Edison’s views on Medserv

Article #440 by Edward Rizzo - Published Published Articles

On 10 June, Medserv plc announced that it appointed Edison Investment Research of the UK to carry out analytical investment research on the company and subsequently publish its findings in the form of publicly available reports on a periodic basis.

This is the first initiative by a company listed on the Malta Stock Exchange to engage an international specialized research house to review the company and produce an independent valuation for public consumption.

To mark this milestone initiative, Medserv and Edison held a joint meeting for financial analysts last week and today’s article reviews the main findings of the report.

In his opening remarks during last week’s meeting, the Executive Director and largest shareholder of Medserv, Mr Anthony Duncan, explained that Medserv wish to go beyond the standard announcements required of public companies due to the need of providing the growing number of shareholders, bondholders and the market in general with additional information and the visibility necessary to make informed judgements. Moreover, Mr Duncan added that Medserv’s clients, which are among the major oil companies and other subcontractors in the oil and gas sector, are closely monitoring the financial strength of their suppliers. He believes that the Edison report will also be instrumental in this respect. Additionally, Mr Duncan argued that Edison’s global reach will further assist Medserv in its ambitions to spread its name beyond the geographical areas in which it presently operates.

“… other local companies, especially those that operate outside of Malta and whose main strategy is to continue to grow internationally, should replicate this initiative …”

Medserv clarified in its announcement via the Malta Stock Exchange that, although Medserv engaged Edison, the independent investment research reports are compiled by Edison solely on the basis of publicly available information and any forward looking statements and projections reflect solely the views of Edison.

Edison Investment Research is surely unknown to many local investors. Edison is Europe’s largest independent investment research company with offices in Europe, Asia and the US. It has a team of over 80 analysts and produces research on over 450 different companies around the world across 8 different areas of sector specialization. Edison provides its clients with a range of services including equity research, investor roadshows and investor relations. The reports produced by Edison are freely downloadable on their website and are distributed among some of the world’s largest asset managers apart from being available via information platforms like Bloomberg and Reuters.

In the 16-page initiation report on Medserv, Edison provide a detailed overview of the history of Medserv, its current strategy, the recent acquisition of METS, the future growth opportunities and also a valuation of the company.

In my view, the most important revelations contained in this report relate to (i) the resilient offshore activity with increasing new opportunities; (ii) the acquisition of METS which was well-timed and apart from increasing earnings visibility, it improves the quality of earnings and cash flows; (iii) the fact that Medserv’s share price is currently trading close to Edison’s fair value estimate of €1.83 but with clear upside potential based on new development opportunities.

With respect to the current operations of Medserv, Edison claim that it may be surprising to many that in the present difficult environment in the oil and gas industry with the pressure of the oil price having an impact across the supply chain, Medserv is not only proving to be very resilient but the opportunities for the company to service new activities are increasing.

Edison explain that this is partly due to geopolitical developments driving previously deferred investment programmes (namely Libya) and partly due to the discovery of significant new oil and gas deposits (namely Egypt). Moreover, Edison highlight the potential for new offshore work in Cyprus, Trinidad & Tobago as well as Iran.

The analyst of Edison who presented the findings last week, Mr Andy Chambers, highlighted that the METS acquisition was very well-timed and it reduces the risk and volatility of the overall Medserv Group while generating strong cash flows. The Edison analyst who has over 32 years experience in research covering multi-national companies such as Rolls-Royce, also explained that in their view, the METS acquisition was a very good financial deal for Medserv considering the operations and financials of METS. Edison believe that this will create value for shareholders.

While Medserv recently published its 2016 financial projections as part of its obligations due to its outstanding bonds in issue listed on the Malta Stock Exchange, the Edison report also discloses the 2017 financial estimates prepared by Edison’s analysts. They expect Medserv to generate revenue of €48.7 million in 2017 (a rise of 10.9% from the projected €43.9 million in 2016); EBITDA to climb to €14.3 million and profit before tax to rise to €6.6 million (compared to the projected €4.3 million in 2016 and the record €6.1 million in 2015). The improved performance being projected by Edison’s analysts is due to the 12-month contribution from METS, higher revenue in Malta due to additional drilling offshore Libya and the partial recovery in Cyprus.

Apart from the 2017 projections which were published in the initiation report, Edison built its financial model on Medserv around forecasts for an additional 6 years which provides the basis for the valuation. Edison also made other assumptions forming the basis of the valuation which works out at €1.83 per share. Edison also publish an interesting matrix showing the resultant changes in the valuation assuming a different weighted average cost of capital and a change in the terminal growth rate. Moreover, it is worth highlighting that Edison stated that the valuation of Medserv could be enhanced significantly on the basis of additional work in Cyprus, Portugal, Trinidad & Tobago, Egypt as well as a possible new base for METS in Iran.

Edison naturally also highlight a number of sensitivities and risks including macro issues related to the oil and gas sector; geopolitical risk; customer dependence; and financial risk following the pressure on balance sheet metrics as a result of the debt financing raised to finance the METS acquisition.

This insightful report is a very positive initiative by Medserv and stands to benefit the wider local capital market. In my column over recent years, I have invariably called on companies that have their equity listed on the MSE to start providing increased guidance to the market. Investors (both retail and institutional) require financial forecasts to assist them in their decision-making process since equity investment decisions are largely dependent on the analysis of the companies’ ability to sustain and grow their operations. Companies such as Edison can assist the local public entities in building up financial models and publishing with their own projections. Such reports are updated regularly throughout the year which can also help investors understand the changes to a company’s valuation based on achievements, business developments, potential opportunities and/or setbacks. This should be a natural progression for the local capital market and helps to educate our investors apart from attracting more sophisticated investors to the domestic market.

In my view, other local companies, especially those that operate outside of Malta and whose main strategy is to continue to grow internationally, should replicate this initiative. Companies also deliberating an equity offering on the MSE should also seek to engage an international research company at the time of their Initial Public Offering and beyond since this will immediately provide added information to the local and international investor community.

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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.

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