Many pieces of news at the same time. As far as certainties are concerned, Q1 18 revenues are weak and the group will find it hard to generate any profit at all in FY18. As a reminder, FY17 ended up with a net loss of €2.5m (o/w €1.3m in Imaging), while the start to the current year was undoubtedly poor.

Concerning the potential deal with Intrasense, it is probably too early to draw conclusions (and the deal still has to be finalised). Nonetheless, the business is rather small and will not impact the group that much in the short term, except for the losses it generates.

Looking further, synergies may give some fresh air to the Imaging segment, but it will take some time before any real impact is felt. Lastly, the group seems to have secured its financing, although the deal struck looks quite complex given the size of the group.

This is good news to finance the new segments (Wellness and Biotech), but we must admit that visibility in this field is very low and that these activities have to be seen as start-up ones, with a high level of risk.

The many pieces of news released should not hide the poor top-line in Q1, we believe. We suspend our opinion/target price and will update our model based on last night’s releases.

DMS has released it Q1 18 revenues, which reached €4.9m (-20%). The group also announced it has entered into negotiations with Intrasense with a view to contributing its imaging activities to the latter, in exchange for new shares to be issued. Lastly, it has secured new financing (maximum amount of €37.5m within the next five years) with the Luxemburg fund “European High Growth Opportunities Securitization Fund”.

Q1 18: poor!

Revenues for Q1 were sharply down on last year (-20% on a comparable basis). The group prides itself in the good performance of the bone-densitometry segment (+58%) and new activities (+68% from an epsilonesque €0.1m basis), but fails to give the relevant number for radiology. Given the fact no absolute numbers were given for the sub-segments, and considering that bone-densitometry weighs about 20% of the imaging activity, we estimate that Radiology went down from c. €4.8m to €3m, or -35% (the group’s largest activity).

Management underlines that an order (worth €1.6m) in Egypt has not been delivered and was thus not billed but that it will be “during the year”. Rather vague, but why not. That said, the segment would still be down including this and total revenues would be more or less flat. In short, the negative trend since Q2 17 (a year ago) does not seem to reverse even if the comparison basis will become favourable. In short, the historic business still has some way to go to achieve decent growth, which probably explains the new initiatives taken, described below.

Exclusive negotiations with Intrasense

DMS announced it had entered in exclusive negotiations with Intrasense, a listed Montpellier-based company which designs Myrian®, a software solution allowing medical images visualisation and analysis. If the deal goes through, DMS would contribute its imaging activities to Intrasense, in exchange for new shares to be issued and would become its majority shareholder. We do not cover Intrasense, but note the company achieved sales of €2.2m in FY17 (down c.25% on FY16!) with a net result of €-2.1m, (i.e. a strong loss compared to its size).

The “ratios” used for the deal would imply a value for DMS’s Imaging segment of €40mf vs €7m for Intrasense’s software applications, which should indicate DMS would control roughly 85% of the “new” entity (exact numbers still have to be figured out) and both companies would remain listed. Why not again, although the price “paid” for Intrasense looks rich (the current holders of Intrasense would get c.15% of a c. €30m revenue entity, 7% of which stemming from the “old” Intrasense).

Whether the combination will enable the development of new solutions and get the group back on the way to growth remains to be seen, while both companies have experienced a rather negative momentum as of late, to say the least. The deal is not done yet and, of course, a number of other details are still missing (Who will manage the imaging business? What synergies can be derived from such a deal? Will DMS be exempted from a full buy-out of minority shareholders? What would be the exact respective valuations of assets? etc.).

In short, it is very early to have a clear view on the potential transaction, although it is unlikely to change the fate of the imaging segment in the very short term (on top of the fact it will first lead to consolidate more losses). Moreover, due diligences still need be done. More news is expected in June (final conditions of the potential transaction).

New financing

DMS has also reached an agreement with the Luxemburg fund “European High Growth Opportunities Securitization Fund”, according to which DMS will be able to issue interest-free “ORNANEs” (bonds repayable in cash and/or new and/or existing shares), with equity warrants for a maximum of €25m nominal (excluding warrants) over the next five years (and €37.5m including warrants).

DMS will have the option to use this financing for acquisitions (among others) as long as the number of its own shares does not increase by more than 20% over 12 rolling months (including the potential dilution stemming from the exercise of warrants).

A number of conditions are, of course, attached to such issuances (among others that no change of control or “material adverse change” occurs or that the 20-day weighted average closing price of the DMS share is higher than its €1.62 nominal, except for the first tranche described below).

If all ORNANE and warrants were to be converted into shares in the next five years, this would roughly mean an extra 22.2m shares at today’s share price. In other words, the total dilution could be c.58% for today’s shareholders, while the group would benefit from a €37.5m financing (again at today’s conditions). DMS has already decided to “call” a first tranche of 2,500 ORNANE (€2.5m) at its Board meeting on 14 May.

We put the stock under review after these pieces of news (thus our target price is no longer valid). Fundamentally, the group’s business (understand Imaging) is not delivering on management’s promises. The deal with Intrasense (if it goes through) has to prove its merits.

The only positive point we see in these three releases is that the group has secured its financing for the years to come (with a number of conditions though). It remains to be seen if and how DMS uses this new financial flexibility. Altogether, the group is likely to look quite different: on the one hand, the Imaging segment (listed as such) and, on the other one, the new activities (also listed).

The latter will consolidate the former, adding complexity to the (still small) group, in our view. If new segments offer opportunities (see our recent comments), the historic business looks stuck in a low-growth path that is not exactly exciting. The immediate market reaction was negative, which is not a surprise to us given the fact that the historic business is suffering, the visibility on the group as a whole has seriously gone down and that there could be future significant dilutive impacts, depending on how DMS intends to use the extra-financing “lines”.