22 Aug 2008 12:35
Engel East Europe N.V
Interim results for the 6 months period ended 30 June 2008
Friday 22 August 2008 - Engel East Europe N.V. ('Engel' or 'the Company') the AIM-listed Central and Eastern European property developer (EEE:L), today announces unaudited results for the 6 months period ended 30 June 2008.
Financial summary
| Figures in €'000 | 6 months period ended 30 June 2008 | 6 months period ended 30 June 2007 | Year ended 31 Dec 2007 |
|
| Restated | Restated | |
| Net assets | 45,597 | 48,761 | 44,813 |
| NAV/share (€) | 0.02 | 0.14 | 0.54 |
| Revenues | 8,171 | 6,900 | 16,396 |
| Revaluation of an investment property | 3,040 | - | 2,295 |
| Gross Profit | 4,686 | 1,538 | 3,157 |
| Operating profit/(loss) | 2,579 | 122 | (2,106) |
| Net financing costs | 1,697 | 1,041 | 2,037 |
| Profit (loss) before tax | 886 | (935) | (4,170) |
| Profit (loss) after tax | 218 | (1,196) | (4,763) |
| Earnings (losses) per share (€) | 0.002 | (0.014) | (0.054) |
Sam Salman, Chairman, said:
"Over the next 12 to 16 months, as we accelerate our construction programme and continue to focus on high-end residential and commercial opportunities, we expect to be able to achieve growth in both total profits and net asset values."
Enquiries:
| Engel East Europe N.V. | |
| Sam Salman | Tel: +1 (646) 214 2000 |
| Samuel Hibel | Tel: +972 (9) 970 7004 |
| Libertas Capital Corporate Finance Limited | Tel: +44 (0) 20 7569 9650 |
| Sandy Jamieson | |
| Bankside Consultants | Tel: +44 (0) 20 7367 8888 |
| Simon Bloomfield, Steve Liebmann or Andy Harris |
Overview
During the first half of 2008, the economies of Central and Eastern Europe have on average continued to achieve solid GDP growth and the long-term trend for new properties in the Company's markets remains strong.
However, following the global impact of the credit crunch, local banks have restricted their construction lending and the availability of mortgage finance has slowed down. This has had a negative impact on the overall pace of commercial and residential property development in the region, particularly in Poland and Romania. In Bulgaria, the failure of the economy to meet EU targets has caused both multilateral agencies and investors to re-allocate their funds to other countries.
Nevertheless, we continue to see opportunities to generate attractive returns for shareholders. For example, in Serbia, where there is a pro-business government and we have Marina Dorcol, a substantial mixed-use project in Belgrade, a strong flow of capital into the economy continues. Similarly, in the Czech Republic, where we have a number of projects with our joint venture partner, Heitman, investor confidence remains high.
During the 6 months period ended 30 June 2008, we increased revenues by 18 per cent comparing the same period in 2007, mainly reflecting sales of units completed in Hungary. The gross margin was increased from 22 per cent to 26 per cent. Additionally, there was a €3 million increase in fair value of investment properties for the period, mainly attributable to Wilanow II commercial and retail development in Warsaw announced on 18 March 2008. Profit before tax for the period was €0.9 million compared to a loss of €0.9 million for the same period in 2007.
As announced on 18 March 2008, during the period we completed a comprehensive strategic, business and financial review of the Company and the management team is actively seeking to resolve the remaining legacy issues. The essential part is the decision to sell the Company's assets in Canada which have a book value of approximately Can $16 million (the company's share in this value is 20 per cent). Whilst the litigation relating to the Company's assets in Canada announced on 11 April 2008 continues, it is not possible to determine when, and at what price, the disposal of the entire portfolio might proceed.
A key priority is to ensure that we are focusing management and financial resources on projects that will generate attractive returns for shareholders. As announced on 23 July 2008, we decided not to proceed with the Gorna Banya project to develop 430 residential units in Sofia, Bulgaria. The process of reviewing the prospects of all our projects is a continuous one and may a result in further decisions not to proceed.
The company estimates that during 2008 about 800 units will be taken to profit, of which 170 were taken during the 6 months period ended 30 June 2008. The company estimates that during 2009 about 640 units will be taken to profit.
Outlook
Over the next 12 to 18 months, as we accelerate our construction programme and continue to focus on high-end residential and commercial opportunities, we expect to be able to achieve growth in both total profits and net asset values.
Financial commentary
As announced on 8 May 2008, following a review of the accounting policies relating to joint ventures, revenues for 2007 and 2006 and been adjusted to correct the over-statement of revenues for those years.
Total revenues for the 6 months period ended 30 June 2008 was €8.2 million, 19 per cent increase on the €6.9 million in the same period in 2007. This mainly reflected the sale of 166 units of the Sun Palace project with Heitman, in Budapest, Hungary, during the period.
