Moving to the next phase

Medserv 10 December 2019 Update
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Medserv

Moving to the next phase

Q3 trading update

Industrial support services

10 December 2019

Price

€1.10

Market cap

€59m

US$1.12/€

Net debt (€m) at 30 June 2019

54.6

Shares in issue

53.7m

Free float

34.5%

Code

MDS

Primary exchange

Malta SE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.4)

(8.3)

(7.6)

Rel (local)

(11.1)

(3.7)

(11.0)

52-week high/low

€1.30

€0.94

Business description

Medserv is a Malta-based provider of integrated offshore logistics and services in support of drilling operations in the Mediterranean, MENA and South America. The acquisition of the METS companies in February 2016 diversified the company into onshore steel tube stockholding and servicing for countries in the Middle East and beyond.

Next events

FY19 results

April 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Medserv is a research client of Edison Investment Research Limited

The search for a strategic partner is moving forward with the announcement that Advanced Maritime Transports SA (AMT) is to be acquired by Medserv via a share-for-share exchange, following which AMT’s owners will purchase the stakes of the majority holders and launch a voluntary bid for the minority holdings at €1.102. The bid represents a 10% premium to the deal for the majority shares. With no financial information provided it is difficult to assess the merits of the offer to shareholders and we await further details. Medserv expects to beat its forecast for FY19 and we have lifted our estimates for this year modestly. However, the challenges for the year ahead have increased and we are lowering our FY20 estimates as a result.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

28.8

(3.6)

(5.6)

0.0

N/A

0.0

12/18

36.2

(3.4)

(6.8)

0.0

N/A

0.0

12/19e

66.4

2.4

5.2

0.0

21.2

0.0

12/20e

44.6

2.3

5.1

2.0

21.6

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

AMT deal should secure the future

Although little detail on the proposed deal is available, it is in effect a reverse takeover with AMT becoming a subsidiary via a share exchange of newly issued Medserv shares, the owners of AMT then buying the majority holding of Medserv at €1.00 per share and launching a voluntary bid at €1.102 for the free float shares. The deal is expected to take three to four months to complete and is subject to conditions that must be approved by 31 January 2020. These include the passing of a resolution for the share exchange by the non-executive directors of Medserv and it being approved at EGM. As we do not know the AMT financials or the shares to be issued, we cannot comment on the deal’s merits. Based in Switzerland, AMT is a privately owned maritime logistics services provider with a broad geographic reach. The deal should provide significant opportunities to expand the global footprint of Medserv’s core operations in Integrated Logistics Support Services (ILSS) and Oil Country Tubular Goods (OCTG).

FY20 to be a year of consolidation

The Q3 trading statement indicates the FY19 company forecast should be beaten, with the Suriname contract now all expected to fall in FY19. However, bringing forward those revenues and delays to offshore Libyan structure projects to FY21 mean our FY20 revenues and EBITDA expectations are cut by c 20% and now decline. We expect growth to resume in Medserv’s current business in FY21.

Valuation: Rated for medium-term growth prospects

Although the reduction in expectations for FY20 is disappointing, projects and prospects are still expected to provide solid medium-term growth for both divisions. A FY20e P/E of 21.6x adequately reflects prospects and strategic developments.

AMT to become the strategic partner

AMT is based in Nyon, Switzerland, and is privately owned. Very little financial information is available, but the group offers logistics services including end-to-end logistics (land, sea and air), marine services and personnel services. We believe it has around 600 employees, around twice the number of Medserv.

Subject to the various conditions and any required regulatory approvals being met, the deal would result in a combined group with four key operating activities: End-2-End Logistics, Shore Base Logistics (ILSS), OCTG Management Services, and non-O&G Logistics. It will have around 900 employees with an operational presence in around 26 countries across four continents. We would expect the senior executives to assume most of the leadership positions within the enlarged company.

Commenting on the proposed deal Michel Dubois, CEO of AMT said “Our goal is to further grow our footprint in African Energy and non-O&G sectors, to become the undisputed leader in the Mediterranean O&G Logistics and be the company of choice for supply chain management of OCTG”.

Current trading and outlook

Q319 performance is summarised in Exhibit 1 below. The Suriname contract continues to drive substantial growth in ILSS, although Cyprus and Egypt have also contributed significant increases in sales as drilling activities for the new discoveries in the eastern Mediterranean gather pace. OCTG also showed strong growth of 25% as activity in Iraq finally started to improve.

