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Medserv — Trading update highlights Q4 delays

Medserv — Trading update highlights Q4 delays

Medserv’s trading update has highlighted project delays that will see H217 miss expectations. A lower Q4 drilling contribution from Cyprus and activity in Iraq falling off Q3 levels prompt us to reduce our FY17 forecasts. However, contracted projects underpin our FY18 estimates and we leave them unchanged.

Analyst avatar placeholder

Written by

Medserv

Trading update highlights Q4 delays

Trading update

Industrial support services

22 November 2017

Price

€1.27

Market cap

€68m

US$1.18/€

Net debt (€m) at June 2017

47.2

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

0.4

(5.2)

(15.1)

Rel (local)

4.9

(0.6)

(14.5)

52-week high/low

€1.7

€1.2

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

FY results

March 2018

Analyst

Annabel Hewson

+44 (0)20 3077 5700

Medserv is a research client of Edison Investment Research Limited

Medserv’s trading update has highlighted project delays that will see H217 miss expectations. A lower Q4 drilling contribution from Cyprus and activity in Iraq falling off Q3 levels prompt us to reduce our FY17 forecasts. However, contracted projects underpin our FY18 estimates and we leave them unchanged.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

42.7

6.1

9.7

4.3

13.1

3.4

12/16

32.8

(1.3)

(2.1)

0.0

N/A

N/A

12/17e

28.2

(2.8)

(6.4)

0.0

N/A

N/A

12/18e

42.3

5.8

9.5

3.8

13.4

3.0

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

Q4 trading to miss expectations

Medserv’s trading statement indicates H217 earnings will be lower than forecast due to delays in both divisions. Within Integrated Logistics Support Services (ILSS), drilling activity is expected to begin in Cyprus from mid-December, instead of a full quarter’s contribution. While delays here reduce the project contribution in FY17, the company has given greater clarity over the number of wells expected to be drilled within the next 12 months. Meanwhile, in the Oil Country Tubular Goods (OCTG) division, the strong pick-up in activity seen in Iraq in Q3 did not continue into Q4, as the IOCs negotiate next steps. We still expect inspection and machine shop demand to grow in the region, supporting FY18 forecasts. We lower our FY17 group revenue forecast to €28.2m from €30.3m, and increase our pre-tax loss forecast to €2.8m from €2.3m. We leave our FY18 estimates unchanged as we view these as delays, not reduced demand.

Robust order pipeline keeps FY18 on track

Medserv sees strong projected growth over the 2018 to 2020 timeframe. The business is working tirelessly in each of its divisions to build its geographic presence and deliver technical expertise. Project timing has been challenging in Q417; however, the overall direction of travel for FY18 remains good. We expect to see further contracts announced early in FY18.

Valuation: Growth not in the price

We adjust our FY17 estimates for the lower H217 contribution. However, our FY18 estimates remain unchanged as delayed Q4 activity moves into the new year. As new territories are brought on stream, the potential for the substantial revenue growth for the 2018-20 period reiterated in the trading statement should become more tangible. In turn, this should provide support for our DCF-based fair value, which currently stands at €1.64 per share, from €1.74 before.

Divisional commentary and outlook

Integrated Logistics Support Services (ILSS)

A key growth driver for this division remains Cyprus. As a reminder, Medserv will support ENI’s drilling operations from its new Limassol base (full operation) and its storage facility in Larnaca. The Limassol base will be fully operational in November. However, drilling will now start in mid-December, later than hoped. While this delay is a significant reason for the group missing H2 expectations, the company has given further clarity over drilling volume, with four to five wells expected to be drilled over the next 12 months. In addition, the division has been active in a tender for drilling support for another international oil company (IOC) in the region next year. This would leverage the investment in facilities in the country.

Activity levels remain healthy at the Malta shore base. As we discussed in August, Medserv is engaged in advanced negotiations to locate support bases in new geographical regions that should support longer-term growth. The company has indicated that contracts here would be focused on development and production rather than exploration. The most advanced of these appears to be Egypt with an MOU signed during the current year. Both ENI and the Egyptian authorities regard the Zohr gas field as a priority for development. The negotiations have continued as the scope of services has increased. Contract execution is expected to commence in Q118. In addition, the division is awaiting the results from an outstanding tender from Trinidad, after failing to secure one tender this month.

Again, as we discussed before, the expectation that rigs will be prioritised to other programmes (as above) has led to the continued deferral of the wildcat drilling programme offshore Portugal where the licence runs to early 2019. Hence, Portugal is expected to remain relatively flat in the short term with drilling expected to resume in Q218. Medserv Italy also remains active.

Oil Country Tubular Goods (OCTG)

In August, we noted that Iraq had seen a strong pick-up in activity in Q3 and the company believed that business here should drive revenue and EBITDA growth for the division as inspection and machine shop demand grows. However, that level of activity did not continue into Q4, as the IOCs negotiate next steps. While this lower level of activity has prompted us to lower our FY17 forecast for the division, we expect a return to growth next year.

In general, the OCTG division is considered to be the largest growth driver of the group. The business is building its geographic reach and technical expertise. The trading statement reminds us of the progress underway in Oman, where the second OTG base opened in Duqm with operations starting at the beginning of November. The Nippon & Sumitomo Metal Corporation contract not only adds predictability with a five-year initial period plus five-year extension, but also delivers an attractive operating margin due to better pricing.

Estimates revision, valuation implications

We have revised our FY17 estimates, lowering group FY17 revenue from €30.3m to €28.2m to reflect the lower contribution than expected from drilling in Cyprus in Q4 and the lower level of trading in Iraq in Q4. We have lowered our FY17 EBITDA forecast from €4.3m to €3.4m to reflect the lower overhead recovery with less drilling contribution than expected, which results in a lower EBITDA margin. We have maintained FY18 forecasts unchanged.

