* Net debt decreased by EUR 25.7m in Q4
* Net debt significantly reduced, while net working capital is at EUR 93m
* We increase our target price to EUR 7.2 (EUR 6.5) and upgrade our recommen- dation to Buy (Neutral)
Swedbank quick comment: Merko Ehitus results
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Merko Ehitus released a good set of Q4 figures on February 14, with EBITDA grow- ing to EUR 5.1m and net profit growing to EUR 4.4m. Both of these figures were more than double our estimates. 2012 EBITDA was affected by nearly EUR 6m in write-downs. Cash collection was impressive –Merko increased its cash position by EUR 20m, while simultaneously reducing its total debt by EUR 6m. Consequently, the net debt of EUR 0.2m at the end of Q4 was the lowest in almost three years.
Revenue growth was mostly supported by the group’s real estate development seg- ment, as the company completed a residential building in Riga with 115 apartments. Merko was able to sell almost 70 of these apartments during the quarter.
The segment’s Q4 pre-tax profit rose to EUR 1.8m, which represents 54% of the 2012 total of EUR 3.4m.The facilities segment, which mostly includes infrastructure projects, generated the largest portion of Merko’s pre-tax profit. While the segment’s revenues declined by 36% y/y to EUR 27.2m, its pre-tax profit rose y/y from EUR 2.4m to EUR 3.1m.
A large part of the segment consists of sewerage pipelines construction projects. The group signed EUR 49m worth of new contracts in Q4. Of this amount, three water supply and sewerage pipelines contracts represented EUR 29m.The buildings seg- ment contributed EUR 1.8m to the group’s pre-tax profit. While the segment in- creased revenues by 29% y/y in Q4, its revenues for the year decreased by 10% y/y. However, the segment’s profitability has improved, resulting in its pre-tax profit re- maining at EUR 5m. The roads segment contributed EUR 0.5m to group profit in Q4.
The group decreased its receivables by EUR 23m in Q4. It did so by collecting cash for completed work and by reducing given out loans. Its net working capital is still EUR 93m, which should create opportunities in the future, in our view. We have therefore increased our cash-generation expectations for the group, as we expect Merko to reduce its inventory from EUR 83m and its receivables from EUR 60m.
As a result, we increase 2013e revenues to EUR 281m, supported by the growth in the group’s order backlog to EUR 190m from EUR 167m in Q4 2011. In addition, the val- ue of signed contracts grew by 47% y/y, to EUR 247m, in 2012. We expect the EBITDA margin to increase from 4% to 4.5% in 2013. Merko is trading at 2013e P/B of 0.9x and a 2013e P/E of 11.3x.
We raise our target price to EUR 7.2 (EUR 6.5) and our recommendation to Buy (Neutral) as the company’s cash collection is improving and valuation is still moderate, in our view.
Recommendation: Buy
Target Price: EUR 7.20
Share price: EUR 6.45