The gross profit for the period was €4.7 million which result from:
€2.1 million from selling of housing units (26 per cent gross margin), compared to €1.5 million (22 per cent) for the same period in 2007;
€3.0 million increase in fair value of investment property, of which €2.6 million related to Wilanow II commercial and retail development in Warsaw; and
€0.4 million loss from write-down of inventory.
The total write-down of inventory for the 6 months period ended 30 June 2008 was €0.4 million, which resulted from the ending of negotiations in respect of the MOU announced on 21 June 2007, for a project in Romania (approximately €0.2 million), and the announcement on 23 July 2008 of the decision not to proceed with the Gorna Banya project in Sofia, Bulgaria (approximately €0.2 million).
Selling, general and administrative expenses for the period were €2.1 million compared to €1.4 million for the same period in 2007. The increase is mainly due to a provision of €0.3 million regarding the legal claim in Hungary and an increase of €0.3 million in the advertising and professional services expenses compared to the same period in 2007. This increase resulted from the progress in the maturity of some of company's projects.
Operating profit, including the increase in fair value in investment property, was €2.6 million compared to €0.1 million for the same period in 2007.
Net financing costs of €1.7 million for the period compared to €1 million for the same period in 2007, reflect an increase in bank borrowing to fund the purchase of the Wilanow II project, the investment in the Marina project in Belgrade and the construction of certain projects mainly in the Czech Republic and Hungary.
Profit before tax for the period was €0.8 million compared to a €0.9 million loss for the same period of 2007.
Inventories at 30 June 2008 were €85.1 million, up from €60.1 million at 30 June 2007 and €71.1 million at 31 December 2007. This followed construction of units at the Gyor project (with Heitman) in Budapest, Hungary, Zar Boris project in Sofia, Bulgaria, and Safranka and Vokovice projects (with Heitman) in Prague, Czech Republic.
Net bank debt (liabilities to the banks offset by restricted bank deposits and cash in escrow) was €46 million at 30 June 2008 compared to €32 million at 31 December 2007.
UNAUDITED CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE 6 MONTHS PERIOD ENDED 30 JUNE 2008
| For the six months period ended 30 June | For the year ended 31 December | ||
| 2008
| 2007 Restated | 2007 Restated | |
| Thousands Euro | |||
| Revenues | 8,171 | 6,900 | 16,396 |
| Change in fair value of investment property | 3,040 | - | 2,295 |
| Write down of inventory | (441) | - | (3,858) |
| Cost of revenues | (6,084) | (5,362) | (11,676) |
| Gross profit | 4,686 | 1,538 | 3,157 |
| Selling, general and administrative expenses | (2,107) | (1,416) | (5,263) |
| Operating profit (loss) | 2,579 | 122 | (2,106) |
| Foreign exchange gains | 483 | 574 | (1,489) |
| Financial income | 413 | 393 | 2,761 |
| Financial expenses | (2,593) | (2,008) | (3,309) |
| Net finance expenses | (1,697) | (1,041) | (2,037) |
| Share in profit (loss) of associate | 4 | (16) | (27) |
| Profit (loss) before tax | 886 | (935) | (4,170) |
| Income taxes | 668 | 261 | 593 |
| Profit (loss) for the period | 218 | (1,196) | (4,763) |
UNAUDITED CONSOLIDATED BALANCE SHEET
AT 30 JUNE 2008
| 30 June | 30 June | 31 December | |
|
| 2008 | 2007 Restated | 2007 Restated |
| Thousands Euro | |||
| ASSETS | |||
| Current assets | |||
| Cash and cash equivalents | 9,268 | 12,560 | 11,030 |
| Restricted bank deposits and cash in escrow | 10,724 | 14,044 | 12,287 |
| Trade accounts receivable | 1,436 | 1,821 | 1,117 |
| Prepayments and other accounts | 5,368 | 3,799 | 2,998 |
| Loans to related parties and other | 6,433 | 3,405 | 8,064 |
| Inventories of housing units | 85,116 | 60,119 | 71,120 |
| Total current assets | 118,345 | 95,748 | 106,616 |
| Non-current assets | |||
| Investment property | 37,207 | 23,792 | 27,936 |
