Medserv — Pieces fitting into place

MedservRegis (MSE: MDS)

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Market capitalisation

35m

Research: Industrials

Medserv — Pieces fitting into place

Medserv has demonstrated the success of its broadened geographic reach with strong H118 revenue growth and improved profitability. With the required investment in equipment and personnel complete, we see greater momentum and improved profitability in H218. We maintain our forecasts.

Analyst avatar placeholder

Written by

Annabel Hewson

Industrials

Medserv

Pieces fitting into place

H118 results

Industrial support services

30 August 2018

Price

€1.09

Market cap

€59m

Net debt (€m) at 30 June 2018

53.0

Shares in issue

53.7m

Free float

35%

Code

MDS

Primary exchange

Malta SE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.5)

3.8

(18.4)

Rel (local)

(1.1)

3.9

(11.7)

52-week high/low

€1.3

€1.0

Business description

Medserv is a Malta-based provider of integrated offshore logistics and services in support of drilling operations in the Mediterranean. 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.

Next events

Q3 results

November 2018

Analyst

Annabel Hewson

+44 (0)20 3077 5700

MedservMedserv is a research client of Edison Investment Research Limited

Medserv has demonstrated the success of its broadened geographic reach with strong H118 revenue growth and improved profitability. With the required investment in equipment and personnel complete, we see greater momentum and improved profitability in H218. We maintain our forecasts.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

32.8

(1.3)

(2.1)

0.0

N/A

N/A

12/17

28.8

(3.6)

(5.6)

0.0

N/A

N/A

12/18e

36.0

(1.4)

(1.4)

2.0

N/A

1.9

12/19e

39.3

2.2

4.7

2.0

22.3

1.9

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

H118

Medserv reported group revenues of €18.14m (H117: €13.62m), up 33.2% on the stronger contribution from operations in Malta and Cyprus in its Integrated Logistics Support Services (ILSS) operations. Group EBITDA of €3.40m (H117: €2.87m) represented an 18.5% uplift. The company invested €5.42m in equipment, mainly related to the start-up operation in Egypt. With this in place, H218 performance will reflect increased income from this project. Performance in Oil Country Tubular Goods (OCTG) was held back by weakness in Oman, but this is expected to improve in H218. Group H118 loss per share of 4.5c (H117: 6.8c loss) improved by 33.8% and should see a stronger H218 result with the improved profit contribution expected from both divisions. Net debt increased to €53.0m (FY17: €49.2m). The company has maintained FY18 guidance and we have maintained our forecasts.

On track to deliver growth

End-market dynamics are clearly playing to Medserv’s strengths. The company has a broad geographic reach across Europe, the Middle East and Africa. This is reflected in a growing order backlog and ongoing tendering activity that now includes West Africa, which is an emerging supplier of energy. Medserv has taken action to review and adapt its portfolio to best address market opportunities and has completed the investment required in Cyprus and Egypt, whereas the operations in Iraq are under consideration. Medserv sees strong projected growth over 2018 to 2020 and we expect the company to build on its H118 performance as the year progresses, supported by the current order book, with further growth in FY19. Medserv is still seeking a strategic purchaser for all or part of the majority shareholding and, while there was no update at the H118 report, we believe there is no time pressure.

Valuation: Backlog underpins uplift

The new territories coming on stream support revenue growth for 2018-20 and we forecast financial performance in FY18 to support a dividend. While we maintain our forecasts, through the passage of time our DCF-based fair value moves up to €1.56 per share, from €1.51 before.

