Medserv plc held a meeting with stockbrokers last week to explain the 2014 interim financial statements in further detail and provide an update on current projects.
The 2014 interim financial statements published on August 28 showed a significant increase in revenue to €9.6 million (2013: €3.7 million) but pre-tax profits edged 4.2 per cent lower to €0.54 million.
It is worth highlighting that as a result of the bond issue and the new investments undertaken, the 2014 interim financial statements also reflected higher finance costs at €0.35 million (2013: €76,000) and a rise in depreciation to €0.45 million (2013: €0.26 million).
The 2014 interim financial statements also reflected higher finance costs
While reviewing the financial statements, executive director Anthony Duncan explained that during the first half of the year, the Malta base was particularly busy preparing for the commencement of the two major contracts with International Oil Companies (IOCs) mentioned in previous announcements. Works on one of the projects already commenced in the second half and the other is expected to start in November 2014.
Duncan also revealed that the reason for the decline in margins was that the company carried out bunkering services and this revenue amounted to around €2 million. The executive director explained that although bunkering is not a core business activity, it is a necessary service requested by clients and the company only generates a low margin of profit from such an activity. The Malta base was also responsible for works to the oil company that was responsible for the Malta oil well and maintenance to an oil platform offshore Egypt.
The interim financial statements also included the initial contribution from the Cyprus base which was contracted to ENI for a 3-year period (with the potential for a 2-year extension). The Cypriot base opened for business on June 1 in line with the contractual obligations with ENI and in only one month, the interim financial statements revealed total revenue of €0.95 million and a profit contribution of €0.33 million, translating into a margin of 35 per cent. Since this is generally a fixed contract, the second half results will show a similar monthly contribution to that seen in June 2014. This is one of the major reasons that the Medserv Group will generate a much higher level of profits in the second half of the financial year compared to that registered during the first six months.
On his part, chairman Anthony Diacono also made reference to the two major contracts with the IOCs. He explained that Medserv had been awaiting the commencement of such contracts ever since the company’s Initial Public Offering (IPO) in 2006 but these had been delayed for various economic and political reasons such as the global recession, the Gulf of Mexico oil spill and developments in Libya in 2011. The renewed political uncertainty in Libya some months ago did not disrupt planned offshore drilling projects in Libyan territorial waters and the major IOCs are committed to the upcoming works. The chairman labeled these as “the biggest projects ever undertaken in the Mediterranean” and Medserv has contracts in hand to benefit from this long anticipated period of significant activity. The rigs have already been contracted and while one is on site, another is shortly underway so as Diacono explained “there is no turning back”.
One of the projects commenced in the summer period and the other project is anticipated to begin in November 2014. Both these projects will also contribute to the additional profitability expected in the second half of the financial year and in the coming years.
While Diacono mentioned that the recent developments in Libya had no effect on planned offshore activities as the market seems to be perceiving it, on the other hand, he confirmed that such developments led to additional opportunities for Medserv – supplementary work which otherwise would not have been contracted to Medserv’s Malta base. The chairman explained that all the staff of the major IOCs relocated to Malta and are operating from the additional office space constructed in recent months at the base within the Freeport. Moreover, Diacono mentioned that the world-renowned subcontractors of the major IOCs are also in the process of utilising Medserv’s services for upcoming projects.
Revenue from such activities was not included in the financial projections at the time of the bond issue. At last week’s meeting, it also transpired that other work is currently being discussed with a large US client which requires Medserv’s expertise in the industry.
In fact, the chairman again expressed his confidence that the group would match the forecasts published on April 7, 2014, which indicated a pre-tax profit of €2.2 million for the 2014 financial year.
Over the past year, Medserv tapped the bond market in two stages with a total offering of €20 million. The two executive directors explained that this funding was fully utilised in the investments envisaged including the solar farm. This is operating as planned and should generate annual revenue in the region of €500,000.
Moreover, the warehouses constructed at the base at the Freeport and the additional space in Ħal Far are already fully occupied and Medserv are also considering the lease of the extra 10,000sq.m. in Ħal Far due to the expected client requirements in the near future.
Duncan also indicated that the group would require additional funding as working capital for the significant work ahead. Duncan explained that discussions are taking place to ensure that the company has the required funding for this work while not overlooking the need for adequate returns to shareholders.
Although the two executive directors have a very positive outlook for the next three years due to the contracts in hand, they also indicated that following the appointment of Neil Patterson as strategic development officer earlier this year, the board of directors is discussing the longer-term strategy with a specific focus on developments in the sector in the Eastern Mediterranean.
Market participants will be particularly attentive for further confirmations in the Interim Directors Statement due in November on the projects currently being undertaken and progress on the commencement of the other major contract expected by the end of the year.
Afterwards, the attention will shift to the publication of the 2014 financial statements due by April 30, 2015 to ascertain whether the company has actually managed to achieve the envisaged pre-tax profits of €2.2 million.
Moreover, the updated Financial Analysis Summary due by June 30, 2015, at the latest, providing the directors’ forecasts for 2015 would be of more interest to equity investors.
One would expect higher profits due to a full-year’s contribution from Cyprus (as opposed to seven months in 2014) and the significant work from the Malta base for the two major IOCs operating offshore Libya.
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