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Published: 2013-02-13 15:30:00 CET
Quarterly report

2012 IV quarter and 12 months consolidated interim report (unaudited)

Nordecon AS publishes its 2012 IV quarter and 12 months consolidated interim report (unaudited)

Tallinn, Estonia, 2013-02-13 15:30 CET -- Announcement includes Nordecon AS’s consolidated financial statements for the fourth quarter and twelve months of 2012, 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
As at 31 December
2012 2011
Current assets    
Cash and cash equivalents 10,231 9,908
Trade and other receivables 44,133 34,645
Prepayments 1,840 2,610
Inventories 26,235 24,120
Non-current assets held for sale 0 242
Total current assets 82,439 71,525
Non-current assets
Investments in equity-accounted investees 202 199
Other investments 26 26
Trade and other receivables 503 2,504
Investment property 4,930 4,930
Property, plant and equipment 8,851 7,437
Intangible assets 14,857 14,960
Total non-current assets 29,369 30,056
TOTAL ASSETS 111,808 101,581
Current liabilities    
Loans and borrowings 27,185 19,130
Trade payables 32,134 27,403
Other payables 5,022 4,930
Deferred income 11,404 10,587
Provisions 521 485
Total current liabilities 76,266 62,535
Non-current liabilities
Loans and borrowings 3,671 9,513
Trade payables 259 199
Other payables 96 96
Provisions 1,210 841
Total non-current liabilities 5,236 10,649
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -404 -463
Retained earnings 6,042 4,563
Total equity attributable to equity holders of the parent 27,849 26,311
Non-controlling interests 2,457 2,086
TOTAL EQUITY 30,306 28,397


Condensed consolidated interim statement of comprehensive income

EUR '000 Q4 2012 Q4 2011 12M 2012 12M 2011
Revenue 42,554 44,542 159,608 147,802
Cost of sales -40,358 -43,630 -151,386 -147,608
Gross profit 2,196 912 8,222 194
Marketing and distribution expenses -136 -79 -389 -317
Administrative expenses -1,444 -1,357 -5,385 -4,641
Other operating income 190 60 810 806
Other operating expenses -220 -521 -566 -672
Operating profit/loss 586 -986 2,692 -4,630
Finance income 163 444 622 938
Finance costs -576 -202 -1,248 -1,086
Net finance costs -413 242 -626 -148
Share of profit/loss of equity-accounted investees -218 -4 -79 100
Profit/loss before income tax -45 -748 1,987 -4,678
Income tax expense -12 -14 -56 -30
Profit/loss for the period -57 -762 1,931 -4,708
Other comprehensive income/expense:        
Exchange differences on translating foreign operations 57 -484 59 -329
Total other comprehensive income/expense for the period 57 -484 59 -329
Profit/loss attributable to:        
- Owners of the parent -151 -1,147 1,479 -5,304
- Non-controlling interests 94 385 452 596
Profit/loss for the period -57 -762 1,931 -4,708
Total comprehensive income/expense attributable to:        
- Owners of the parent -94 -1,865 1,538 -5,924
- Non-controlling interests 94 619 452 887
Total comprehensive income/expense 0 -1,246 1,990 -5,037
Earnings per share attributable to owners of the parent:        
Basic earnings per share (EUR) 0.00 -0.04 0.05 -0.17
Diluted earnings per share (EUR) 0.00 -0.04 0.05 -0.17


Condensed consolidated interim statement of cash flows

EUR '000 12M 2012 12M 2011
Cash flows from operating activities    
Cash receipts from customers1 193,524 185,147
Cash paid to suppliers2 -161,447 -160,805
VAT paid -6,192 -2,384
Cash paid to and for employees -16,888 -13,476
Income tax paid/recovered -56 41
Net cash from operating activities 8,941 8,523
Cash flows from investing activities    
Acquisition of property, plant and equipment -1,792 -58
Proceeds from sale of property, plant and equipment and intangible assets 379 340
Loans granted -1,709 -213
Repayment of loans granted 399 1,745
Dividends received 0 4
Interest received 18 204
Net cash used in/from investing activities -2,705 2,022
Cash flows from financing activities    
Proceeds from loans received 3,190 1,925
Repayment of loans received -5,950 -4,907
Dividends paid -80 0
Payment of finance lease liabilities -1,967 -1,921
Interest paid -1,106 -1,089
Other payments 0 -4
Net cash used in financing activities -5,913 -5,996
Net cash flow 323 4,549
Cash and cash equivalents at beginning of period 9,908 5,818
Effect of exchange rate fluctuations 0 -459
Increase  in cash and cash equivalents 323 4,549
Cash and cash equivalents at end of period 10,231 9,908

