DMS : Weak FY17 results; all hopes on the new segments?

FY17 was weak. If the group has ambitions in its new segments (Wellness and Biotech), it will still need to convert these into results and cash while the market will also be scrutinising the evolution of the historic imaging business, still by far the group’s main activity with c. 98% (!) of sales. The stock is a bet on DMS’s new segments.

DMS released FY17 results. Revenues reached €27.1m (vs €37.4m), EBITDA €-2.2m (vs €-0.71m), EBIT €-1.9m (vs €-1.3m) and net income €-2.5m (of which €-1.3m from discontinued operations, i.e. Alpha Mos). The group had a net debt position at the end of FY17 of €1.7m (vs a net cash position of €2.1m in FY16 and €1.1m at the end of FY15). Contrary to previous years, the group didn’t not really mention in the release any target for the current year, only again describing the new segments it has engaged in (Wellness and Biotech) with hardly any comment on the key historic imaging business. As a reminder, the group indicated last year that the imaging segment was to be supported by the agreement with NGI, the first results of the R&D efforts at Alpha Mos should have started bearing fruit in H2, while DMS Wellness should also have booked its first sales in H2. This probably explains this year’s cautiousness since nothing has really happened according to plan.

Needless to say that the FY17 results are rather weak. This was quite predictable since the group had published in early February a weak revenue number (€27.1m or -9% on a comparable basis, i.e. after the disposal of Alpha Mos, see our Latest dated 4 February). Due to this lack of momentum at the top-line level, the group’s losses have increased in FY17, with EBITDA strongly down, even after the deconsolidation of Alpha Mos (which contributed negatively to FY16 EBITDA). In other words, the comparable EBITDA for FY16 was actually €0.3m (vs €-0,7m published), i.e. the group was still at break-even EBITDA-wise, which was far from the case in FY17. Even taking into account the losses due to the operating investments in the new segments (Wellness and Biotech), the group still posts a rather dirty €-1.7m loss at EBITDA level on its historic imaging business (a -6% margin). Altogether, the operating result looks better (or not so bad) to €-1.9m but it includes the €1.8m capital gain on the disposal of the stake in Alpha Mos, so the underlying EBIT level is very low as well (€-3.7m). In terms of cash flow, the low level of results has led to a €3.6m increase in net indebtedness (from a €2.1m cash position to a €1.7m net debt), which is not a real concern at this stage with above €23m of equity in the group. Looking forward, it takes of bit of patience and makes it necessary to dig into the group’s annual report to read that the group expects the first sales linked to the agreement with Fujifilm Europe (see our Latest dated March 2017) in FY18 in the Imaging segment (with no comment on the rest of this segment), that the DMS Wellness should “progressively” benefit from the agreements signed in Asia (see our previous comments as well) and that the first Cellis devices have been delivered in March 2018 in the Biotech segment. This is supportive, but rather vague. It remains that the new segments look promising. We are, however, a bit worried to hear so little on the (still) key imaging business. On top of this, we believe that the market will be “in a hurry to wait” for the first real impact of new businesses on the group top-line and, above all, the results, since the latter remain so far disappointing.

We will cut our earnings forecasts on this weak set of numbers, significantly below what had previously been anticipated by the group’s management. Looking forward, the prospects for the group will heavily depend on the success of its new offer (both in Wellness and Biotech) and the stock appears more and more as a bet on this. Our valuation will therefore not necessarily fall despite the weak set of figures and the downward revision of our estimates, depending on our modelling of the new segments. In short and from an investor’s perspective, rewards could be high, but this goes with a high level of risk in our view.