17dec14_MEDSERV_MEL_0682

Strong year in progress

Medserv 2 September 2019 Update
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Medserv

Strong year in progress

H119 results

Industrial support services

2 September 2019

Price

€1.20

Market cap

€64m

$1.10/€1

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

3.5

6.2

14.3

Rel (local)

4.3

7.2

2.4

52-week high/low

€1.20

€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

Q319 update

November 2019

FY19 results

April 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Medserv is a research client of Edison Investment Research Limited

With a strong revenue and profit contribution from the Suriname contract, H119 group performance was excellent. The timing of the project should mean there is a stronger H219 performance, although FY20 group revenue prospects are impaired by the anticipated end to activity early in the year. Existing prospects in Cyprus, Egypt and elsewhere support our FY20 estimates and should be augmented by several major new projects that could be captured in the coming months for both the ILSS and OCTG divisions. Medserv’s international expansion with an increasing number of IOCs is spreading the risk, and for the time being we expect the company to deliver progressively improving profitability and cash flows.

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

N/A

12/18

36.2

(3.4)

(6.8)

0.0

N/A

N/A

12/19e

63.1

2.4

5.2

0.0

23.1

N/A

12/20e

57.2

4.2

8.9

2.0

13.5

1.7

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

H119 trading improves significantly

H119 trading was strong, with revenues up 65% to €29.9m, largely as a result of the start of the Suriname contract, as well as increased activity in Egypt for the ILSS (integrated logistics and support services) segment. OCTG (oil country tubular goods) saw a more modest increase aided by better returns in Iraq. Adjusted group EBITDA rose 81% to €6.2m (H119: €3.4m) with all business units contributing positively. Group operating profit swung from a loss of €1.0m in H118 to a profit of €1.5m. After finance and tax, the company still recorded a net loss for the period and there was a modest cash outflow resulting from an increase in receivables. Adjusted net debt (excluding lease liabilities) rose €0.9m to €54.6m.

Improving contract supports profit growth

Medserv expects to deliver against its Financial Analysis Summary (FAS) forecast published in May (FY19 sales €64.2m, EBITDA €14.1m). Suriname should increase its contribution, as should other ILSS operations in Cyprus and Egypt and OCTG. We expect the Suriname contract to end in March 2020, with a €20m lower FY20 revenue contribution partially offset by growth of other existing contracts. Medserv has significant opportunities to expand its contract portfolio in both ILSS and OCTG. Some major awards should be made in H219, which may be incremental to our FY20 estimates. Some of the receivables have already unwound, and with improved earnings we expect a fall in adjusted net debt by the year end.

Valuation: Undemanding rating as earnings recover

Our estimates are unchanged, and we continue to forecast progressive EBITDA growth. We envisage potential upside if incremental long-term contracts are won in H219. An FY20e P/E ratio of 13.5x remains undemanding. Our capped DCF returns a value of €1.42 per share (previously €1.33) due to a lower calculated WACC.

H119 results

Medserv’s H119 trading produced a strong advance in revenues and profits, allowing management to reaffirm expectations for the full year. These appear to mark a step change in performance compared to the challenging market conditions experienced over the last few years. The key highlights were:

Revenues of €29.9m (H118: €18.1m) were up 65%, supportive of anticipated growth for the year as a whole. The bulk of the increase was accounted for by the initial contribution from the $30.6m 15-month Suriname contract, where drilling activity commenced in Q219 after mobilisation in Q119.

Gross profit more than trebled to €3.8m (H118: €1.2m), a margin of 12.6% compared to 6.4% in H118. The improvement is despite the lower-margin nature of much of the initial work being undertaken in Suriname, for example vessel chartering.

Company adjusted EBITDA increased 81% to €6.2m (H118: €3.4m), which compares to an FY18 EBITDA of €7.3m.