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

2 Line item Cash paid to suppliers includes VAT paid to suppliers.


Financial review

Financial performance

Nordecon Group’s unaudited gross profit for 2012 was 8,222 thousand euros (2011: 194 thousand euros). The upswing in gross profit and gross margin (2012: 5.2% compared with 2011: 0.1%) was underpinned by the absence of loss-generating contracts, which weakened our performance in 2011.

The key factors that helped improve the margins were Group-wide austerity measures enforced in 2010 in response to market slump and internal restructuring and streamlining. Although volume growth, which emerged in 2011, has clearly improved the situation in the Estonian construction market, we will have sustain our efforts to maintain and enhance the results achieved. It should be kept in mind that the profits of long-term construction contracts are earned based on the stage of completion of contract activity, which means that profit is recorded gradually over the contract term.

The rise in profitability was facilitated by changes in the external environment. Thanks to the investments made by the public sector as well as the private sector whose activity increased notably in 2012, the Estonian construction market sustained growth through the year. At the same time, the prices of construction inputs and subcontracting services remained relatively stable. The combination of those factors created a sound basis for a rise in construction contracts’ average profit margin.  Although competition in the construction market continues to be fierce, in certain segments (e.g. road construction and construction of water and wastewater networks) the number of players has stabilised, alleviating pressure on the bidders’ profit margins. Unfortunately, there is still no indication of a decrease in competitive pricing pressure in building construction, where lack of private sector customers has rendered the market too small for all general contractors. Nordecon continues to acknowledge the fact that long-term construction contracts involve the risk of growth in input prices and remains committed to prioritizing the profitability of contracts secured over increasing or maintaining the revenue figures.

Administrative expenses for 2012 totalled 5,385 thousand euros (2011: 4,641 thousand euros). The figure for 2012 includes non-recurring consulting fees incurred for adjusting the Group’s operating and financial strategy in the changing environment and the provisions made for performance bonuses. The ratio of administrative expenses to revenue was 3.4% (2011: 3.1%). Our cost-control measures continue to yield strong results allowing us to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

The Group’s operating profit for 2012 was 2,692 thousand euros (2011: an operating loss of 4,630 thousand euros). EBITDA was positive at 4,837 thousand euros (2011: negative at 1,819 thousand euros).

The Group ended the year with a net profit of 1,931 thousand euros (2011: a net loss of 4,708 thousand euros). The profit attributable to owners of the parent, Nordecon AS, was 1,479 thousand euros (2011: a loss of 5,304 thousand euros).

Cash flows

Operating activities generated a net cash inflow of 8,941 thousand euros (2011: 8,523 thousand euros). Operating cash flow was strongly influenced by cyclical fluctuations in project-related cash flows. The settlement terms granted to customers are unreasonably long and in the case of public procurement generally extend from 45 to 100 days while subcontractors ordinarily have to be paid within 21 to 45 days. In 2012 the difference between the settlement terms agreed with customers and those agreed with subcontractors continued to increase. We counteract the mismatch between cash inflows and outflows with factoring and overdraft facilities for meeting working capital requirements.

VAT and labour-related payments grew. In 2012, a significant amount of building materials was purchased from abroad without the possibility to recover input VAT but on the sale of services in Estonia VAT had to be paid. The sum of VAT payments was also influenced by the fact that we generated considerably more gross profit. In 2011, completion of loss-making contracts resulted in prepaid VAT, which was used, among other things, to offset labour tax liabilities. In 2012 we did not have such offsetting opportunities. Moreover, labour related payments increased because of performance pay, which was introduced thanks to generation of profit. 

Cash flows from investing activities resulted in a net outflow of 2,705 thousand euros (2011: a net inflow of 2,022 thousand euros). The main reasons for the net outflow were loans to associates including a loan given for privatising the plot of a real estate project in Ukraine. Payments for property, plant and equipment (including a new and more productive asphalt plant acquired through a sale and leaseback transaction) accounted for a similar proportion as loans granted. In the comparative period, net cash flow was positive on account of settlement of loans granted.

