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Medserv — FY16 results

MedservRegis (MSE: MDS)

Last close As at 25/12/2024

0.65

— 0.00 (0.00%)

Market capitalisation

35m

More on this equity

Research: Industrials

Medserv — FY16 results

2016 turned out to be a far more challenging year for Medserv than we had anticipated. Project delays compounded the cost-saving actions of major customers in a depressed market. The delays are also likely to adversely affect 2017 prospects, especially H117, resulting in a sharp reduction in our near-term estimates. Longer-term cash values hold up well, assuming the stabilisation in market conditions persists, and our revised DCF value is now €1.83 compared to €2.03 previously.

Analyst avatar placeholder

Written by

Industrials

Medserv

FY16 results

FY16 results

Industrial support services

6 April 2017

Price

€1.52

Market cap

€82m

€/$1.10

Net debt (€m) at end December 2016

47.0

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

(6.8)

(5.3)

(14.4)

Rel (local)

(5.5)

(6.6)

(16.7)

52-week high/low

€1.84

€1.47

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

AGM

31 May 2017

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

Medserv is a research client of Edison Investment Research Limited

2016 turned out to be a far more challenging year for Medserv than we had anticipated. Project delays compounded the cost-saving actions of major customers in a depressed market. The delays are also likely to adversely affect 2017 prospects, especially H117, resulting in a sharp reduction in our near-term estimates. Longer-term cash values hold up well, assuming the stabilisation in market conditions persists, and our revised DCF value is now €1.83 compared to €2.03 previously.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

42.7

6.1

9.7

4.3

15.7

2.8

12/16

32.8

(1.3)

(2.1)

0.0

N/A

0.0

12/17e

35.2

0.5

0.6

0.0

N/A

0.0

12/18e

42.3

5.9

9.6

3.8

15.8

2.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and retention contracts, and exceptional items.

FY16 trading hurt by late project delays

The sharp contraction of exploration & production capex budgets of the oil majors meant that 2016 was a difficult year for all oilfield support services companies. In addition to reduced activity levels, customers bore down on cost leading to severe price pressures. Aided by the acquisition of METS, we had expected Medserv to maintain a robust level of profitability. However, a shortfall in sales for offshore logistical support due to project delays towards the year end sharply reduced the performance of the Malta base operations. As a result, revenues and profits missed expectations by a substantial margin. Sales of €32.8m were €5.3m short of our estimates, and €11.7m below the company’s original forecast for 2016. EBITDA more than halved, falling from €10.3m to €5.0m, producing a €1.3m normalised loss before tax, compared to our expectation of a €2.3m profit. No dividend is being paid for 2016 to preserve capital integrity, with year-end gross cash balances standing at €6.2m and net debt of €47.0m.

FY17 will face similar challenges in H1

The weaker trading conditions in Malta are likely to persist through H117 until the offshore Libyan projects gather pace. Drilling programmes should commence in both Portugal and Cyprus in H217 providing a boost to shore-based logistics performance. METS should grow, with two extra months of consolidation and a recovery in performance in Iraq where trading conditions are returning to normal. We have taken a more conservative view of prospects for 2017, reducing our underlying pre-tax forecast to €0.5m from €6.6m, consistent with the new management projection for 2017 released today.

Valuation: Lower near-term forecasts

The company should see progressive recovery in its offshore logistical base activity through 2018 which, combined with continued growth at METS, should see a more meaningful improvement in earnings and cash flow. Our current DCF valuation stands at €1.83, down 10% as a result of the near-term reduction in returns.

FY16 results

Difficult end to the year at Malta base

The outcome for 2016 was significantly below our expectations, as indicated in Exhibit 1 below, demonstrating the lumpiness of the core offshore logistical services contracting activity. We had already reduced our estimates due to the delay to the drilling programme in Portugal, but there was further weakness in shore-based logistics, principally due to project delays for offshore Libyan operations at the Malta base. The difficult trading conditions for METS in Iraq also persisted through the second half. The shortfall in revenues dropped through to profits due to the largely fixed cost element of the base operations. METS also performed worse than we had anticipated, all of which was caused by a lack of activity in Iraq and resultant cost reduction actions.