H118 results and outlook

Highlights of the H118 results are outlined in the following table:

Exhibit 1: Medserv H118 financial summary

€m (half year to June)

H117*

H118

% change

Revenue by division

Integrated Logistics Support Services (ILSS)

5.76

11.32

96.56

Oil Country Tubular Goods (OCTG)

7.55

6.58

(12.85)

Photovoltaic farm

0.31

0.24

(22.81)

Group revenues

13.62

18.14

33.17

Gross profit

1.03

1.15

12.20

Gross margin (%)

7.55%

6.36%

 

EBITDA by division

Integrated Logistic Support Services (ILSS)

0.21

1.90

817.92

Oil Country Tubular Goods (OCTG)

2.35

1.26

(46.44)

Photovoltaic farm

0.31

0.24

(22.81)

Group EBITDA

2.87

3.40

18.54

Depreciation

(2.83)

(3.40)

 

Amortisation

(1.39)

(1.03)

 

Unrealised FX differences

0.20

0.23

 

Provision for impairment on Trade Receivables

 

(0.21)

 

Operating profit (as reported)

(1.16)

(1.02)

(12.02)

Net finance costs

(2.20)

(1.66)

 

Operating profit before tax (as reported)

(3.35)

(2.67)

(20.28)

Tax

(0.50)

0.06

 

Operating profit from continuing operations (as reported)

(3.85)

(2.61)

(32.23)

EPS (c)

(6.80)

(4.50)

(33.82)

DPS

0.00

0.00

 

Net debt

47.22

53.00

 

Source: Company reports. Note: *Restated on an IFRS 15 and IFRS 16 basis.

Integrated Logistics Support Services (ILSS) (62% group sales)

ILSS reported H118 revenues of €11.32m (H117: €5.76m), with increased contributions from Malta and Cyprus, plus Egypt on stream from the start of FY18. By comparison, the results from H118 in Malta are already higher than its FY17 revenue and EBITDA contributions as projects that came on line during H118 are driving this positive uplift.

Going forward, FY18 revenue forecasts in ILSS continue to be supported by growth prospects across a number of geographies. Activity in Malta, Cyprus and Egypt is driving the growth, which should continue its current level of contribution to the group as the majority of new equipment acquired for the Egypt operations are now in place.

Medserv is employing its shore base logistics and engineering services to address the needs of the offshore Libya, Bahr Essalam Phase 2 project. Work here is progressing well as customer ENI’s strategic plan is to increase offshore production volumes. This has the potential to include two new structures (A & E structures), indicating the scale of the work and demands on Medserv’s services.

In Cyprus, as disclosed previously, Medserv has closed down its storage facility in Larnaca and consolidated its operations at Limassol. The additional logistics facilities required in Limassol by a second customer have been established, with the set-up cost incurred in H118. Drilling activity for this customer is scheduled for Q418. As a reminder, the Calypso lean gas discovery offshore Cyprus is believed to be ‘Zohr-like’; Zohr, offshore Egypt, is the largest gas field in the Mediterranean. The new find should provide an extended drilling programme, offering greater visibility and improved returns from Cyprus now from multiple customers.

There is no change to operations in Portugal, which remain in mothball mode, as environmental issues persist regarding offshore exploratory drilling. Hence performance here is expected to remain flat year-on-year.

In Egypt, Medserv has commenced its three-year c €10m contract to provide integrated logistics support services to an international oil company (IOC) for the production phase of offshore operations. The company admits that the initial phase of equipment procurement and sourcing personnel has been challenging but is now complete. H218 will benefit from this being completed. The contract in Egypt is long term and very important to Medserv, and should lead to additional activity with other IOCs. In the future, Medserv could build OCTG opportunities into the offering in this country.

Oil Country Tubular Goods (OCTG) (36% of group revenues)

OCTG reported H118 revenues of €6.58m (H117: €7.55m), largely reflecting a slower H118 performance in Oman. Weak performance was visible in Q118 in the country and this continued in Q218. However, H218 performance is expected to be stronger, underpinned by order backlog, including the long-term supply chain management Sumitomo contract. As we discussed before, it is possible the company will consolidate its operations within the newly opened Duqm facility.