Financing activities resulted in a net cash outflow of 5,913 thousand euros (2011: a net outflow of 5,996 thousand euros). The net amount of loan receipts and repayments was negative at 2,760 thousand euros (2011: negative at 2,982 thousand euros). The volume of loans received was increased by the acquisition of a new asphalt plant through a sale and leaseback transaction. Dividends paid comprise profit distributions to a subsidiary’s non-controlling shareholders.

At 31 December 2012, the Group’s cash and cash equivalents totalled 10,231 thousand euros (31 December 2011: 9,908 thousand euros).  Management’s comments on potential liquidity risks are presented in the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio 12M 2012 12M 2011 12M 2010
Revenue (EUR’000) 159,608 147,802 99,312
Revenue growth/decrease, % 8.0% 48.8% -35.8%
Net profit/loss (EUR’000) 1,931 -4,708 -12,738
Profit/loss attributable to owners of the parent (EUR’000) 1,479 -5,304 -11,810
Weighted average number of shares 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.05 -0.17 -0.38
Administrative expenses to revenue, % 3.4% 3.1% 4.9%
Administrative expenses to revenue (rolling) 3.4% 3.1% 4.9%
EBITDA (EUR’000) 4,837 -1,819 -5,375
EBITDA margin, % 3.0% -1.2% -5.4%
Gross margin, % 5.2% 0.1% -0.7%
Operating margin, % 1.7% -3.1% -9.0%
Operating margin excluding gains on asset sales, % 1.4% -3.5% -9.4%
Net margin, % 1.2% -3.2% -12.8%
Return on invested capital, % 5.2% -5.9% -15.8%
Return on equity, % 6.6% -15.2% -32.6%
Equity ratio, % 27.1% 28.0% 35.1%
Gearing, % 33.7% 32.8% 42.3%
Current ratio 1.08 1.14 1.39
As at 31 December 2012 2011 2010
Order book (EUR’000) 127,259 134,043 85,607


Revenue growth/decrease = (revenue for the reporting period/ revenue for the previous period) – 1*100
Earnings per share (EPS) = net profit attributable to equity holders of the parent / weighted average number of shares outstanding
Administrative expenses to revenue = (administrative expenses/ revenue)*100
Administrative expenses to revenue (rolling) = (past four quarters’ administrative expenses/past four quarters’ revenue)*100
EBITDA = operating profit + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA/revenue)*100
Gross margin = (gross profit/revenue)*100
Operating margin = (operating profit/revenue)*100
Operating margin excluding gains on asset sales = ((operating profit -  gains on sale of property, plant and equipment - gains on sale of investment properties and real estate held for sale)/revenue) *100
Net margin = (net profit for the period/revenue)*100
Return on invested capital = ((profit before tax + interest expense)/ the period’s average (interest-bearing liabilities + equity))*100
Return on equity = (net profit for the period/ the period’s average total equity)*100
Equity ratio = (total equity/ total liabilities and equity)*100
Gearing = ((interest-bearing liabilities – cash and cash equivalents)/ (interest-bearing liabilities + equity))*100
Current ratio = total current assets/ total current liabilities


Performance by geographical market

In 2012, roughly 2% of the Group’s revenue was generated outside Estonia. In 2011, foreign operations accounted for 3% of the Group’s revenue.

  12M 2012 12M 2011 12M 2010
Estonia 98% 97% 94%
Ukraine 0% 0% 2%
Belarus 0% 1% 3%
Finland 2% 2% 1%

The decline in foreign revenues results from discontinuance of operations in Belarus (see also the chapter Changes in the Group’s business operations in the reporting period). Finnish revenues comprise revenue from concrete works. We expect the contribution of foreign markets to remain at a similar level in 2013.

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


Performance by business line

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

The Group’s unaudited revenue for 2012 was 159,608 thousand euros, 8% up on the 147,802 thousand euros generated in 2011. The foundation for revenue growth was laid in 2011 when the Estonian construction market began recovering and the Group secured a number of major new contracts lasting for over 12 months. The first half of 2012 was also successful in terms of winning new contracts.

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

Segment revenue

In 2012, the revenues of our Infrastructure segment were expectedly larger than those of our Buildings segment, the unaudited figures for the two segments being 89,184 thousand euros and 66,922 thousand euros respectively. The corresponding figures for 2011 were 72,735 thousand euros and 70,357 thousand euros (see note 8). Compared with 2011, the Infrastructure segment has increased revenue, mostly in the road construction sub-segment. The revenues of the Buildings segment have declined because most of the work under some major public procurement contracts (e.g. the construction of the Exhibition Building of the Estonian Maritime Museum) was done in 2011.