Exhibit 1: Medserv estimates revisions

Year to December (€m)

2017e

2017e

 

% change

2018e

2018e

 

% change

Prior

New

Prior

New

Sales

30.3

28.2

-7.0%

42.3

42.3

0.0%

 

 

 

 

 

 

EBITDA

4.3

3.4

-20.2%

12.5

12.5

0.0%

Depreciation

(3.6)

(3.4)

-7.4%

(3.7)

(3.7)

0.0%

EBITA

0.7

0.1

-90.7%

8.8

8.8

0.0%

PPA Amortisation

(2.5)

(2.4)

0.0%

(1.7)

(1.7)

0.0%

EBIT reported

(1.9)

(2.5)

32.2%

7.1

7.1

0.0%

 

 

 

 

 

 

Underlying PBT

(2.3)

(2.8)

22.8%

5.8

5.8

0.0%

 

 

 

 

 

 

EPS – underlying continuing (c)

(5.3)

(6.4)

22.0%

9.5

9.5

0.0%

DPS (c)

0.0

0.0

0.0%

3.8

3.8

0.0%

Net debt

46.8

46.6

0.3%

48.0

48.7

-1.4%

Source: Edison Investment Research

We continue to employ a capped DCF approach to valuation, which encompasses a six-year explicit forecast projection in our model 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 8.5%. On our reduced FY17 estimates, our core assumptions return a DCF value of €1.64 per share, down from €1.74 per share.

Exhibit 2: 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

28.2

42.3

Cost of Sales

(23.2)

(29.9)

(22.9)

(19.5)

(25.8)

Gross Profit

9.2

12.8

9.9

8.7

16.5

EBITDA

 

 

5.9

10.3

5.0

3.4

12.5

Operating Profit (before amort. and except.)

 

 

4.2

7.6

1.6

0.1

8.8

Exceptionals

(0.0)

(0.1)

(1.2)

(2.4)

(1.7)

Other

(0.1)

(0.2)

0.0

0.0

0.0

Operating Profit

4.1

7.3

0.4

(2.5)

7.1

Net Interest

(1.1)

(1.5)

(2.8)

(2.9)

(2.9)

Profit Before Tax (norm)

 

 

3.1

6.1

(1.3)

(2.8)

5.8

Profit Before Tax (FRS 3)

 

 

3.0

5.8

(2.5)

(5.3)

4.2

Tax

(0.9)

(1.3)

5.4

(1.1)

(0.4)

Profit After Tax (norm)

2.3

4.8

(1.3)

(3.4)

5.4

Profit After Tax (FRS 3)

2.2

4.5

3.0

(6.4)

3.8

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)

(6.4)

9.5

EPS - normalised and fully diluted (c)

 

 

5.0

9.7

(2.1)

(6.4)

9.5

EPS - (IFRS) (c)

 

 

4.2

8.9

5.9

(12.1)

6.9

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

24.1

15.3

12.2

29.6

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

13.0

17.9

4.8

0.2

20.8

BALANCE SHEET

Fixed Assets

 

 

23.3

24.0

51.4

48.5

46.0

Intangible Assets

0.0

0.0

17.2

15.6

14.3

Tangible Assets

23.3

24.0

34.3

32.8

31.8

Investments

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

57.5

57.1

70.0

62.4

69.8

Stocks

0.0

0.0

1.3

1.1

1.7

Debtors

13.4

12.2

12.8

11.0

16.5

Cash

1.1

1.0

6.2

4.2

3.2

Other

43.0

43.9

49.7

46.1

48.4

Current Liabilities

 

 

(15.3)

(13.3)

(8.3)

(6.1)

(9.0)

Creditors

(10.4)

(9.5)

(7.2)

(6.1)

(9.0)

Short term borrowings

(4.9)

(3.8)

(1.1)

0.0

0.0

Long Term Liabilities

 

 

(56.1)

(56.7)

(86.8)

(84.8)

(85.0)

Long term borrowings

(21.1)

(22.4)

(52.1)

(50.8)

(51.9)

Other long term liabilities

(35.0)

(34.3)

(34.7)

(33.9)

(33.1)

Net Assets

 

 

9.5

11.1

26.4

20.0

21.7

CASH FLOW

Operating Cash Flow

 

 

(1.7)

10.4

6.0

5.7

4.1

Net Interest

(1.1)

(1.5)

(2.8)

(2.9)

(2.9)

Tax

(0.9)

(1.3)

(0.0)

(0.6)

(0.6)

Capex

(13.4)

(3.8)

(1.7)

(1.9)

(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)

0.3

(2.1)

Opening net debt/(cash)

 

 

6.9

24.9

25.2

47.0

46.6

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)

 

 

24.9

25.2

47.0

46.6

48.7

Source: Medserv accounts, 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 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 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 Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) 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.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 2018. “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.

Frankfurt +49 (0)69 78 8076 960

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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 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 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 Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) 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.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 2018. “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.

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 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney+61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Vernalis — Operational initiatives in place, execution is key

Tuzistra XR prescriptions (Rx) grew threefold to ~35k in FY16/17 (2nd year on the market) vs ~12k in FY15/16. Investment into addressing the barriers to higher Tuzistra XR prescribing is translating into higher Rx rates, although this has not been matched by revenue growth due to higher inventory stocking in the same period last year. In H217 FDA issued partner Tris with two complete response letters to Vernalis’s CCP-07 and CCP-08 NDAs and we now model launch during the 2018/19 cough cold season. Our updated forecasts reflect this and lower Tuzistra XR revenues due to a slower than anticipated sales trajectory in the near term.

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