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MANAGEMENT REPORT

Chairman’s summary

The year 2018 has been significant for Pro Kapital, with respect to reaching important milestones in the operations which in turn is demonstrated by financial performance of the Company. We have shown stable growth through our business and continue to focus on improving our results.

Pro Kapital aims to strengthen its position as one of the largest and strongest real-estate companies in the Baltics, with more than ever emphasis on all aspects of the business. I’m especially glad to highlight that in the fourth quarter of 2018, Pro Kapital opened a one of a kind shopping and entertainment centre T1 Mall of Tallinn, right at the heart of the future transportation centre of Tallinn. This new landmark will continue to grow and is expected to welcome a unique ferris wheel to be installed on the roof of the mall in early spring of 2019.

As of 19 November 2018, the Company’s shares are traded on the Nasdaq Tallinn Stock Exchange Main List. We are more than ever dedicated in building new communities and aspire sharing our story with investors as equally as with the public.

Building new communities

Our business is not merely about building houses but establishing entire communities and improving the living environment. The Company has nearly 25 years of experience identifying upcoming opportunities and thereby add new value to the areas of development. One of the most significant ongoing developments in Tallinn, the Kristiine City area, allows to expect increase in real-estate price in the entire surrounding area. We develop in multiple phases and have completed six of ten Kristina Houses, in one of the ongoing phases of the whole area. We have sold 155 new homes in five apartment buildings and completed the sixth building in December 2018 with 8 flats yet to be sold. Development of the following four Kristina Houses is currently ongoing. With active presale being carried out simultaneously to construction works, altogether 43 apartments have been presold.

Pro Kapital is in progress with projecting works for a prestigious Kalaranna residential and commercial area, right at the border of Tallinn’s old town. Kalaranna’s unique location just by the bay of Tallinn is making it as one of the most exclusive development projects in town. As a result of increasing interest towards the project, we have started with initial reservations in July 2018. Although we have not yet started the construction nor advertising, we have, to date, made 76 reservations to residential premises in Kalaranna.

In Riga, we are building Kliversala residential area which is a true sight to see in the city centre. The new living area is located right on the bank of the Daugava river on the shore of Agenskalna bay. We finished the construction works of the prestigious River Breeze Residence in spring 2018. We are currently proceeding with the sales of remaining 37 luxury apartments in the residence. Following the completion and ongoing sale of River Breeze Residence, we’re proceeding with the following phase of Kliversala, but also other development projects. Tallinas residential quarter is a modern combination of new and restored historical buildings, for which the projecting works are ongoing. Another new area development Zvaigznes Quarter, for which the projecting is ongoing at this point in time, represents a commercial property for an office complex and be built on the site of a former factory.

In Vilnius, Pro Kapital is developing a Šaltinių Namai area, bordering with and offering a stunning view from the top-hill to the historic old town. The first phase of yhe development is completed and almost sold out. In 2017 the construction works for the second stage of residential buildings, Šaltinių Namai Attico, started and 77 preliminary agreements have been already signed. Four buildings of Šaltinių Namai Attico development are expected to be completed in the middle of 2019. The Company is looking into obtaining new attractive developments in the region, to start new projects after the completion of Šaltinių Namai.

Continuous improvement in the financial results 

The completion of multiple development phases, that have proven to attract the market’s interest, is clearly demonstrated by good financial results for the reporting period. At the end of 2018, the Company recorded net revenue of 28 million euros, an increase of 99% as compared to 14.1 million euros during the same period in 2017. Revenues have increased in real estate segment due to completion of 4 apartment buildings in Tallinn and 1 in Riga as the revenues are recorded at the moment notary deed of sale is concluded. The net profit was 18 million euros, which was 18.5 million euros improvement comparing to 0.5 million euros loss during the same period in 2017. The net result was significantly influenced by increased value of investment property due to completion and opening of T1 Mall of Tallinn.
We are continuously focused on improving the efficiency. The Company is exploring opportunities to reduce financial costs by refinancing current debt instruments. We foresee stable growth in revenues and operating results during the upcoming periods.

As at the end of 2018, the Company’s overall loans from financial institutions were 83.3 million euros. The loans from the minority shareholders were 0.3 million euros. The Company had 10.2 million euros worth convertible bonds debt and 28.5 million euros worth non-convertible bonds debt.

As at 31 December 2018, there were 89 employees working in the Company, 40 of them were employed by the hotel and property maintenance business.