For a long time, the bulk of the work in the construction market has been related to infrastructure assets (mostly projects financed with the support of the state and the EU structural funds) and a major proportion (65%) of contracts in the Group’s order book belongs to the Infrastructure segment. Despite this, in previous periods the segments’ revenues have been more or less equal because building construction contracts have a shorter term than those of infrastructure construction. Infrastructure contracts have a longer term (e.g. road maintenance contracts) and their contribution to realised revenue is therefore comparatively smaller.

Revenue distribution between segments2 12M 2012 12M 2011 12M 2010
Buildings 42% 48% 48%
Infrastructure 58% 52% 52%

2 In connection with the entry into force of IFRS 8 Operating Segments, the Group has changed segment reporting in its financial statements. In Directors’ report the Ukrainian and Belarusian buildings segment and the EU buildings segment, which are disclosed separately in the financial statements, are presented as a single segment. In addition, the segment information presented in Directors’ report does not include the disclosures on “other segments” that are presented in the financial statements.

In Directors’ report, projects have been aggregated and allocated to operating segments based on their nature (i.e. building or infrastructure construction). In the segment reporting presented in the financial statements, aggregation and allocation are based on the subsidiaries’ main field of activity (as required by IFRS 8 Operating Segments). In the financial statements, the results of a subsidiary that is primarily engaged in infrastructure construction are presented in the Infrastructure segment. In Directors’ report, the revenues of such a subsidiary are presented based on their nature. The differences between the two reports are not significant because in general Group entities specialise in specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in both building and infrastructure construction. The figures for the parent company have been allocated in both parts of the interim report based on the nature of the work.

Revenue distribution within segments

The Buildings segment continued to earn most of its revenue from the construction of public buildings financed by the public sector although volumes shrank compared with the previous year. In terms of work performed, the largest projects of 2012 were the construction of the Ämari Air Base and the Estonian embassy in Kiev. During the year, group entities built several family and care home complexes across Estonia in the framework of the national social welfare program. The largest ongoing construction project is the design and build of the translational medicine centre of the University of Tartu.

Improvements in the economic environment encouraged private sector investments in the commercial buildings sub-segment. During the year, we began building five new commercial buildings – three in Tallinn, one in Tartu and one in Narva.  Although private sector investments grew visibly year over year, their relative scarcity compared with public sector investments remains a problem for the entire construction market.

In the industrial and warehouse facilities sub-segment private sector investments grew slightly but most of the revenue still resulted from contracts performed for the agricultural sector. Compared with 2011, their contribution declined because the support allocated from the EU structural funds that co-finance the projects decreased.

Apartment buildings were built for non-Group customers, the Group acting as a general contractor, not a developer.

Revenue distribution within the Buildings segment 12M 2012 12M 2011 12M 2010
Commercial buildings 26% 12% 19%
Industrial and warehouse facilities 35% 40% 36%
Public buildings 36% 45% 35%
Apartment buildings 3% 3% 10%


As expected, at the reporting date the main revenue source in the Infrastructure segment was road construction and maintenance. The sub-segment’s contribution was boosted by contracts secured in the first half-year – the construction of the Tartu western bypass and eastern ring road.

In specialist engineering, growth was underpinned by the construction of Sillamäe port, which commenced in the second half of 2011, and Kärdla guest harbour, which began in summer 2012.

Similarly to previous years, a major share of the revenue of the Infrastructure segment resulted from other engineering, i.e. the construction of water and wastewater networks financed with the support of the EU structural funds across Estonia. The sub-segment’s turnover remained stable but its contribution dropped because the revenues of other sub-segments increased.

The contribution of environmental engineering decreased because there was no contract comparable to the bio-filter of the Tallinn wastewater treatment plant, which was under construction in 2011. We won several environmental engineering contracts in 2012 but the bulk of their construction activity will fall in 2013.

Revenue distribution within the Infrastructure segment 12M 2012 12M 2011 12M 2010
Road construction and maintenance 51% 47% 62%
Specialist engineering (including hydraulic engineering) 16% 10% 1%
Other engineering 27% 35% 28%
Environmental engineering 6% 8% 9%


Order book

At 31 December 2012, our order book stood at 127,259 thousand euros, being 5% smaller than a year ago.