Growth from Medserv’s United Arab Emirates operations has been strong, as orders picked up for the premium threading activity, building visibility in this area. Meanwhile, Iraq remains affected by domestic issues. While this business unit has seen some periods of strength, this has not proved continuous. While the number of land rigs mobilised in country and the current order book suggest activity levels will improve, there remains some concern over this area. Although Medserv holds the premium sole threading licence in the country, it is undertaking a considered inspection and review of this business, which will be completed by the year end.

Looking forward, Medserv is in a tender for the provision of machine shop services in Uganda, which as a long-term contract could bring greater visibility to the division and predictability to its financial performance. For the division as a whole, in spite of the weaker start to the year, we believe the current order book supports managements and our FY18 expectations.

Photovoltaic Farm (PV) (2% of group sales)

PV reported H118 revenues of €0.24m down from €0.31m in H117. FY18 revenue is still expected to remain constant year-on-year at c €0.5m.

Outlook

While FY17 presented a number of challenges to the oil & gas industry, Medserv’s H118 report continues the trends identified in May, when we indicated that FY18 has started strongly for ILSS, while OCTG had a weaker start. Medserv sees strong projected growth over 2018 to 2020. The business is working in each of its divisions to build its geographic presence and deliver technical expertise. Medserv is active and profitable in six out of its seven operating bases and expects to build on its H118 performance as the year progresses, with a stronger performance in OCTG in particular. We believe that the company’s current order book supports FY18 expectations, which have been maintained and are set out in Exhibit 2. The company continues to expect further growth in FY19. We have maintained our forecasts and continue to believe that stronger group performance should allow dividend payments to return in FY18.

Exhibit 2: Q118, H118 reported and Medserv’s estimates for revenue and EBITDA

€m

Q118

Q218

H118

FY17

Medserv's FY18 outlook

% FY change

ILSS

4.9

6.4

11.3

14.0

18.4

31.4

OCTG

3.3

3.3

6.6

14.3

17.8

24.5

PV Farm

0.1

0.1

0.2

0.5

0.5

0.0

Group revenues

8.3

9.8

18.1

28.8

36.7

27.4

Group EBITDA

1.4

2.0

3.4

4.4

6.8

54.5

EBITDA margin (%)

16.9

20.3

18.7

15.3

18.5

20.9

Source: Company reports

There was no strategic update at the H118 report on the future shareholder structure. As a reminder, Anthony Diacono will continue to chair the board of directors; however, Anthony Diacono and executive director Anthony Duncan, beneficial owner of Malampaya Investments, have announced their intention to source a strategic purchaser for all or part for their shareholdings (in total 65.5% of issued share capital). The process is still at an early stage and it is important to note there is no time or financial pressure to sell.

Valuation

We continue to employ a capped DCF approach to valuation, which encompasses a six-year explicit forecast projection with a zero growth scenario anticipated in our terminal value calculation. We have used a cost of equity of 11%, which gives us a calculated WACC of 8.2%. Our core assumptions return a DCF value of €1.56 per share, up from €1.51 per share. As our estimates are unchanged, this reflects the progression time and continues to present upside to the current share price given the growth prospects of the business.


Exhibit 3: Financial summary

€m

2015

2016

2017

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

42.7

32.8

28.8

36.0

39.3

Cost of Sales

(29.9)

(22.9)

(18.2)

(21.8)

(22.9)

Gross Profit

12.8

9.9

10.6

14.2

16.4

EBITDA

 

 

10.3

5.0

3.7

6.5

10.5

Operating Profit (before amort. and except.)