A reported operating profit of €1.5m (H118: loss €1.0m) was also a sign of improving returns and on an adjusted basis (ignoring PPA and contract cost amortisation) the company generated an operating profit of €2.4m compared to break even in the prior year.

The major cash flow feature was an increase in trade receivables, which relates to two main factors. One is the structure of the payment terms in the Suriname contract, which as a reminder is the first service management contract Medserv has undertaken. In addition, there were some outstanding invoice payments in Malta, which we believe have now been settled.

Net debt at the end of the period had risen modestly to €54.6m (FY18: €53.7m). Absent of the receivables factors, net debt would have declined at the half year and as some of the increase has already unwound in H219 this gives us confidence in our net debt reduction for FY19 overall.

Exhibit 1: Medserv H119 results summary

€m

H118

H119

Change

Shore base logistics (Medserv ongoing)

11.32

22.37

97.7%

Oil Country Tubular Goods (METS)

6.58

7.22

9.7%

Photovoltaic farm

0.24

0.27

13.4%

Group revenues

18.14

29.86

64.6%

Gross profit

1.15

3.76

226.2%

Gross margin

6.4%

12.6%

Adjusted EBITDA (company defined)

3.41

6.18

80.9%

Depreciation

(3.40)

(3.76)

10.5%

Operating profit (adjusted)

0.01

2.42

N/M

PPA amortisation

(0.74)

(0.74)

0.0%

Exceptional

(0.29)

(0.16)

-45.5%

Operating profit (reported)

(1.02)

1.52

N/M

Finance costs

(1.66)

(2.65)

59.8%

Profit before tax (adjusted)

(1.65)

(0.23)

-85.9%

Profit before tax (reported)

(2.67)

(1.13)

-57.9%

Net income (ongoing adjusted)

(1.58)

(0.09)

-94.5%

Net income (ongoing reported)

(2.61)

(0.98)

-62.4%

Net debt

53.70

54.56

1.6%

Lease liabilities

30.51

29.63

-2.9%

Source: Company report

Outlook

Our estimates remain unchanged at present following the positive first-half performance. Indeed, in the commentary accompanying the results, management expects the FAS forecast for FY19 sales of €64.2m and adjusted EBITDA of €14.1m to be met. Allowing for non-inclusion of other operating income in our EBITDA definition, our estimates remain slightly below the company’s forecast.

In ILSS, we expect existing contractual activity in Cyprus and Egypt to expand into 2020 as drilling activity increases following recent major discoveries. Malta workload for offshore Libya is underpinned by two new major structure projects in the Bahr Essalam gasfield. OCTG should benefit from consistency in its Oman operation. The recovery of the Iraqi operation, which were profitable in H119, should continue as it is seeing an increase in potential projects, with growth now anticipated by management into 2020.

Encouragingly, the prospective new business opportunities for each segment continue to look positive. In ILSS, additional tenders for shore-based management are being sought in Egypt, and the neighbouring offshore markets appear to be opening up. While the current contract in Suriname is scheduled to end in March 2020, as we reflect in our estimates, management is working hard to extend the company’s presence there, as well as in adjacent territories. There is a potential for cross selling of tube services in this region for OCTG.

OCTG also appears well positioned to benefit from the recent award by the Abu Dhabi National Oil Company (ADNOC) for the provision of significant casing and tubing volumes spread over several years to three tube manufacturers: Tenaris, Marubeni and Vallourec. Management’s target is to try to secure supply chain management contracts similar to the agreement with Sumitomo in Oman. Volumes overall would be larger than in Oman but scale of activity for Medserv will depend on the success of discussions and contract negotiations.

The potential for a new machine shop in Uganda also remains live, and is awaiting final government approval of the investment in the pipeline project.

While an ending to the activity in Suriname may impair revenue growth in FY20, we feel the proliferation of new projects and expansion of existing base support and tube services activity should drive a higher-margin performance for the group.