| Property and equipment | 245 | 387 | 414 |
| Deferred tax assets | 1,639 | 1,301 | 1,425 |
| Investment in associate | 28 | 39 | 24 |
| Total non-current assets | 39,119 | 25,519 | 29,799 |
| Total assets | 157,464 | 121,267 | 136,415 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||
| Current liabilities | |||
| Interest-bearing loans from banks | 57,002 | 23,647 | 43,979 |
| Current portion of finance lease liability | 715 | 5,513 | 1,634 |
| Loans and amounts due to related parties and other | 5,354 | 7,601 | 4,749 |
| Trade accounts payable | 8,972 | 6,531 | 7,204 |
| Other liabilities | 20,195 | 13,046 | 16,603 |
| Provisions | 1,383 | - | 1,079 |
| Income tax payable | 740 | 320 | 335 |
| Total current liabilities | 94,361 | 56,658 | 75,583 |
| Non-current liabilities | |||
| Finance lease liability | 15,902 | 14,064 | 14,549 |
| Deferred tax liabilities | 1,604 | 1,784 | 1,470 |
| Total non-current liabilities | 17,506 | 15,848 | 16,019 |
| Equity | |||
| Share capital | 878 | 878 | 878 |
| Share premium | 39,298 | 39,298 | 39,298 |
| Capital reserves | (229) | (322) | (328) |
| Retained earnings | 4,860 | 8,200 | 4,579 |
| Accumulated translation adjustment | 616 | 524 | 149 |
| Equity attributable to equity holders of the parent | 45,423 | 45,578 | 44,576 |
| Minority interest | 174 | 183 | 237 |
| Total equity | 45,597 | 48,761 | 44,813 |
| Total liabilities and equity | 157,464 | 121,267 | 136,415 |
UNAUDITED CONSOLIDATED CASH FLOW STATEMENT
FOR THE 6 MONTHS ENDED 30 JUNE 2008
| For the six months period ended 30 June | |||
|
| 2008 | 2007 | |
| Thousands Euro | |||
| Cash flows from operating activities |
|
| |
| Net profit (loss) for the period | 218 | (1,196) | |
| Adjustments for: | |||
| Depreciation | 62 | 50 | |
| Gain from sale of fixed assets | (10) | - | |
| Net finance expenses | 1,697 | 1,041 | |
| Income taxes | 668 | 261 | |
| Company's share of losses (profits) of associate | (4) | 16 | |
| Gain from sale of subsidiaries | - | (53) | |
| Share based payment | 99 | 4 | |
| Change in fair value of investment property | (3,040) | - | |
| Write-down of inventory | 441 | - | |
| Increase in inventory | (15,031) | (14,572) | |
| Increase in trade accounts receivable | (307) | (627) | |
| Increase in other accounts receivable | (2,690) | (1,958) | |
| Increase in trade accounts payable | 1,693 | 3,966 | |
| Increase in other accounts payable | 5,840 | 1,298 | |
| Cash from (used in) operations: | |||
| Interest received | 254 | 341 | |
| Interest paid | (873) | (241) | |
| Income taxes paid | (685) | (541) | |
| Net cash used in operating activities | (11,668) | (12,211) | |
| Cash flows from investing activities | |||
| Acquisition of property and equipment | - | (98) | |
| Proceeds from selling fixed assets | 117 | - | |
| Disposal of subsidiaries | - | 4,472 | |
| Acquisition of investment property | (4,356) | - | |
| Short term loans granted to related parties and other | (931) | (1,142) | |
| Short term loans repaid by related parties and other | 2,673 | 93 | |
| Restricted cash | 1,691 | (7,491) | |
| Net cash used in investing activities | (806) | (4,166) | |
|
| |||
| Cash flows from financing activities | |||
| Short term loans received from banks | 18,998 | 13,908 | |
| Short term loans repaid to banks | (8,388) | (786) | |
| Short term loans received from related parties | 1,202 | 2,013 | |
| Short term loans repaid to related parties | (139) | (3,089) | |
| Payment of finance lease liability | (1,075) | (125) | |
| Net cash from financing activities | 10,598 | 11,921 | |
| Net decrease in cash and cash equivalents | (1,876) | (4,456) | |
| Effect of exchange rate fluctuations on cash held | 114 | 239 | |
| Cash and cash equivalents at 1 January | 11,030 | 16,777 | |
| Cash and cash equivalents at 30 June | 9,268 | 12,560 | |
Notes
The Company has also reclassified deferred tax assets and liabilities in the amount of EUR 1,425 thousands and EUR 1,301 thousands in 31 December 2007 and 30 June 2007, respectively.
