Report
Shana Gavron

LHV Institutional Baltic Insight, February 14th, 2020

* Merko Ehitus’ (MRK1T ET) Q4 2019 results, published on 13 February 2020, are notably better than our expectations. Although the company recorded a significant decline in revenue, the improvement in profitability positively surprised us.
* The improvement in profitability was primarily a result of two factors, i.e. better selection of construction projects and higher contribution in the total revenues from the real estate development segment which has better profitability compared to the construction services segment.
* Although it is commendable that despite the prevailing competition situation between the main contractors and increasing construction input prices, Merko has been able to improve its profitability margins, declining order book remains a key concern. Fierce competition for larger contracts, accompanied by rising construction input prices, especially in Latvia and Lithuania, may continue to be the key risks. The availability of resources is likely to remain tight, especially in Latvia and Lithuania, which may lead to delays in construction schedules. Our fair value range for the company is EUR 8.70-9.20 (closing price as of 13 February 2020: EUR 10.20). Please also refer to the tables in the attachment.
Underlying
Merko Ehitus (New)

Merko Construction Ltd. Merko Ehitus AS is an Estonia-based holding company engaged in the construction industry sector. Through its subisidaries the Company focuses on construction of buildings, facilities and roads. In addition, it is also engaged in the real estate sector, which is based on the Company's own real estate development, including construction and sale, as well as maintenance and leasing of real estate. Merko Ehitus AS is active domestically and abroad in Latvia and Lithuania. The Company operates through 35 subsidiaries, five associates and joint ventures, such as SIA Merks, UAB Merko Statyba, AS Merko Infra, Tallinna Teede As and AS Gustaf, among others.

Provider
LHV PANK
LHV PANK

LHV Bank is an independent pan-Baltic bank, based on Estonian capital. The company was founded in 1999 by two founders of Hansapank (today’s Swedbank in the Baltics) and has been offering a full range of investment services for 15 years. In May 2009, LHV received a credit institution licence allowing it to provide all banking services.

The head office is situated in Tallinn, Estonia. Cross-border services are offered in Vilnius, Lithuania and in Riga, Latvia. LHV provides brokerage (institutional and retail), asset management, banking and capital markets services. Compared to other banks, we are more innovative and have more solid experience in investment and entrepreneurship.

The Bank, together with the Group asset management company employs over 320 people. LHV Group shares are listed on Nasdaq Tallinn.

Analysts
Shana Gavron

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