Exhibit 1: Medserv earnings revisions

Year to December (€m)

2016e

2016a

% change

2017e

2017e

% change

 

Prior

Reported

Prior

New

Revenues

Malta operation

19.0

16.1

(15.5)

23.0

11.5

(50.0)

Libya

0.5

0.5

0.0

1.0

0.5

(50.0)

Cyprus

1.6

1.5

(1.6)

3.5

4.0

14.3

Portugal

0.5

1.1

129.4

0.5

1.2

130.0

METS

16.0

13.1

(18.0)

20.7

17.5

(15.4)

Photovoltaic farm

0.5

0.5

(11.0)

0.5

0.5

(8.3)

Group revenues

38.1

32.8

(13.8)

49.2

35.2

(28.6)

 

 

 

 

 

 

EBITDA

8.5

5.0

(40.9)

14.3

7.0

(50.9)

Depreciation

(3.6)

(3.5)

(3.8)

(4.9)

(3.6)

(25.3)

EBITA

4.9

1.6

(68.2)

9.4

3.4

(64.2)

PPA Amortisation

(1.4)

(1.4)

 

(1.7)

(1.7)

 

EBIT reported

3.5

0.1

(95.9)

7.7

1.7

(78.4)

 

 

 

 

 

 

Underlying PBT

2.3

(1.3)

N/M

6.6

0.5

(92.6)

 

 

 

 

 

 

EPS - underlying continuing (p)

4.4

(2.1)

N/M

11.0

0.6

(94.3)

DPS (p)

1.1

0.0

(100.0)

4.4

0.0

(100.0)

Net debt

42

47

12.3

40.6

45.1

11.2

Source: Medserv reports, Edison Investment Research estimates

The company did report positive earnings of €0.059 (FY15 €0.089), but this was largely the result of a deferred tax net credit of €5.4m, which was a non-cash event. Our underlying pre-tax loss resulted in negative EPS for the year, after adjusting out that credit. Net debt at the year-end was €47m, some €5m worse than we expected largely due to the profit shortfall, and year-end gross cash balances stood at €6.2m. In order to maintain financial rigour, management is not proposing a dividend for 2016, and we would be surprised if there was a payment for the current year in the absence of an unexpectedly strong trading performance.

The major positive is that Medserv has renewed all of its existing major contracts for the Malta base, as well as winning the largest Oil Country Tubular Goods (OCTG) pipe servicing and supply chain management contract from Sumitomo that METS has ever won. As drilling activity recovers both onshore and offshore Medserv should experience a progressive improvement in performance.

Forecasts reduced

Overall, the company missed its original revenue forecast for FY16 by a margin and has adopted a cautious stance for 2017. The company is projecting a further weakening in Malta as the revenue run rate apparent as the company exited 2016 will persist until project pace for Libya picks up, which is currently expected in H217. The drilling programme for one well in Portugal has been licensed and should start in late Q3, with a renewed drilling programme offshore Cyprus expected to commence in Q417, serviced from Limassol.

METS should also make an improving contribution. In addition to an extra two months of consolidation, the Oman business is continuing to grow and Iraq is expected to recover sharply now that the trading conditions have stabilised, with customers having resolved the issues with the Iraqi oil authorities that had stymied activity.

We continue to use the company forecast as the best guide to current year performance, although clearly expectations are heavily weighted towards the second half. As the year progresses and the oil market and geopolitics continue to fluctuate the situation could vary once again, for better or worse. We still do not project any new regional streams of activity even though progress is being made in a number of areas, most notably Egypt. Our new forecast highlights are also shown in Exhibit 1.

We also introduce our 2018 estimates. The main element of our expectation is that Malta recovers significantly, Portugal drops away and that there is further progress in Cyprus as drilling continues. We anticipate continued growth for METS as Oman expands and Iraq continues to improve.

Valuation: Cash support holding up

Following the reduction in expectations, partially offset by a reduction in starting net debt (we had been using a higher pro forma figure of €52m for FY15 period-end net debt) as we have rebased to the current year, our capped DCF valuation for the company now stands at €1.83/share on a calculated WACC of 7.8%. The reduction of 10% from our former value of €2.03/share reflects a 15% fall in aggregate nominal cash flows over the six-year forecast period of €8.5m. The terminal cash flow has increased as we have extended and incorporated another year of growth in EBIT. The sensitivity to WACC and terminal growth rates is reflected in the table below, with the closest value to our assumptions highlighted.

Exhibit 2: Capped DCF sensitivity analysis to WACC and terminal growth rate (€/share)

WACC

Terminal growth

6%

7%

8%

9%

10%

11%

15%

0%

2.74

2.18

1.76

1.43

1.17

0.96

0.40

1%

3.34

2.59

2.05

1.65

1.34

1.09

0.45

2%

4.24

3.16

2.44

1.93

1.55

1.25

0.52

3%

5.74

4.02

2.99

2.31

1.82

1.45

0.60

Source: Edison Investment Research estimates

Financials: Reduced numbers with added complexity

In adjusting our profit numbers for the company we exclude the purchase price allocation (PPA) intangible amortisation that arose on the acquisition of METS. In addition, we exclude amortisation of retention contracts for key personnel relating to that deal from the calculation. The payments are already made and are thus non-cash impacts moving forwards, unless the party leaves and a repayment is due. We treat all of these as exceptional items. In addition, the company estimates other operating income of around €0.5m in its 2017 forecast. Last year this was largely made up of property, plant and equipment disposal proceeds and we choose to treat these as exceptional as they are unpredictable and outside normal trading activity.

