LHV Institutional 'Merko Ehitus (MRK1T ET) Annual Review, July 30th, 2020'

* AS Merko Ehitus (hereinafter referred to as the ‘Company’; jointly with its subsidiaries ‘Merko’ or the ‘Group’), formed in 1990, is one of the leading construction groups in the Baltics. Merko offers a wide scope of construction services in all the main segments, including general construction, civil engineering, road construction, and real estate development in the Baltic states. Overall, we expect that total revenues in 2020 will decline by about 24% y-o-y to EUR 247m while in 2021 we assume that it will remain at a similar level as in 2020. During 2022-24, we forecast revenues to grow in a 6-18% y-o-y range. However, if the COVID-19 pandemic worsens, the negative surprises cannot be ruled out.
* Triggers for an upwards tilt in the share price include: quicker than expected recovery from the COVID-19 pandemic; higher demand for housing; increased public and private sector investments in construction, leading to higher than expected revenues; and declines in construction input prices, especially labour costs. Key risks for our fair value range include: lower than expected growth in the secured order book; an extended sales period for the Group’s own apartments; a further rise in construction input prices; deteriorating economic conditions; and a shortage of labour and/or construction materials, leading to delays in construction.
* To derive our fair value range of EUR 8.20-9.10, a weight of 90% was assigned to the discounted cash flow (‘DCF’) valuation and of 10% to the relative valuation, divided equally between the values based on EV/EBITDA and P/E multiples. Based on our own five-year projections, alongside WACC and terminal growth rate assumptions of 9.2% and 2.5% respectively, the intrinsic value per share of Merko, using the DCF method, is EUR 8.98, which is 0.3% lower than the share price of EUR 9.00, as on 17th July 2020. This report contains a full set of financial forecasts and is useful for gaining an initial insight into the company. Please also refer to the tables and charts in the attachment.