Additional information:
| 31 December 2007 | ||
| As reported | As restated | |
|
| Thousands Euro | |
| Total current assets | 110,863 | 106,616 |
| Total non-current assets | 28,374 | 29,799 |
| Total current liabilities | (77,507) | (75,583) |
| Total non-current liabilities | (14,689) | (16,019) |
| Share capital | (878) | (878) |
| Share premium | (39,298) | (39,298) |
| Capital reserves | 328 | 328 |
| Retained earnings | (6,745) | (4,579) |
| Accumulated translation adjustment | (211) | (149) |
| Minority interest | (237) | (237) |
| 30 June 2007 | ||
| As reported | As restated | |
|
| Thousands Euro | |
| Total current assets | 99,508 | 95,748 |
| Total non-current assets | 24,218 | 25,519 |
| Total current liabilities | (57,992) | (56,658) |
| Total non-current liabilities | (14,676) | (15,848) |
| Share capital | (878) | (878) |
| Share premium | (39,298) | (39,298) |
| Capital reserves | 322 | 322 |
| Retained earnings | (10,451) | (8,200) |
| Accumulated translation adjustment | (570) | (524) |
| Minority interest | (183) | (183) |
| For the six month period ended 30 June 2007 | ||
| As reported | As restated | |
| Thousands Euro | ||
| Revenues | 7,292 | 6,900 |
| Cost of revenues | (5,205) | (5,362) |
| Selling, general and administrative expenses | (1,738) | (1,416) |
| Finance expenses | (998) | (1,041) |
| Income tax expenses | 300 | 261 |
| Basic and diluted losses per share (Euro) | (0.011) | (0.014) |
4. Segment reporting
| For the six month period ended 30 June | ||||||
| Residential | Commercial | Consolidated | ||||
| 2008
| 2007 Restated | 2008
| 2007 Restated | 2008
| 2007 Restated | |
| Thousands Euro | ||||||
| Segment revenues | 8,167 | 6,900 | 3,044 | - | 11,211 | 6,900 |
| Segment results | (438) | 122 | 3,017 | - | 2,579 | 122 |
5. Income tax expense
The Group's consolidated effective tax rate in respect of continuing operations for the six month period ended 30 June 2008 was 78% (for the period ended 30 June 2007: -28%).
The change in effective tax rate was caused mainly by the following factors:
Taxes for previous years.
The change in fair value of investment property which carry tax rate of 19%.
Non - deductable expenses related to share option programme (see note 10).
Unrecognised deferred tax assets for carry forward tax losses which the company believes could not be utilized.
6. Significant acquisitions and transactions
1. On February 2008, the Company through its subsidiary purchased 41,387 sqm of land in Wilanow district of Warsaw, Poland. The Group intends to develop the site, which is located close to the Wistula River and Wilanow Palace gardens, into a commercial centre and optional residential units. The total purchase price of the site was approximately EUR 4.5 million. Construction work, subject to all the necessary planning approvals, is likely to begin in the next 24 months, with completion expected within four years. The Company classified the asset as investment property. As a result the Company recorded the difference between carrying amount of the investment property and its fair value as of June 30 2008, amounting to approximately EUR 2,650 thousands as a gain at the statement of profit and loss. 2. The Company sold 2 vehicles to its former Chairman and CEO for a total consideration of EUR 116 thousands. 3. On 23 July 2008 the Company decided not to proceed with the Gorna Banya project to develop 430 residential units in Sofia, Bulgaria (the "Project"). The Company holds a 40% interest in the Project through a joint venture. The Company's share of the costs incurred by the Project to date is approximately EUR 182 thousands which is written off in 2008. 4. On 5 May 2008 a subsidiary in which the Company holds 95% interest signed a revised lease agreement with the municipality of Belgrade for a 99-year lease on approximately 4.07 hectares of land in Marina Dorcol. The above mentioned agreement replaces two previously signed agreements on approximately 2.57 and 1.5 hectares of land. 5. Following note 30.q. in the annual financial statements, the Company reclassified the Gym and Pool in Sun Palace project, Hungary, from inventory to investment property due to commencement of long term operating lease to third party. As a result the Company recorded the difference between carrying amount of the investment property and its fair value as of June 30 2008, amounting to approximately EUR 390 thousands as a gain at the statement of profit and loss. 6. Following note 35.a. in the annual financial statements, the Company has decided to update the provision regarding the legal claim filed against Engel Sun Palace Kft, a 100% owned subsidiary of Arces, a 50% jointly controlled entity, in amount of approximately EUR 265 thousands (the company part) as an expense at the statement of profit and loss under "Selling, general and administrative expenses". 7. Due to the announcement of the Company to discontinue negotiations in respect of the MOU announced on 24 July 2006, for a project in Romania, the Company written off in 2008 approximately EUR 259 thousands.
7. Subsequent event
On 12 August 2008 the Chief Executive Officer (CEO) of the Company resigned his position as director and CEO. The resignation was approved by the board of directors on 13 August 2008. The board of directors has also decided that the Chief Financial Officer (CFO), will assume the position of CEO for a period of at least 4 months while the board completes a process of selecting the new CEO. According to the resignation agreement, the CEO waived his rights for share options mentioned in note 10.