With a favourable tax regime for METS in the Middle East and the write up of the deferred tax asset in 2016, we expect METS to be able to maintain its tax charge at around 10% for the foreseeable future. In our adjusted EPS calculation, as previously mentioned, we exclude the €5.4m net deferred tax credit. The cash benefit of this will be reflected in the subnormal tax charge moving forward.

While 2016 proved to a very trying year for the group in a turbulent market and geopolitical environment, we expect a solid recovery in profitability and cash returns should conditions continue to stabilise.

Exhibit 3: Financial summary

€m

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

32.4

42.7

32.8

35.2

42.3

Cost of Sales

(23.2)

(29.9)

(22.9)

(24.4)

(25.8)

Gross Profit

9.2

12.9

9.9

10.8

16.5

EBITDA

 

 

5.9

10.3

5.0

7.0

12.4

Operating Profit (before amort. and except.)

 

 

4.2

7.6

1.6

3.4

8.7

Intangible Amortisation

0.0

0.0

0.0

0.0

0.0

Exceptionals

(0.0)

(0.1)

(1.0)

(2.5)

(1.7)

Other

(0.1)

(0.2)

0.0

0.0

0.0

Operating Profit

4.1

7.3

0.5

0.9

7.0

Net Interest

(1.1)

(1.5)

(2.8)

(2.9)

(2.8)

Profit Before Tax (norm)

 

 

3.1

6.1

(1.3)

0.5

5.9

Profit Before Tax (FRS 3)

 

 

3.0

5.8

(2.3)

(2.0)

4.2

Tax

(0.9)

(1.3)

5.4

0.2

(0.4)

Profit After Tax (norm)

2.3

4.8

(1.3)

0.4

5.3

Profit After Tax (FRS 3)

2.2

4.5

3.1

(1.8)

3.7

Average Number of Shares Outstanding (m)

46.1

46.1

52.8

53.7

53.7

EPS - normalised (c)

 

 

5.0

9.7

(2.1)

0.6

9.6

EPS - normalised and fully diluted (c)

 

 

5.0

9.7

(2.1)

0.6

9.6

EPS - (IFRS) (c)

 

 

4.2

8.9

6.2

(3.6)

6.8

Dividend per share (c)

4.3

4.3

0.0

0.0

3.8

Gross Margin (%)

28.4

30.1

30.2

30.8

39.0

EBITDA Margin (%)

18.1

24.0

15.3

20.0

29.3

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

13.0

17.8

4.8

9.6

20.5

BALANCE SHEET

Fixed Assets

 

 

23.3

24.0

51.4

48.7

46.3

Intangible Assets

0.0

0.0

17.2

15.6

14.3

Tangible Assets

23.3

24.0

34.3

33.0

32.0

Investments

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

57.5

57.1

70.0

69.6

71.9

Stocks

0.0

0.0

1.3

1.4

1.7

Debtors

13.4

12.2

12.8

13.7

16.5

Cash

1.1

1.0

6.2

7.0

5.3

Other

43.0

43.9

49.7

47.4

48.4

Current Liabilities

 

 

(15.3)

(13.3)

(8.3)

(7.6)

(9.0)

Creditors

(10.4)

(9.5)

(7.2)

(7.6)

(9.0)

Short term borrowings

(4.9)

(3.8)

(1.1)

0.0

0.0

Long Term Liabilities

 

 

(56.1)

(56.7)

(87.9)

(86.1)

(82.9)

Long term borrowings

(21.1)

(22.4)

(53.2)

(52.1)

(49.8)

Other long term liabilities

(35.0)

(34.3)

(34.7)

(33.9)

(33.1)

Net Assets

 

 

9.5

11.1

25.3

24.6

26.3

CASH FLOW

Operating Cash Flow

 

 

(1.7)

10.4

6.0

7.2

6.8

Net Interest

(1.1)

(1.5)

(2.8)

(2.9)

(2.8)

Tax

(0.9)

(1.3)

(0.0)

(0.0)

(0.6)

Capex

(13.4)

(3.8)

(1.7)

(2.4)

(2.7)

Acquisitions/disposals

0.0

(2.6)

(34.5)

0.0

0.0

Financing

(0.2)

0.5

11.2

0.0

0.0

Dividends

(0.7)

(2.0)

0.0

0.0

0.0

Net Cash Flow

(18.0)

(0.3)

(21.8)

1.8

0.7

Opening net debt/(cash)

 

 

6.9

24.9

25.2

47.0

45.1

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)

 

 

24.9

25.2

47.0

45.1

44.4

Source: Company reports; Edison Investment Research estimates

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “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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United Kingdom

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Level 12, Office 1205

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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

245 Park Avenue, 39th Floor

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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