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

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:

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

UNAUDITED CONSOLIDATED BALANCE SHEET

AT 30 JUNE 2008

UNAUDITED CONSOLIDATED CASH FLOW STATEMENT

FOR THE 6 MONTHS ENDED 30 JUNE 2008

Notes

    Additional information:

4.    Segment reporting