Paolo Michelozzi
CEO

Key financials

The total revenue of the Company in 2018 was 28.0 million euros, which is an increase of 99% compared to 12.1 million euros from continuing operations and 14.1 million euros including discontinued operations during the same period in 2017. The total revenue of the fourth quarter of 2018 was 6.9 million euros compared to 4.3 million euros during the same period of 2017. The real estate sales revenues are recorded at the moment of handing over the premises to the buyer. Therefore, the revenues from sales of real estate of the Company depend on the completion of the residential developments. The improvement of the results of 2018 was influenced by the completion of the 4th, 5th and 6th apartment buildings in the Kristina Houses development in Tallinn, renovation works of Marsi 6 in Tallinn and River Breeze Residence in Riga, as presales realized in notarised sales transactions.
The gross profit of 2018 was 9.6 million euros, which is an increase of 78% compared to 4.6 million euros for continuing operations and 5.4 million euros including discontinued operations during the same period in 2017. The gross profit of the fourth quarter of 2018 was 2.7 million euros compared to 2.1 million euros during the same period in 2017.
The operating result of 2018 increased by 19.1 million euros, totalling to the operating profit of 21.5 million euros compared to profit of 1.8 million euros for continuing operations and profit of 2.4 million euros including discontinued operations during 12 months of 2017. The operating profit of the fourth quarter in 2018 was 16.7 million euros comparing to 1.2 million euros profit during the same period in 2017. Operating result includes profit from revaluation of investment properties. Total impact from revaluation in 2018 is 18.0 million euros (Note 7).
The net result of 2018 increased by 18.5 million euros, totalling to positive result of 18.0 million euros compared to the loss of 1.0 million euros for continuing operations and loss of 0.5 million euros including discontinued operations during 12 months of 2017. The net profit of the fourth quarter in 2018 was 15.8 million euros compared to 0.9 million euros profit during the same period in 2017.
Cash used in operating activities was -1.0 million euros in 2018 compared to -5.3 million euros during 2017.  In the fourth quarter of 2018 cash used in operating activities was -4.5 million euros comparing to -2.2 million euros during same period in 2017.
Net assets per share on 31 December 2018 totalled to 1.80 euros compared to 1.46 euros on 31 December 2017.

  Continuing operations Continuing and
discontinued operations
in thousands of euros 2018 12M 2017 12M adjusted 2018 Q4 2017 Q4 2018 12M 2017 12M
 adjusted
             
Revenue 27 991 12 077 6 948 4 281 27 991 14 098
Gross profit 9 576 4 561 2 684 2 056 9 576 5 380
Gross profit, % 34% 38% 39% 48% 34% 38%
Operating result 21 467 1 797 16 688 1 155 21 467 2 385
Operating result, % 77% 15% 240% 27% 77% 17%
Net result 18 040 -953 15 761 922 18 040 -518
Net result, % 64% -8% 227% 22% 64% -4%
Earnings per share, EUR  

0,30
 

-0,02
0,26  

0,02
 

0,30
 

-0,01

2017 12M adjusted - comparative information from the annual audited report 2017.

in thousands of euros 31.12.2018 31.12.2017
     
Total Assets, th EUR 245 105 175 158
Total Liabilities, th EUR 144 383 92 476
Total Equity, th EUR 100 722 82 682
Debt / Equity * 1,43 1,12
     
Return on Assets, % ** 8,6% -0,3%
Return on Equity, % *** 19,7% -0,6%
Net asset value per share, EUR **** 1,78 1,46


   *debt / equity = total debt / total equity
   **return on assets = net profit/loss / total average assets
   ***return on equity = net profit/loss / total average equity
   ****net asset value per share = net equity / number of shares



CONSOLIDATED FINANCIAL STATEMENTS

Consolidated interim statement of financial position

in thousands of euros 31.12.2018 31.12.2017
ASSETS    
Current assets    
  Cash and cash equivalents 7 040 10 317
  Current receivables 2 937 4 888
  Inventories 59 331 38 024
Total current assets 69 308 53 229
Non-current assets    
  Non-current receivables 216 37
  Property, plant and equipment 7 128 7 435
  Investment property  168 129 114 140
  Intangible assets 324 317
Total non-current assets 175 797 121 929
TOTAL ASSETS 245 105 175 158
     
LIABILITIES AND EQUITY    
Current liabilities    
  Current debt  10 328 6 738
  Customer advances 5 716 7 224
  Current payables 11 939 10 091
  Tax liabilities 357 132
  Short-term provisions 852 170
Total current liabilities 29 192 24 355
Non-current liabilities    
  Long-term debt  112 009 62 527
  Other non-current payables 1 039 3 437
  Deferred income tax liabilities 2 004 2 058
  Long-term provisions 139 99
Total non-current liabilities 115 191 68 121
TOTAL LIABILITIES 144 383 92 476
     
Equity attributable to owners of the Company    
  Share capital in nominal value 11 338 11 338
  Share premium 5 661 5 661
  Statutory reserve 1 082 1 082
  Revaluation reserve 3 262 3 256
  Retained earnings 59 944 60 369
  Profit/ Loss for the period 16 811 -419
Total equity attributable to owners of the Company 98 098 81 287
Non-controlling interest 2 624 1 395
TOTAL EQUITY 100 722 82 682
     