Partly, the order book has decreased in connection with the performance of major contracts secured in 2011 (e.g. the design and build of the Aruvalla-Kose road section and construction of berths at Sillamäe port). Addition of large contracts is irregular. Initially new contracts increase the order book considerably (positive impact on order book), but as they are performed, their balance declines (negative impact on order book). 

Some of the decline may also be attributed to changes taking place in the construction market. Due to market shrinkage, competition in the public buildings sub-segment has intensified, reducing the proportion of such contracts in our portfolio.

On the other hand, we have been able to increase our order book in the commercial and apartment buildings sub-segments (Buildings segment) and in other engineering (construction of water and wastewater networks) and environmental engineering sub-segments (Infrastructure segment). The order book used to include the outstanding balance of the Tivoli housing development project in Tallinn city centre of 12,814 thousand euros. On 4 February 2013, Tivoli Arendus OÜ sent us a notice of termination of the contract, which in our opinion is baseless. Accordingly, as at the date of release of this report Nordecon AS considers the notice of termination unfounded and the contract still effective. However, in light of the circumstances, we believe that it is unlikely that construction work can continue under the same contract.

As at 31 December 2012 2011 2010
Order book (EUR’000) 127,259 134,043 85,607

At 65% the Infrastructure segment continues to account for a major share of the total order book (31 December 2011: 80%).

Between the reporting date (31 December 2012) and the date of release of this report, Group companies have been awarded construction contracts of approximately 3,108 thousand euros.



Staff and personnel expenses

At the end of 2012, the Group (the parent and the subsidiaries) employed, on average, 764 people including 367 engineers and technical personnel (ETP). In connection with growth in the Group’s operating volumes, both the number ETP and workers have increased year over year.

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

  12M 2012 12M 2011 12M 2010
ETP 367 351 362
Workers 397 380 412
Total average 764 731 774

The Group’s personnel expenses for 2012 including all taxes totalled 16,803 thousand euros, 18% up on 2011 when personnel expenses were 14,225 thousand euros. The growth in personnel expenses is mainly attributable to performance pay provided to project staff and recognition of provisions for performance bonuses payable to our management and support staff. Selective salary increases had less impact.  

The remuneration of the members of the council of Nordecon AS for 2012, including social security charges, amounted to 256 thousand euros (2011: 92 thousand euros). The amount has increased in connection with the decision of Nordecon AS’s annual general meeting to increase the council’s remuneration as from 2012. The remuneration of the members of the board of Nordecon AS, including social security charges, totalled 597 thousand euros (2011: 316 thousand euros). The figure includes the termination benefits paid to the member of the board who left the Group in spring 2012. The remuneration expenses of both the council and the board include the provisions made for their performance bonuses, which are calculated based on the Group’s consolidated financial results (in 2011 no bonus provisions were made).

Labour productivity and labour cost efficiency

In 2012 nominal labour productivity grew by 3.3%, lagging somewhat behind revenue growth (8%). Management has acknowledged this. Improving labour productivity remains a priority and we see untapped resources in both general and daily construction management (including IT development). Nominal labour cost efficiency has decreased due to the provision of performance bonuses, which were not paid in 2011.

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


  12M 2012 12M 2011 12M 2010
Nominal labour productivity (rolling), (EUR’000) 208.9 202.3 128.3
Change against the comparative period, % 3.3% 57.7% -6.3%
Nominal labour cost efficiency (rolling), (EUR’000) 9.5 10.4 6.9
Change against the comparative period, % -8.6% 51.6% 3.0%


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)