Exhibit 1: Medserv Q319 trading highlights

€m

Q318

Q319

9M19

FY18

FY19e

FY19e*

Turnover

- ILSS

4.5

14.4

37.0

21.5

50.4

48.7

- OCTG

3.8

4.8

11.7

14.2

15.5

15.0

- Photovoltaic (PV) farm

0.1

0.1

0.4

0.5

0.5

0.5

Group

8.4

19.3

49.1

36.2

66.4

64.2

EBITDA (co definition)

1.5

3.2

9.3

7.3

14.3

14.1

EBITDA margin (%)

17.9

16.6

18.9

20.2

21.5

22.0

% change

- ILSS

220%

134%

- OCTG

26%

9%

- Photovoltaic (PV) farm

0%

0%

Group

130%

83%

EBITDA

113%

96%

Source: Company reports, Edison Investment Research estimates. Note: *Company guidance.

The Suriname contract is lower margin, which means Medserv will exceed its previous revenue and EBITDA expectations, albeit leading to a slightly lower EBITDA margin that is reflected in our revised estimates. The EBITDA margin for the group fell to 16.6% in Q319 compared to 17.9% in Q318, reflecting the lower-margin nature of the Suriname contract. Nevertheless, allowing for some year-end contract risk retirement and provision releases, we expect an improvement in Q419 to deliver the expected overall improvement in the full-year margin.

All of the €30m of revenue and profit from the Suriname contract is expected to be booked this year, as following an unsuccessful initial drilling programme it has been completed and suspended slightly ahead of schedule. The Cyprus and Egypt offshore support base contracts have also performed strongly. These factors offset a slightly weaker than expected performance in Malta as projects have slipped once again. In addition, METS is performing well, especially in Iraq, which has moved into profit as activity has picked up. Medserv expects to achieve its forecast for FY19 (see Exhibit 1) and we have raised our estimates accordingly, with revenues 5% higher and our EBITDA estimate raised by 2%.

Looking ahead to FY20, delays to projects for Malta and the earlier than expected completion of the Suriname contract by the end of 2019 will lead to an overall decline in both revenues and profitability; we had previously expected a modest improvement in EBITDA. Because there will be no residual income from the Suriname contract as it now falls in FY19, there is a shortfall of €5m relative to our previous revenue estimates, albeit at a below-average margin. In addition, the major structures service contracts for Bahr Essalam Phase II offshore Libya appear to have been deferred until FY21. Together with other modest contract delays, we now expect Malta base revenues to be some €6m lower than previously with growth resuming in FY21. Cyprus, Egypt and METS are all expected to show good growth. In Egypt we expect a second IOC (international oil company) support base contract to be secured and contribute in FY20. The Abu Dhabi OCTG supply chain management contracts have yet to be secured but would be incremental to our forecasts.

For FY20, the end of the Suriname contract was always going to challenge revenue growth but the early completion and the deferral of offshore Libya now reduce EBITDA and PBT year-on-year. We expect growth in sales and earnings to be re-established in FY21.

Exhibit 2: Medserv earnings estimate revisions

Year end 31 December (€m)

2019e

2019e

 

2020e

2020e

 

 

Prior

New

Change

Prior

New

Change

Malta operation

13.9

11.6

-16.7%

18.8

12.4

-34.0%

Cyprus

5.6

5.6

0.0%

10.6

9.0

-14.7%

Egypt

3.3

3.3

0.0%

5.9

5.9

0.0%

Suriname

25.0

30.0

+20.0% 

5.0

0.0

-100.0%

METS

14.8

15.5

4.4%

16.4

16.8

2.0%

Photovoltaic farm

0.5

0.5

0.0% 

0.5

0.5

0.0%

Revenues

63.1

66.4

5.3%

57.2

44.6

-22.1%

 

 

 

 

 

 

EBITDA adjusted (company definition)

14.0

14.3

1.7%

15.7

12.9

-17.9%

EBITDA adjusted (Edison definition)

13.1

13.4

1.8%

14.8

12.0

-19.0%

Depreciation

(8.6)

(8.9)

2.7%

(8.7)

(7.7)

-11.3%

Other operating income

0.9

0.9

0.0% 

0.9

0.9

0.0% 

Operating profit (adjusted)

5.4

5.4

0.0%

7.0

5.2

-26.1%

Exceptionals (including PPA amortisation)

(1.8)

(1.8)

0.0%

(1.8)

(1.8)

0.0%

Operating profit (reported)

