI.

Compared with a year earlier, the order book of the Infrastructure segment grew by 32%. The rise was largely underpinned by growth in the road construction sub-segment, which was 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 books of the environmental engineering sub-segment, which continues to perform a contract for the design and construction of an extension to the Kohtla-Järve wastewater treatment plant, and other engineering sub-segment also grew somewhat. However, due to the small size of their contracts this did not have a strong impact on the segment’s overall portfolio growth. 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 an impact on the construction sector before the second half-year. Thus, we do not expect the revenues of the Infrastructure segment to increase in 2016 (for further information, see the Business risks section of the chapter Description of the main risks).

In the light of order book growth and developments in our chosen markets, we forecast 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 (31 March 2016) and the date of release of this report, Group companies have secured additional construction contracts in the region of 12,121 thousand euros.



Staff and personnel expenses

In the first quarter of 2016, Nordecon Group (the parent and the subsidiaries) employed, on average, 652 people including 353 engineers and technical personnel (ETP). Compared with the same period in 2015 headcount, particularly the number pf workers, decreased by around 8% due to shrinkage in the portfolio of projects performed with own resources.

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

  Q1 2016 Q1 2015 Q1 2014 2015
ETP 353 362 341 356
Workers 299 349 359 334
Total average 652 711 700 690

Our personnel expenses for the first quarter of 2016 including all taxes totalled 4,109 thousand euros (Q1 2015: 3,781 thousand euros). Personnel expenses have increased due to pay-rises provided to some of the employees and performance bonuses paid for successfully completed projects.

The service fees of the members of the council of Nordecon AS for the first quarter of 2016 amounted to 34 thousand euros and associated social security charges totalled 11 thousand euros (Q1 2015: 35 thousand euros and 12 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 87 thousand euros and associated social security charges totalled 28 thousand euros (Q1 2015: 74 thousand euros and 24 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:

  Q1 2016 Q1 2015 Q1 2014 2015
Nominal labour productivity (rolling), (EUR ’000) 216.4 224.5 227.7 210.9
Change against the comparative period -3.6% -1.4% 6.3% -4.3%
Nominal labour cost efficiency (rolling), (EUR) 8.0 8.2 8.4 8.0
Change against the comparative period -4.4% -2.1% -9.7% -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)


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 fierce in all segments of the construction market. In 2016, public investment is not likely to grow substantially. There is strong competitive pressure on builders’ bid prices in a situation where input prices have not decreased noticeably. Competition is particularly aggressive in general building construction. 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, these allocations are not expected to have an impact on the construction sector before the second half of 2016 or even later.

In the light of the above factors, we see opportunities for business growth compared with 2015 mostly in our chosen foreign markets. We expect that in Estonia infrastructure construction volumes will remain at the level of 2015 while investment in building construction may grow slightly. 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.

The Group’s business is also influenced by seasonal changes in weather conditions, which have the strongest impact on infrastructure construction where a lot of work is done outdoors (road and port construction, earthwork, etc.). To disperse the risk, we secure road maintenance contracts that generate year-round business. Our strategy is to counteract the seasonality of infrastructure operations with building construction that is less exposed to seasonal fluctuations. Our long-term goal is to be flexible and keep our two operating segments in relative balance (see also the chapter Performance by business line). Where possible, our entities implement appropriate technical solutions that allow working efficiently also in changeable weather conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific insurance contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount due until the contract has been completed. To remedy construction deficiencies which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 31 March 2016, the Group’s warranty provisions (including current and non-current ones) totalled 1,137 thousand euros (31 March 2015: 1,066 thousand euros).

In addition to managing the 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

During the period, we did not incur any significant credit losses from operating activities. The credit risk exposure of receivables is low because the solvency of all prospective customers is assessed, 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.

In the first quarter of 2016 and in the comparative period, we did not incur any impairment losses on receivables.

Liquidity risk

The Group remains exposed to higher than usual liquidity risk resulting from a mismatch between the long settlement terms agreed with customers (mostly 30 to 56 days) and increasingly shorter settlement terms negotiated by subcontractors (mostly 21 to 45 days). We counteract the differences in settlement terms by using factoring where possible.

At the reporting date, the Group’s current assets exceeded its current liabilities 1.02-fold (31 March 2015: 1.01-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 (primarily overdraft facilities) for a period exceeding twelve months.

Due to the strained political situation in Ukraine, we believe that the realisation of our Ukrainian investment properties may take longer than originally expected. Accordingly, at the reporting date the Group’s loans to its Ukrainian associates of 8,448 thousand euros were classified as non-current assets.

At the reporting date, interest-bearing liabilities accounted for 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. So far, banks have refinanced liabilities for periods not exceeding 12 months, which is why a substantial portion of loans is classified as current although it is probable that some borrowings (particularly overdraft facilities) will be refinanced when the 12 months have passed. At 31 March 2016, the Group’s current loan liabilities totalled 15,687 thousand euros. After the reporting period, banks have refinanced or committed to refinancing current loan liabilities of 4,098 thousand euros, settlement of 3,498 thousand euros of which will be deferred to 2017.

At the reporting date, our cash and cash equivalents totalled 4,236 thousand euros (31 March 2015: 2,198 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 decreased by 2,450 thousand euros. The decline is mainly attributable to a decrease in factoring liabilities. We use factoring to counteract the differences in the settlement terms agreed with customers and subcontractors (see also the chapter Liquidity risk).  At 31 March 2016, interest-bearing loans and borrowings totalled 20,480 thousand euros (31 March 2015: 22,930 thousand euros). Interest expense for the first quarter of 2016 amounted to 147 thousand euros (Q1 2015: 152 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 do not use derivatives to hedge 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), 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. During the period, the hryvnia weakened against the euro by around 12%. 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 291 thousand euros (Q1 2015: 516 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 2 thousand euros for the period (Q1 2015: nil euros). The exchange loss has been recognised in Other operating expenses.

We have not acquired derivatives to hedge 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 share of support 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. As a result, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. To some extent, the situation will be improved 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 general contractors 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 been slowed down by the customers’ (particularly public sector customers’) increasing desire to apply less stringent tendering requirements to increase competition and lower the price even though this increases the risks related to security, quality, adherence to deadlines and the builder’s liability.
  • Competition is tough in all segments of the construction market. The average number of bidders for a contract has increased and there is a wide gap between the lowest bids made by the winners and the average bids. At the same time 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 the 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 thorough 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 situation is worsened 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 in the second half of 2015 the supply of new housing grew 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 respect 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 building construction subcontractors would decline any further. Certainly there are areas where major changes in the environment may trigger more abrupt price movements. For example, in the period under review the price of structural steel surged and there appeared a lack of certain categories of the material, which will inevitably affect builders that have entered into large long-term contracts without mitigating relevant risks. The rise in housing construction is lengthening the supply periods of various essential materials and services, making it impossible to carry out all processes in the previous optimistic timeframes. As a result, activities require more extensive planning or need to be postponed. 
  • Shortage of skilled labour (including project and site managers) will persist but so far it has weakened the quality of the construction process/service rather than the companies’ performance capacity. Labour migration to the Nordic countries will remain steady and despite a comparative decline in construction volumes, e.g., in Finland, the number of job seekers who return to the Estonian construction market will not increase considerably. This 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 for the construction of a five-storey 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.

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 over 650 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_3m_2016.pdf