11.01.2013: 2012 profit warningArco Vara's management board completes revaluation of the group's assets
In November 2012, Arco Vara’s management board undertook a revaluation of the group’s assets and liabilities, which entailed both a critical analysis of the valuation bases applied and consideration of the impacts of developments of 2012. Items whose value was reviewed included the group’s inventories, investment properties, significant receivables and provisions. The purpose of the revaluation was to obtain an objective as well as a highly conservative overview that could serve as a basis for making plans for continuing the group’s operations and, possibly, raising capital for new investments.
The revaluation process was undertaken in cooperation with the managers, specialists and legal counsels of the units involved in all countries where the group operates (Estonia, Latvia, Lithuania and Bulgaria) and the group’s auditor.
The revaluation was completed on 10 January 2013.
Outcome
As a result of the revaluation process, the management board will adjust the group’s assets and liabilities as at 31 December 2012 as follows: receivables will be written down by 3.46 million euros, inventories and investment properties will be written down by 14.25 million euros and provisions will be increased by 1.96 million euros. Altogether, the group’s net assets will decrease by 19.67 million euros, which will affect both the group’s financial performance for 2012 as well as its financial position as at 31 December 2012.
The group’s assets and liabilities as at 31 December 2012 will be fixed on the approval of the results for the financial year in line with the usual procedure. It is possible that the comparative data on 2011 may have to be restated.
Valuation methods applied
The management board considered it appropriate to apply the following valuation methods:
1) the values of projects under development, which are carried as inventories, were measured using the sales comparison method and the residual value method;
2) the values of projects generating cash flow were measured using the discounted cash flow method;
3) the values of plots and buildings carried as investment properties were measured using the sales comparison method, i.e. specialists estimated the price for which those assets could be realised within one year by reference to the market prices of similar assets.
The revaluation was impacted by both developments that took place in 2012 and changes in valuation bases. The principal differences in valuation bases are as follows:
(i) The main valuation basis for apartments and plots classified as inventories is their possible sales price during a roughly one-year realisation period.
(ii) Previously, the primary valuation bases for plots classified as investment properties included possible future income from the development of the plots into the end product. The current valuation is primarily based on the value of the plot on the assumption that it has to be realised within one year.
The group adjusts the valuation bases in light of the overall economic uncertainty in its target markets as well as the current maintenance and finance costs incurred in connection with passive assets (assets not used in the production process) and assets that have been completed but not yet realised. Estimating a very distant future value of inventories and investment properties would be based on too many variables, which are beyond the group’s control and could not be projected reliably.
The change in valuation bases accounts for up to 75% of the total write-down of inventories and investment properties.
Commentary on major write-downs
Revaluations were conducted in (i) Bulgaria, where inventories and investment properties will be written down by a total of 9.78 million euros; (ii) Latvia, where inventories and investment properties will be written down by a total of 3.16 million euros; and (iii) Estonia, where receivables will be written down by 3.47 million euros, provisions will be increased by 1.96 million euros and inventories and investment properties will be written down by a total of 1.30 million euros.
BULGARIA
In Bulgaria, the write-downs are based on the results of market transactions and weaker than anticipated pace of realisation of the Madrid and Manastirski apartments, which has partly been influenced by the will of the bank that financed the projects. The revaluations are based on the assumption that the group will succeed in negotiating more favourable financing terms from the current main finance supplier, the Piraeus bank. Relevant negotiations are currently in progress.
LATVIA
In Latvia, the decrease in the value of assets results largely from the write-down of investment properties, which was triggered by the expiry of certain rights relating to the Mazais Baltezers residential plots.
ESTONIA
In Estonia, the group will write down a receivable from its joint venture Tivoli Arendus OÜ. At the moment, the group’s receivable from Tivoli Arendus OÜ is secured with a mortgage of the second ranking created on the property belonging to Tivoli Arendus OÜ, while the co-investor’s receivables from the joint venture, which are secured with a mortgage of the first ranking, exceed 8 million euros (together with accrued interest). In such a situation, continuing investment in the Tivoli project is not reasonable and the probability of realising the business plan of the Tivoli project in a profitable manner, so that the joint venture would be able to settle its debts to Arco Vara, is extremely remote. Arco Vara is holding negotiations with the co-investor in order to restructure the Tivoli project. In addition, the group will increase its provisions in connection with surety bonds issued to secure the loan commitments of joint ventures Tivoli Arendus OÜ and Arco HCE OÜ because the probability of the realisation of the surety bonds has increased.
Further information
To provide investors with additional information about the extensive revaluation of its inventories, investment properties and receivables as well as its further action plan, Arco Vara is going to hold a webinar (a web-based seminar) in the last week of January or in the first week of February. Further information on the webinar will be communicated in a separate stock exchange announcement before 18 January.
A webinar is a virtual conference where the company’s representatives can present the company’s operations and plans. A webinar provides opportunities for interactive communication, including opportunities for asking questions and obtaining answers directly from the company’s representatives. Additional information on webinars can be found at: http://www.nasdaqomxbaltic.com/en/exchange-information/products-and-services/webinars/.
Tarmo Sild
Chief Executive Officer
Arco Vara AS
Tel: +372 614 4630
tarmo.sild@arcovara.ee
http://www.arcorealestate.com
|