3.6

3.6

0.1%

5.2

3.4

-35.1%

Profit before tax (adjusted)

2.4

2.4

-0.3%

4.2

2.3

-44.6%

EPS - underlying continuing (c)

5.2

5.2

-0.3%

8.9

5.1

-43.1%

DPS (c)

0.0

0.0

0.0% 

2.0

2.0

0.0% 

Net debt

50.0

50.3

0.7%

43.2

44.9

3.8%

Source: Edison Investment Research estimates

Exhibit 3: Financial summary

€m

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

28.8

36.2

66.4

44.6

Cost of Sales

(18.2)

(23.6)

(47.5)

(29.0)

Gross Profit

10.6

12.6

18.9

15.6

EBITDA (Edison defined)

 

 

3.7

6.3

13.4

12.0

Operating Profit (before amort. and except.)

 

 

(1.2)

(0.3)

5.4

5.2

Intangible Amortisation

0.0

0.0

0.0

0.0

Exceptionals

(4.4)

(5.4)

(3.6)

(3.7)

Other

0.8

1.3

0.9

0.9

Operating Profit

(4.1)

(3.5)

3.6

3.4

Net Interest

(3.9)

(5.4)

(4.8)

(4.8)

Profit Before Tax (norm)

 

 

(3.6)

(3.4)

2.4

2.3

Profit Before Tax (FRS 3)

 

 

(8.0)

(8.8)

(1.2)

(1.4)

Tax

0.4

(0.7)

(0.1)

(0.1)

Profit After Tax (norm)

(3.2)

(4.1)

2.3

2.2

Profit After Tax (FRS 3)

(7.6)

(9.5)

(1.3)

(1.5)

Average Number of Shares Outstanding (m)

53.7

53.7

53.7

53.7

EPS - normalised (c)

 

 

(5.55)

(6.76)

5.2

5.1

EPS - normalised and fully diluted (c)

 

 

(5.55)

(6.76)

5.2

5.1

EPS - (IFRS) (c)

 

 

(13.8)

(16.8)

(1.5)

(1.9)

Dividend per share (c)

0.0

0.0

0.0

2.0

Gross Margin (%)

36.8

34.8

28.5

35.0

EBITDA Margin (%)

12.8

17.3

20.1

26.8

Operating Margin (before GW and except.) (%)

-4.1

-0.9

8.1

11.6

BALANCE SHEET

Fixed Assets

 

 

122.3

124.7

118.6

112.3

Intangible Assets

14.5

13.2

11.7

10.2

Tangible Assets

31.9

33.2

32.9

32.3

Right of use asset

75.9

78.3

74.1

69.8

Investments

0.0

0.0

0.0

0.0

Current Assets

 

 

31.0

32.1

39.7

36.7

Stocks

1.2

1.3

1.8

1.2

Debtors

12.2

12.8

17.7

14.3

Cash

3.6

5.6

6.6

9.3

Other

13.9

12.4

13.7

11.9

Current Liabilities

 

 

(9.4)

(16.2)

(16.2)

(12.3)

Creditors

(7.3)

(10.9)

(16.2)

(12.3)

Short term borrowings

(2.0)

(5.3)

0.0

0.0

Long Term Liabilities

 

 

(115.8)

(121.9)

(124.8)

(122.0)

Long term borrowings

(50.8)

(54.0)

(57.0)

(54.1)

Lease liabiliites

(25.9)

(28.7)

(28.7)

(28.7)

Other long term liabilities

(39.1)

(39.2)

(39.2)

(39.2)

Net Assets

 

 

28.1

18.7

17.4

14.7

CASH FLOW

Operating Cash Flow

 

 

1.8

6.6

10.7

11.3

Net Interest

(2.4)

(3.1)

(3.0)

(2.8)

Tax

0.4

(0.7)

(0.1)

(0.1)

Capex

(2.6)

(6.9)

(4.3)

(2.9)

Acquisitions/disposals

0.0

0.0

0.0

0.0

Financing

0.6

(0.5)

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Net Cash Flow

(2.3)

(4.5)

3.4

5.5

Opening net debt/(cash)

 

 

47.0

49.2

53.7

50.3

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

49.2

53.7

50.3

44.9

Source: Company reports, Edison Investment Research


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This report has been commissioned by Medserv and prepared and issued by Edison, in consideration of a fee payable by Medserv. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

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General disclaimer and copyright

This report has been commissioned by Medserv and prepared and issued by Edison, in consideration of a fee payable by Medserv. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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