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market in 2013

  • The bulk of construction work will be done in the infrastructure segment but the segment’s lead over building construction will diminish at an increasing pace. Private sector investments, which will grow compared with 2012, will mostly be channelled into the buildings segment. Moreover, the public sector will contribute to building construction through two major contracts - the construction of a new main building for the Estonian National Museum and the Maarjamõisa medical campus for Tartu University Hospital. The turnover of the infrastructure segment, on the other hand, will be undermined by the depletion of funds allocated from the EU budget for the period 2007-2013.
  • The construction market will remain disproportionately reliant on public procurement and projects executed with the support of the EU structural funds. In the last year of the EU budget period, the volume of new procurements will decrease because most funds have already been allocated.  Co-financing terms generally require that a project should be completed during the budget period. Thus, most of the remaining procurements will be announced in the first half of 2013. On the positive side, the EU multi-annual financial framework for 2014-2020 is ultimately being finalised. If swift and decisive action is taken, preparations for construction tenders to be announced in 2014 may already commence in the second half of 2013.   
  • The industry will see further consolidation, particularly in the field of general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is too large. 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 rather than merge with another or exit from the market. We will see more and more frequently that three or four smaller players will form a consortium to bid for major procurement contracts, meet stringent tendering conditions and secure the required funding.
  • Competition will intensify in all segments of the construction market. The average number of bidders for a contract has increased and there is already a notable gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when anticipation of a fall in demand triggered a rapid fall in construction prices, which caused a decline in the prices of many construction inputs. However, currently the prices of construction inputs seem unaffected and companies that are banking on their decrease in the bidding phase may run into difficulty. Competition is exerting strong pressure on profit margins but many companies have learned from past mistakes and are trying to maintain their margins at least at the level of 2012.
  • In new housing development, the success of a project will depend on the developer’s ability to control the input prices included in its business plan and thus to set an affordable sales price. The offering of new residential real estate cannot be significantly increased because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict.  Developers that can create or find an unexploited niche are more likely to succeed.
  • The contracts signed with public sector customers will continue to impose tough conditions, including extensive obligations, strict sanctions, different financial guarantees, extremely long settlement terms, etc. Contractors cannot implement more optimal solutions identified in the construction phase that would reduce the construction or operating costs of the procured asset without sanctions because procurement terms do not allow this. In a situation where public procurement is based on underbidding, the above factors increase the risks of all market participants.
  • The prices of construction inputs will remain stable. Local subcontracting prices may decrease due to weakening demand but considering the subcontractors’ financial and human resources, the decline could not be substantial or long-lasting. In some areas, price fluctuations will continue to be unpredictable and notably greater and hard or even impossible to influence (petroleum and metal products, some materials and equipment). On the whole, input prices will remain at a level that constitutes a major obstacle to private customers’ investment decisions.
  • The situation in the labour market will be relatively stable but not encouraging. There will be a shortage of qualified labour (including project and site managers). In 2013 there will not be any overall rise in the base wage paid by construction companies, which have to maintain tight cost control, but pressure for a wage increase will remain strong. Labour migration to the Nordic countries will remain steady and despite certain market shrinkage (particularly in Finland), the number of job seekers is not likely to increase.

Latvia and Lithuania

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

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

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


The Group operates in Ukraine as a general contractor and project manager in the segment of commercial buildings and production facilities, offering its services primarily to foreign private sector customers. In the past three years, there have been practically no private sector customers in that segment. Regardless of this, we will continue our business in Ukraine in 2013. There are some signs that investment activity in Ukraine may pick up in 2013 although the economic and political risks do not allow us to expect any rapid changes. We will monitor the situation in the Ukrainian construction market closely and will be ready to carry out additional restructuring at the companies involved. We will continue seeking opportunities for exiting the conserved real estate projects or signing a construction contract with a potential new owner.


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

Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins, are competition in the construction market and changes in the demand for construction services. In addition, in the region where the Group operates construction operations are influenced by seasonality caused by the change of seasons.

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

In the coming years, the Estonian construction market will be heavily dependent on public sector investments. A significant proportion of those investments will be funded with the assistance of the EU structural funds. The availability of EU support is relatively certain until the end of the current budget period (2007-2013). According to financing terms, a supported project has to be completed by the end of the budget period. This means that in 2013 the number of new projects will decrease significantly. We do not yet know the expenditures of the EU financial framework for 2014-2020 that will be designated for investments involving construction work. Although the amounts allocated to Estonia under the cohesion policy programmes have increased, the national priorities in utilising those amounts may have changed. However, the planned investments will have a significant and direct impact on the business volumes of construction companies.

The impacts of seasonality are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, surface works, etc). In order to disperse the risk, the Group has secured road maintenance contracts that generate year-round business. According to its business strategy, the Group counteracts seasonal fluctuations in its infrastructure operations with building construction operations that are less exposed to seasonality. Thus, the Group endeavours to keep the operating volumes of the two segments in balance (see also the chapter Performance by business line). In addition, Group companies consistently seek new technical solutions that would yield greater efficiency under changeable weather conditions. 