TOTAL LIABILITIES AND EQUITY 245 105 175 158



Consolidated interim statements of comprehensive income

in thousands of euros 2018 12M 2017 12M adjusted 2018 Q4  2017 Q4
CONTINUING OPERATIONS        
Operating income        
Revenue 27 991 12 077 6 948 4 281
Cost of goods sold -18 415 -7 516 -4 264 -2 210
Gross profit 9 576 4 561 2 684 2 071
         
Marketing expenses -1 336 -822 -630 -186
Administrative expenses -5 427 -5 256 -1 390 -1 478
Other income 18 823 4 114 16 144 748
Other expenses -169 -800 -120 0
Operating profit 21 467 1 797 16 688 1 155
         
Financial income 4 6 1 3
Financial expense -3 473 -3 352 -925 -817
Profit/ loss before income tax 17 998 -1 549 15 764 341
Income tax 42 596 -3 582
Profit/ loss from continuing operations 18 040 -953 15 761 923
         
Profit from discontinued operations 0 435 0 0
Profit/ loss for the period 18 040 -518 15 761 923
         
Attributable to:        
Equity holders of the parent 16 811 -419 14 491 955
Non-controlling interest 1 229 -99 1 270 -32
         
Other comprehensive income,
net of income tax
       
Income that will not be reclassified
subsequently to profit
       
Net change
in properties revaluation reserve
0 -4 0 3
Total comprehensive income
for the year
18 040 -522 15 761 926
Attributable to:        
Equity holders of the parent 16 811 -419 14 491 955
Non-controlling interest 1 229 -99 1 270 -32
         
Earnings per share
from continuing operations (EUR)
0.30 -0.02 0.26 0.02
Earnings per share for the period (EUR) 0.30 -0.01 0.26 0.02



Consolidated interim statements of cash flows

in thousands of euros 2018 12M 2017 12M
adjusted
2018 Q4  2017 Q4
Cash flows from operating activities        
Profit/loss for the period 18 040 -518 15 762 923
Adjustments for:        
  Depreciation, amortisation of non-current assets  214 455 56 -20
  Gain from disposal of property, plant, equipment -4 -3 045 0 0
  Gain from disposal of investment property -418 0 0 0
  Change in fair value of property, plant, equipment -13 -26 -13 -26
  Change in fair value of investment property  -17 979 -530 -16 069 -530
  Loss from disposal of shares of subsidiaries 0 346 0 0
  Finance income and costs 3 468 3 460 923 815
  Other non-monetary changes (net amounts) 15 345 12 410 -1 428 -683
Changes in working capital:        
  Trade receivables and prepayments 1 773 -408 931 -833
  Inventories -21 248 -23 880 -2 611 -4 221
  Liabilities and prepayments -119 6 556 -1 420 2 367
  Provisions -107 -101 -609 23
Net cash used in operating activities -1 048 -5 281 -4 478 -2 186
         
Cash flows from investing activities        
Payments for property, plant and equipment -206 -281 -40 -127
Payments for intangible assets -24 -52 -17 -22
Proceeds from disposal of property, plant, equipment 336 6 651 0 0
Payments for investment property -47 786 -24 772 -16 702 -7 424
Proceeds from disposal of investment property 1 000 0 1 000 0
Net cash from disposal of shares of subsidiaries 0 6 249 0 0
Interests received 4 6 1 2
Net cash used in by investing activities -46 676 -12 199 -15 758 -7 571
         
Cash flows from financing activities        
Proceeds from increase of share capital 0 4 328 0 4 328
Dividend payment -850 0 0 0
Net changes related to non-controlling interests 0 -480 0 0
Proceeds from bonds 0 1 446 0 0
Redemption of convertible bonds -649 -773 -6 0
Proceeds from borrowings 56 923 28 260 23 449 8 984
Repayment of borrowings -7 496 -7 048 -1 987 -909
Interests paid -3 481 -3 318 -1 259 -1 122
Net cash generated by financing activities 44 447 22 415 20 197 11 281
         
Net change in cash and cash equivalents -3 277 4 935 -39 1 524
Cash and cash equivalents at the beginning of the period 10 317 5 382 7 079 8 793
Cash and cash equivalents at the end of the period 7 040 10 317 7 040 10 317


2017 12M adjusted - comparative information from the annual audited report 2017.

Full report is in the file attached.

Allan Remmelkoor
Member of the Board
+372 614 4920
[email protected]

Attachment

Pro Kapital Grupp is one of the leading Estonian real estate developer focussing on contemporary large-scale commercial and residential property developments in the capitals of Estonia, Latvia and Lithuania.

Since its establishment in 1994, Pro Kapital has completed about 20 projects with the total surface area for sale extending over 190,000 square meters. Pro Kapital projects have been among the most remarkable developments in the Baltic real estate sector.

Every day more than 50,000 people wake up, work, shop or dine in buildings constructed by Pro Kapital.