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Medserv plc 2017 results and updates

On April 30, the board of directors of Medserv plc released the consolidated financial statements for 2017 of the Medserv Group, which posted a loss after tax of €7.6 million, due to the downturn that has characterised the oil and gas industry in the past years.

As a result, the earnings of oil companies were put under pressure and investments in the sector were cut down and/or delayed.

The group currently operates in two main segments: integrated logistics support services (ILSS) which are primarily provided in the Mediterranean rim from the Malta and Cyprus base; and the oil country tubular goods (OCTG) provided through the METS Group in the Middle East from the bases in Oman, UAE and Iraq.

As indicated above, the downturn in the oil and gas sector and the delay in the commencement of a number of projects led to a 12.3 per cent decline in revenue for the group in 2017.

This drop is stemming from the ILSS segment, whose revenue decreased by 27 per cent compared to 2016, primarily due to the reduced activity in Mediterranean.

Conversely, the OCTG registered a 16 per cent growth, mainly thanks to the growth registered in Oman where the group opened a new base in Duqm following the award of a 5+5 year contract by the Sumitomo Group during 2017.

Despite the scaled down activities, the group did not curtail costs in 2017, and remained operative in bases that were mothballed, such as Cyprus, Portugal and Iraq, in view of future projects. This translated into lower margins and profitability due to the fixed nature of a significant part of the cost base. The Group registered a positive adjusted EBITDA of €4.4 million, down 18 per cent from 2016 and an operating loss of €4 million.

Net results were also impacted by the adoption of the early adoption of IFRS 16 (for the recognition of lease agreements), which resulted in a €2.3 million increase in de depreciation charge as well as approximately €1 million in finance costs according to management.

The company’s management expects 2018 to be a turning point for the group.

t the beginning of 2018 the group was awarded a three-year contract for ILSS services in Egypt (a new market for the group), whose contract value is estimated at around €10 million.

Cyprus returned operational at the very end of 2017, and following the discovery of massive natural gas reserves off Cyprus the group is now in advanced negotiation stage with an international oil company to offer ILSS services.

The group is also currently involved in a tendering process in Uganda which is expected to be awarded in the second half of 2018. Other potential tenders for the group are expected to come out during 2018 in Africa and Middle East.

The base in Iraq, the subsidiary most impacted by the recent downturn in the oil and gas industry, posted a negative EBITDA of around 19 per cent according to the management comments, classifying itself as the worst contributor within the group. In this regard, the management is optimistic and expects a positive contribution from this base in 2018, on the strength of the Iraqi base being the sole VAM-licensed workshop in the country and of the recovery expectations over the Iraqi economy for 2018 and 2019.

The base in Portugal, where the drilling operations of ENI have been delayed due to environmental issues, is expected to remain mothballed for 2018.

Overall, the management forecasted group’s revenue for 2018 at €36.7 million and EBITDA at €6.7 million. Operating and net profit are forecasted to be still negative in 2018 at -€1.4 million and -€5.6 million respectively, due to the high depreciation and amortisation charge and finance costs. Despite the expected negative profitability, the management would not exclude the payment of a dividend (for the years 2018 and 2019), if a number of other conditions are met, such as a positive EBITDA, retained earnings and cash balance.

Concurrently to the approval of the group’s financial statements, the company announced the intention of the two majority shareholders, holding over 65 per cent of the company, to sell out their shares to a strategic investor, which could potentially accelerate the group’s growth. The board was informed that the process was a very early stage and there was no certainty that a suitable purchaser would be found or that negotiations would, once commenced, be successful.

Disclaimer:

This article was issued by Elisabetta Gaudiano, research analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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