On 5 April, Medserv plc (“Medserv” or “Group”) published its financial results for the year ended 31 December 2016. It is important to highlight that the 2016 financial results are not directly comparable with those of the previous year following the acquisition of Middle East Tubular Service Holdings Limited (“METS”) in February 2016. It is also important to highlight that, during the period under review Medserv adopted a reclassification of the income generated from its photovoltaic farm located within the Group’s operating base in the Malta Freeport, Kalafrana from ‘Other Income’ to ‘Revenue’. For this reason, the comparative figures for 2015 have been restated in line with this newly adopted classification.
During 2016, Medserv plc generated €32.8 million in revenues, down 23.2% from the record €42.2 million figure generated during the previous financial year as the additional contribution from METS was offset by delays in contracted works largely due to the notable drop in the price of oil. Furthermore, the Group also registered lower business activity at the Malta base due to the instability across Libya and the drilling works scheduled for 2016 in offshore Portugal were delayed by environmental issues.
Despite the notable decrease in business activity, cost of sales only dropped by 5.1% to €28.2 million from €29.8 million in 2015 as the Group maintained its bases located in Cyprus and Portugal operational even though they are not contributing any significant revenue. Furthermore, most of the Group’s administrative expenses are fixed in nature and Medserv also invested in additional manpower with the objective of participating in new tenders as opportunities present themselves. Accordingly, gross profit slumped by nearly 65% to €4.58 million from a record of €12.4 million in 2015 whilst the gross profit margin fell to nearly 14% (FY2015: 30%). Administrative and other operating expenses, net of other operating income, also declined to €4.57 million from €5.44 million in the previous comparable period, leading to a break-even position at the operating profit level.
Excluding depreciation and amortisation charges, which during the period under review increased to €5.52 million from €2.65 million in 2015 (reflecting additional depreciation and amortisation charges related to the acquisition of METS), earnings before interest, tax, depreciation and amortisation (“EBITDA”) totalled €5.53 million – down nearly 46% from the previous year’s figure of €10.2 million. The EBITDA margin dropped to 16.8% from nearly 24% in 2015.
The financial performance of Medserv was also negatively impacted by much higher net finance costs reflecting the additional borrowings taken on by the Group to finance the acquisition of METS. Indeed, finance costs rose to €2.46 million from €1.5 million in the previous financial year.
Overall, Medserv reported a pre-tax loss of €2.45 million compared to a pre-tax profit of €5.8 million in FY2015. After accounting for a tax credit of €5.43 million (attributable to investment tax credits on previously unrecognised deferred tax assets availed of by the Group’s Malta subsidiary following favourable changes in local tax regulations) and a loss of €0.16 million attributable to minority interests (largely related to the 20% shareholding of the Cypriot subsidiary and the 10% of METS Iraq owned by third parties), the Group’s net profit attributable to shareholders amounted to €3.14 million compared to €4.12 million in 2015. This translates into an earnings per share of €0.059 compared to €0.092 in 2015.
The Statement of Financial Position shows that total assets of the Group grew by nearly 50% to €121.5 million, mainly reflecting the inclusion of METS within the Group’s structure (including the creation of intangible assets and goodwill) as well as the notable increase in deferred tax assets. Similarly, total liabilities increased by 35.7% to €95 million mainly reflecting the higher level of borrowings of the Group which were used to finance the acquisition of METS. Accordingly, total shareholders’ funds jumped to €26.4 million mainly reflecting the net profit generated during the year under review as well as the additional capital raised by the Group following a rights issue exercise undertaken in the early part of 2016. The net asset value per share increased to €0.49 (31 December 2015: €0.247). The Group’s gearing ratio (calculated as total borrowings divided by total equity plus total borrowings) eased by 3.4 percentage points to 66.8%.
The Directors did not declare the payment of a dividend.
In their concluding remarks to the Directors’ Report, the Directors of Medserv warned that the oil price dynamics will continue to remain uncertain and volatile in 2017. However, on a positive note, most of the projections, including those from the World Bank, indicate that the oil price is on the recovery path though it is still far away from the prices seen in recent years. The Directors also noted that the first countries to benefit should the price of oil continue to recover are the geographical regions in which Medserv operates given that the cost of producing oil in these countries is relatively lower compared to other regions.
As such, the Directors expressed their optimism for the future as the drilling activity that has been planned for both Portugal and Cyprus is now expected to commence by the Q4 2017. In addition, the Group anticipates a better performance in the Oil Country Tubular Goods operating segment given the Group’s business pipeline in the Middle East.