2026 6 months and II quarter consolidated unaudited interim report

Merko Ehitus reported Q2 2026 revenue of EUR 92.7m (up from EUR 82.6m) but profitability weakened: Q2 pre-tax profit fell to EUR 9.1m (from EUR 11.9m) and 6M pre-tax profit declined to EUR 10.8m vs EUR 23.5m in 6M 2025, shrinking the pre-tax margin to 7.2% (from 14.0%). The secured order book hit an all-time high of EUR 835.7m (up from EUR 443.8m) with 6M contract signings of EUR 486.4m, while net debt increased to EUR 29.6m from net cash previously. Management flagged no easing of construction input price pressures and noted higher price sensitivity among customers.

Analysis

The key market signal is not the backlog headline; it is the spread between revenue visibility and earnings quality. A record order book helps de-risk top-line for the next few quarters, but the mix is shifting toward large public/infrastructure jobs that are typically lower-margin, slower-turning, and working-capital intensive, so incremental revenue may translate into less incremental EBITDA than investors assume. The rise in net debt alongside higher inventories suggests the balance sheet is absorbing the growth before cash does, which matters if Baltic rates stay sticky.

The development book is the softer part of the story. High presale coverage is good enough to prevent an inventory overhang, but not strong enough to support aggressive re-rating if end-demand stays price-sensitive and apartment launches keep gravitating toward lower-ticket units; that usually compresses gross margin first, then slows land acquisition and new starts 1-3 quarters later. If input inflation has already reset higher and cannot be passed through immediately, the next earnings revisions risk being driven by margin dilution rather than volume.

Contrarian take: the market may be underestimating how much of the backlog is actually timing rather than profit. Defence, rail, and energy-infrastructure work should improve visibility, but those contracts can also carry execution risk, milestone slippage, and bonding/working-capital strain; if any one large project slips, the earnings base can look flatter than the order book implies. Over 6-18 months, the real upside would come only if housing absorption in Vilnius/Riga re-accelerates and Merko proves it can convert backlog into cash at roughly stable margins; absent that, this looks more like a quality-okay, valuation-capped compounder than a strong momentum name.

Key Decisions for Investors

• No immediate directional trade: treat this as a hold/watch item until 2H margin and operating cash flow confirm that backlog is converting into cash, not just revenue.
• For the next 1-3 months, watch for any further rise in net debt or inventories; a continued build would be a bearish falsifier and would argue for de-risking any exposure to Baltic construction equities.
• If a listed Baltic construction peer or regional small-cap infrastructure proxy is available, prefer a relative short against the most levered, highest working-capital name; the second-order risk is that record backlog is not equally profitable across the group.
• Use the next quarterly print as a catalyst check: if gross margin stays near current depressed levels despite higher activity, the market should expect multiple compression rather than expansion over 6-12 months.
• Set an alert on apartment presales and cancellation rates in Vilnius/Riga; a meaningful pickup would be the cleanest evidence that development margins can recover, while continued price sensitivity would keep this in the 'capital preservation' bucket.