Update on strategic shareholding process

Following on from the 20 May 2019 update, Medserv gave a brief update in the interim statement on the search for a strategic purchaser for the holdings of the two major shareholders, Anthony Diacono and Malampaya Investments, which total 65.5% of the share capital. The company indicates that the due diligence process is ongoing and that it will provide further information to the market when appropriate to do so.

Valuation

In terms of progress, we feel that Medserv has turned a corner in terms of scale and financial performance, which allows a lower risk attribution to the group’s prospects. As such, we have reduced our cost of equity to 10% from 11% previously, which reduces our calculated WACC to 7.9% from 8.1%. As a result, our DCF valuation increases to €1.42 per share from €1.33 previously.

Exhibit 2: Capped DCF sensitivity to WACC and terminal growth rates (€ per share)

WACC

6.0%

7.0%

7.9%

8.0%

8.9%

9.9%

15.0%

Terminal growth rate

0%

2.32

1.80

1.42

1.41

1.12

0.88

0.15

1%

2.89

2.19

1.71

1.69

1.33

1.04

0.21

2%

3.75

2.74

2.10

2.07

1.61

1.25

0.27

3%

5.18

3.56

2.64

2.59

1.98

1.51

0.35

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

63.1

57.2

Cost of Sales

(18.2)

(23.6)

(45.1)

(37.2)

Gross Profit

10.6

12.6

18.0

20.0

EBITDA (Edison defined)

 

 

3.7

6.3

13.1

14.8

Operating Profit (before amort. and except.)

 

 

(1.2)

(0.3)

5.4

7.0

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

5.2

Net Interest

(3.9)

(5.4)

(4.8)

(4.7)

Profit Before Tax (norm)

 

 

(3.6)

(3.4)

2.4

4.2

Profit Before Tax (FRS 3)

 

 

(8.0)

(8.8)

(1.2)

0.5

Tax

0.4

(0.7)

(0.1)

0.0

Profit After Tax (norm)

(3.2)

(4.1)

2.3

4.2

Profit After Tax (FRS 3)

(7.6)

(9.5)

(1.3)

0.5

Average Number of Shares Outstanding (m)

53.7

53.7

53.7

53.7

EPS - normalised (c)

 

 

(5.55)

(6.76)

5.2

8.9

EPS - normalised and fully diluted (c)

 

 

(5.55)

(6.76)

5.2

8.9

EPS - (IFRS) (c)

 

 

(13.8)

(16.8)

(1.5)

2.0

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

20.8

25.8

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

-4.1

-0.9

8.5

12.2

BALANCE SHEET

Fixed Assets

 

 

122.3

124.7

118.7

112.2

Intangible Assets

14.5

13.2

11.7

10.2

Tangible Assets

31.9

33.2

32.9

32.2

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

38.5

38.8

Stocks

1.2

1.3

1.7

1.6

Debtors

12.2

12.8

16.8

15.2

Cash

3.6

5.6

6.6

9.3

Other

13.9

12.4

13.4

12.8

Current Liabilities

 

 

(9.4)

(16.2)

(15.4)

(13.9)

Creditors

(7.3)

(10.9)

(15.4)

(13.9)

Short term borrowings

(2.0)

(5.3)

0.0

0.0

Long Term Liabilities

 

 

(115.8)

(121.9)

(124.4)

(120.3)

Long term borrowings

(50.8)

(54.0)

(56.6)

(52.5)

Lease liabilities

(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

16.8

CASH FLOW

Operating Cash Flow

 

 

1.8

6.6

10.9

13.2

Net Interest

(2.4)

(3.1)

(3.0)

(2.8)

Tax

0.4

(0.7)

(0.1)

0.0

Capex

(2.6)

(6.9)

(4.1)

(3.7)

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)

3.7

6.7

Opening net debt/(cash)

 

 

47.0

49.2

53.7

50.0

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

50.0

43.2

Source: Company accounts, 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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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.

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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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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.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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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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