Medserv plc, the oil and gas logistics and support services company, published its 2014 financial statements early last week. The market was eagerly awaiting these results not only to gauge the possible impact from the adverse developments in Libya but also to verify whether the company managed to achieve its forecasts published at the time of the issuance of the second tranche of bonds in April 2014.
The Medserv Group reported that during 2014 it registered a pre-tax profit of just over €3 million, a significant improvement compared to the marginal profit registered in 2013 and more importantly 34.6 per cent above the projected €2.2 million.
During a meeting with financial analysts a few days after the publication of the financial statements, chairman Anthony Diacono explained that the superior performance was due to the higher values attributed to the contracts that commenced during the second half of 2014.
The primary contributor to the 2014 financial performance was the Malta base as the two major contracts with the international oil companies (IOCs) that had been signed early in 2014 commenced as anticipated during the second half of the year. However, the provision of services widened in part due to the developments in Libya which brought about new contracts with some of the service providers and also as the employees of these two IOCs all relocated to Malta.
Medserv’s chief financial officer Karl Bartolo also reported that the 2014 financial statements show a 7-month contribution from the Cyprus base with pre-tax profits amounting to €1.5 million. Medserv’s shareholding in the Cypriot base amounts to 80 per cent and this subsidiary has a 3-year contract with ENI Cyprus which commenced on June 1, 2014 with the potential for a 2-year extension.
Moreover, in 2014, Medserv generated revenue from the solar farm at the Malta base which went live in July 2014.
While pre-tax profits were 34.6 per cent above projections, the difference in the revenue figure was substantially above this mainly due to bunkering income of circa €8 million in 2014. Although this is classified as low margin business with a lesser beneficial effect on profit margins, it was necessary for Medserv Malta to provide such services due to its holistic service approach to its large clients.
Last week, Medserv’s directors recommended the payment of a net dividend of €1.4 million, equivalent to €0.056 per share. This is a sizeable increase over the 2013 dividend of €600,000 and reflects the surge in profits during the year. The dividend is payable to all shareholders as at close of trading on Tuesday May 26, 2015 and the dividend payout ratio works out at 72 per cent.
Although the company has recently been through a heavy investment programme mainly funded via the bond issue, the extent of the dividend hike reflects the intentions of the two executive directors to reward all shareholders accordingly when the financial performance is positive. The dividend is paid out of tax exempt profits and therefore this needs to be compared to other equities on a net basis. In fact, despite last week’s rally in the share price, Medserv’s net yield of 2.95 per cent currently ranks among the top five dividend yielding equities in Malta.
While equity investors should be pleased with the increased dividend as well as the strong return on equity of 22.6 per cent after tax, bondholders should also be satisfied given the resultant interest cover which is now at above five times following the 2014 results.
The estimated contract value of €2.1 million has since been increased to €4 million
Given the company’s erratic track record to date, some investors may question the sustainability of Medserv’s financial performance in 2015 and beyond. The pre-tax profits of €3 million in 2014 are just below the record achieved in 2009. The decline in profitability since 2009 is as a result of the negative impact from the delay in the oil and gas exploration programme offshore Libya due to various economic and political reasons such as the global recession, the Gulf of Mexico oil spill and developments in Libya in 2011.
However, barring any unforeseen developments, the contracts in hand will remain operating in 2015 and beyond. In fact, during the first half of 2014, Medserv reported that the two contracts awarded by the two IOCs for the use of the Malta base are for two years with the option of extending for another two. The contracts relate to the provision of support services for a sizeable programme of exploration and production of a number of wells offshore Libya. Works commenced in the second half of 2014 and revenue from these sizeable contracts should again be the major contributors to the 2015 financial performance.
Likewise, the contract for the Cyprus base with ENI is fixed for a 3-year term. As such, the contracts in hand should reassure investors on the likelihood of less volatility in the company’s performance for the duration of these contracts.
In fact, in the 2014 Annual Report published last week, Diacono stated that current operations out of Malta and Cyprus are estimated to have a duration of three years.
Additionally, the revenue from the solar farm is fixed for a 20-year period while Medserv also recently announced that it was awarded a maintenance contract for works on an offshore platform which is due to commence in the coming weeks and will take 10 months to complete. This contract was included in the 2014 financial forecasts but was delayed due to the recent upheaval in Libya. More importantly, the estimated contract value of €2.1 million has since been increased to €4 million as the scope of work expanded.
Medserv’s chairman also indicated in the annual report that after consolidating its position in the Mediterranean region, the company “is well placed to expand its services to other regions”. This was also mentioned at length during the analysts’ meeting as the executive management team aims to develop longer-term sources of revenue.
Medserv’s future strategy was presented to analysts by executive director Anthony Duncan. He mentioned that Medserv was now being recognised globally since the same IOCs operate in various regions across the world. Duncan indicated that Medserv was studying the Egyptian market once again and referred to other opportunities that may yield results within the next 12 months.
Following the positive 2014 financial performance and the uplift in dividends which led to a rally in the company’s share price, investors now eagerly await the publication of the 2015 financial forecasts that should be published by May 23.
This forthcoming announcement will provide valuable information to the market on the immediate expectations for the current financial year, but market participants should also be on the lookout for announcements related to other potential contracts and strategic initiatives which could enable the Medserv Group to achieve further diversification and continued success over the longer-term.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.