Termination of criminal proceedings against Nordecon AS and a member of its board

On 26 September 2012, the Public Prosecutor’s Office issued a ruling by which it terminated the criminal proceedings instituted against Nordecon AS and a member of its management board, Erkki Suurorg, in November 2010.

The criminal matter concerned the first procurement of services for the design and build of the Aruvalla-Kose road section arranged by the Estonian Road Administration. In connection with the procurement, Erkki Suurorg and Nordecon AS (at the time Nordecon Infra AS) were charged with suspicion of attempting to conclude an agreement for distorting competition and to engage in concerted practices, as well as of attempting to offer a bribe which in the course of the proceedings was reclassified to an attempt to grant gratuities.

Criminal proceedings concerning the attempt to grant gratuities were terminated by the Public Prosecutor’s Office already earlier, with a ruling issued on 20 June 2012. In the final ruling, the Public Prosecutor’s Office found, based on evidence gathered, that the suspicions brought against Erkki Suurorg and Nordecon AS had no basis and terminated the criminal proceedings against them in their entirety.


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 the performance of their obligations with a bank guarantee provided to a Group company. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranties provisions based on their historical experience. At 31 December 2012, the Group’s warranties provisions (including current and non-current ones) totalled 1,407 thousand euros. At 31 December 2011, the corresponding figure was 1,192 thousand euros.

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


Financial risks

Credit risk

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

In 2012, credit losses on the write-down of receivables totalled 239 thousand euros (2011: gain on the reversal of prior write-downs totalled 8 thousand euros). 

The Group has recognised a trade receivable of approximately 2.4 million euros (includes a portion of late payment interest) due from the customer of the Exhibition Building of the Estonian Maritime Museum. Under the contract, determination of whether the claim has merit is at the discretion of the Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s management is convinced that the claim has merit and has therefore not written the receivable down. Most probably the case will be ruled upon in 2013.

Liquidity risk

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

The Group continued to work with the banks in implementing its financing program for 2011-2014, which was developed with the assistance of one of the world’s leading consulting firms, Roland Berger Strategy Consultants. In line with the program, in 2012 the banks supported the Group’s liquidity position by refinancing long-term loans and by granting repayment holidays for loan principal. In addition, the banks granted the Group additional short-term overdraft facilities of approximately 6.2 million euros for meeting working capital requirements. The Group repaid the loans received under the financing program by the year-end, which increases the probability that relevant limits will be made available again in 2013.  We will begin negotiating the current year’s financing program with the banks in the first quarter of the year. 

At 31 December 2012, the Group’s current assets exceeded its current liabilities 1.08-fold (31 December 2011: 1.14-fold). Bank loans made up a significant proportion of current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. Although management believes that it is likely that the Group’s overdraft liabilities and other short-term bank loans will be refinanced for another 12 months, relevant decisions will be made in 2013 when the loans fall due. Therefore, at the reporting date the loan commitments constituted short-term liabilities. According to the Group’s estimates, current liabilities include loans of 11,501 thousand euros that will probably be refinanced. If the items were reported as long-term liabilities, the current ratio would be 1.27.

At the reporting date, the Group’s cash and cash equivalents totalled 10,231 thousand euros (31 December 2011: 9,908 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 floating interest rates is mostly Euribor. At 31 December 2012, the Group’s interest-bearing loans and borrowings totalled 30,855 thousand euros, an increase of 2,213 thousand euros year over year. Interest expense for 2012 amounted to 1,097 thousand euros. Compared with 2011, interest expense increased by 104 thousand euros. The Group’s interest rate risk is currently influenced by two factors: a rise in the base rate for floating interest rates (Euribor/EONIA) and a low interest coverage ratio caused by operating cash flow. The first risk factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. Realisation of the second risk factor depends on the success of operating activities.

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

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e. in euros (EUR) and in Ukrainian hryvnas (UAH). From the beginning of 2012 the Group was not exposed to currency risks related to the Belarusian ruble (BYR) because the Group then practically discontinued its operations in Belarus. The exchange rate of the Ukrainian hryvna against the euro has been stable since 2010. In 2012, fluctuations in the euro-hryvna exchange rate remained below 10%. The Group’s net foreign exchange loss for 2012 was 95 thousand euros (2011: a net foreign exchange gain of 168 thousand euros).

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

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


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 2011 was 147.8 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

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

Investor presentation_12m_2012.pdf