 

 

7.6

1.6

(1.2)

1.6

5.4

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

(0.1)

(1.2)

(4.501)

(3.2)

(3.1)

Other

(0.2)

0.0

0.0

0.0

0.0

Operating Profit

7.3

0.4

(5.7)

(1.6)

2.3

Net Interest

(1.5)

(2.8)

(2.4)

(3.1)

(3.3)

Profit Before Tax (norm)

 

 

6.1

(1.3)

(3.6)

(1.4)

2.2

Profit Before Tax (FRS 3)

 

 

5.8

(2.5)

(8.1)

(4.6)

(0.9)

Tax

(1.3)

5.4

0.4

0.5

0.1

Profit After Tax (norm)

4.8

4.1

(3.2)

(1.0)

2.3

Profit After Tax (FRS 3)

4.5

3.0

(7.7)

(4.2)

(0.9)

Average Number of Shares Outstanding (m)

46.1

52.8

53.7

53.7

53.7

EPS - normalised (c)

 

 

9.7

(2.1)

(5.6)

(1.4)

4.7

EPS - normalised and fully diluted (c)

 

 

9.7

(2.1)

(5.6)

(1.4)

4.7

EPS - (IFRS) (c)

 

 

8.9

5.9

(14.0)

(7.3)

(1.2)

Dividend per share (c)

4.3

0.0

0.0

2.0

2.0

Gross Margin (%)

30.1

30.2

36.8

39.5

41.7

EBITDA Margin (%)

24.1

15.1

12.8

18.0

26.7

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

17.9

4.8

-4.2

4.6

13.8

BALANCE SHEET

Fixed Assets

 

 

24.0

51.4

46.4

44.2

42.1

Intangible Assets

0.0

17.2

14.5

13.2

12.1

Tangible Assets

24.0

34.3

31.9

31.0

30.1

Investments

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

57.1

70.0

106.9

108.6

111.0

Stocks

0.0

1.3

1.2

1.5

1.7

Debtors

12.2

12.8

12.2

14.0

15.3

Cash

1.0

6.2

3.6

2.6

5.6

Other

43.9

49.7

89.8

90.4

88.3

Current Liabilities

 

 

(13.3)

(8.3)

(9.4)

(7.7)

(8.3)

Creditors

(9.5)

(7.2)

(7.3)

(7.7)

(8.3)

Short term borrowings

(3.8)

(1.1)

(2.0)

0.0

0.0

Long Term Liabilities

 

 

(56.7)

(86.8)

(115.8)

(122.2)

(123.8)

Long term borrowings

(22.4)

(52.1)

(50.8)

(57.2)

(58.9)

Other long term liabilities

(34.3)

(34.7)

(65.0)

(65.0)

(65.0)

Net Assets

 

 

11.1

26.4

28.1

22.9

20.9

CASH FLOW

Operating Cash Flow

 

 

10.4

0.6

1.8

(0.5)

8.1

Net Interest

(1.5)

(2.8)

(2.4)

(3.1)

(3.3)

Tax

(1.3)

5.4

0.4

0.5

0.1

Capex

(3.8)

(1.7)

(2.6)

(2.3)

(2.5)

Acquisitions/disposals

(2.6)

(34.5)

0.0

0.0

0.0

Financing

0.5

11.2

0.6

0.0

0.0

Dividends

(2.0)

0.0

0.0

0.0

(1.1)

Net Cash Flow

(0.3)

(21.8)

(2.3)

(5.4)

1.4

Opening net debt/(cash)

 

 

24.9

25.2

47.0

49.2

54.6

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(0.0)

0.0

0.0

(0.0)

(0.0)

Closing net debt/(cash)

 

 

25.2

47.0

49.2

54.6

53.2

Source: Company reports, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Medserv and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Immutep — LAG-3 progress in-house and via partners

Immutep has reported encouraging progress from its in-house and partnered programs over the past few months. Interim data from the TACTI-mel combo study included a 61% response rate from the start of the Keytruda monotherapy screening period among subjects who went on to receive eftilagimod alpha (efti or IMP321) combo therapy. Partners GSK and Novartis are progressing their in-licensed LAG-3 programs into Phase II or proof of concept studies, which increases the likelihood that these programs will return significant value to Immutep. Our valuation has increased to $387m or $12.80/ADR (from $333m or $10.41/ADR).

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