Company Overview: Paragon Care Limited is engaged in the supply of medical equipment, medical devices and consumable medical products to the health and aged care markets throughout Australia and New Zealand. The Company provides solutions for bedding, bedding furniture, emergency trolleys, medical carts, stainless steel medical equipment, storage systems, material handling products, surgical instruments, clinical refrigerators, lifting systems, newborn hearing screening, diagnostic and intraoperative ultrasound, dermatologic and cosmetic medicine, temperature management solutions and air management, among others. Its products include NeuroCom Clinical Research System, NeuroCom Basic Balance Master, Stralus S-Line Bed Light Birch Trim Single, Stralus S-Line Bed Milano Walnut Trim Single, Elite Mattress Replacement System and Prelude Mattress Overlay System. Its brands include axishealth, gmmedical, iona, Richards Medical, MediTron, rapini, western biomedical and Scanmedics.


PGC Details

FY 2018 driven by Inorganic Growth, Nine Acquisitions to be Key Drivers: Paragon Care Limited (ASX: PGC) ended FY 2018 with strong momentum primarily because of the inorganic growth. The company managed to wrap up nine acquisitions in FY 2018 which truly aided the company in terms of the diversification. The company’s revenues witnessed YoY (year-over-year) growth of 17% to $136.7 million in FY 2018 whereas its EBITDA amounted to $18.2 million which implies an increase of 6.3% as compared to the previous year. The company’s management has described FY 2018 a year of acquisitions which not only compliments the existing business but also helps in expanding into new markets as well as new products. Further, the company has increased its presence across geographies as the company now has operations in South Australia, Queensland as well as New Zealand. Apart from the inorganic growth, the company has also managed to experience organic growth in many parts of the existing product ranges in FY 2018 on the back of increased penetration into the health and age care sector and new product development. In our view, the company has a brighter outlook on the back of synergistic acquisitions which will support to increase the clients’ productivity and overall business performance in years to come.


Synergistic Acquisitions: A Comparative View (Source: Company Reports)

Robust Deployments, Improved Sales Capabilities – Key Growth Catalysts: Paragon Care has maintained its clear focus on achieving healthy growth momentum, and the company is actively seeking and leveraging the opportunities which could help it in near future. In FY 2018, the company has deployments towards the growth initiatives in the sales team as well as towards IT infrastructure. During the same period, the company has also worked towards cross-sell opportunities as well as cost efficiencies. Additionally, the management of the company is also optimistic about these steps and expect initiatives would pay-off moving forward. The primary factors which aided Paragon Care in achieving the organic growth are product expansion as well as improved sales capabilities. The company’s management believes that the M&A opportunities can help it in witnessing strong growth with regards to geographies as well as customer base.     

Huge Market Opportunity Positions PGC for a better Market Share: The management of Paragon Care is of the view that there is significant opportunity to grow in the market. According to them, total spending with respect to the healthcare in New Zealand as well as Australia is $193 billion. The company’s target market reflects robust opportunities with respect to the medical as well as surgical supplies expenditure. Of the total market share which the company has been targeting, its share has been estimated at 3% which clearly signifies that there is still immense scope to grow in the market with support coming from organic and inorganic tools.


Broader Market View (Source: Company Reports)

Strengthened Balance Sheet Would Help PGC in Achieving Growth: Paragon Care’s management believes that its balance sheet is robust which places the company well to achieve growth objectives moving forward. In FY 2018, the company had a total asset base of $349.7 million in FY 2018 while in FY 2017 the asset base was $166.1 million. This substantial rise in the company’s asset base was witnessed on the back of the acquisitions done in FY 2018. The company has robust flexibility which might help it to grow along with the payments of dividends. The current ratio and quick ratio stood at 1.88x and 1.15x, respectively in FY18 while debt-to-equity ratio came in at 0.62x. It represents a decent liquidity position of the company and we expect the same to continue in years to come.

 
PGC’s Total Assets (Source: Company Reports)

EBITDA and EBITDA Margin expected to be at higher levels going forward: The Company has recorded EBITDA Y-o-Y growth of 6.3% in FY18 due to increased topline growth and disciplined cost control approach. However, EBITDA margin contracted to 130 bps and recorded 13.3% in FY18 against 14.6% in FY17 as the company was aggressive to expand its business via strategic acquisition during the same period. Post-acquisition, the company expects EBITDA margin would be around 15% in the upcoming period.


EBITDA and EBITDA Margin expected to be at higher levels going forward (Source: Company Reports)

Healthy Financials: The company has consistently achieved higher Net Margins over the past few years. For FY18, the net margin came in at 8.0% compared to the industry average of 3.0%. Over the period, the company has also generated a significant return for the shareholders with ROE at 8.7% against the industry average of 12.4%. Operating margin, on the other hand, came in at 10.0% in FY18 which is higher than the industry average of 6.5%. Further, the management of Paragon Care is highly optimistic about the company’s performance. As per the management of Paragon Care, the restructuring activities in the sales team coupled with the improvements in the IT infrastructure would help boost the company’s tools for organic growth. The management stated that the robust momentum in the revenues has been witnessed which could help the company moving ahead.

However, Paragon Care’s management is targeting revenues amounting to approximately $260 million in FY19E. The company is expected to witness full contribution from the acquisitions that have been done in FY 2018. It also plans to achieve the organic growth of around 10% and is tapping more opportunities related to the mergers and acquisitions that are expected to act as a catalyst in the company’s growth momentum. The company has been targeting EBITDA of approximately $36 million in FY19E as the company expects ~$3 Mn annualized cost savings due to business transformation.


Expected Revenues and EBITDA (Source: Company Reports)

Drivers for Future: Paragon Care has maintained its focus on increasing the market share and to become the leading supplier of New Zealand and Australia’s healthcare equipment as well as services. In order to achieve this, the company plans to undertake organic and inorganic methods of growth. The company plans to increase the share by working with the customers along with various products as well as services. In addition, the company also plans to continue with its inorganic growth strategies and undertake certain acquisitions which bring products and services to the company’s platform as well as which could help in expanding the geographic reach.

Further, the company had sold different products and services to the large customer base with the help of one platform. The management stated that the costs are getting reduced with common warehousing as well as distribution logistics. Moreover, selling the products to increased customer base helps in increasing the wallet share, and improving the relationship with the customer which leads to higher selling opportunities going forward.
 
 
Various Product and Services sold Via One Platform (Source: Company Reports)

Other Key Updates: In September 2018, Paragon Care has made an announcement that it had issued 16,483,517 ordinary shares (fully paid). These shares have been issued to Pioneer Pharma Australia Pty Limited. The issue price of shares, as stated by Paragon Care, is A$0.91 per share. After the completion of the placement (Tranche 1), PGC would be having 302,187,703 shares on an issue while China Pioneer would be holding 5.45%.

Stock Recommendation: The company has generated negative YTD return of 5.02% and traded at reasonable PE multiple of 14.07x with the beta of 0.24x as on 5-Year (monthly basis), signaling undervalued position at the current juncture. In the meantime, two technical indicators, Relative Strength Index (RSI) and Moving Average Convergence Divergence or MACD, have been applied on the daily chart of Paragon Care and the default values have been used. As per the observation, the MACD line has crossed the signal line and is moving upwards. Therefore, it can be stated that the crossover has been a bullish crossover. Moving forward, the company’s performance is expected to be helped by the increased investments, acquisitions, potential opportunities for M&As as well as the restructuring of the sales team. FY19 EPS will particularly find support from acquisition of Total Communications that has better revenue and margins. Given the backdrop of aforesaid facts and decent fundaments, we believe that the company can deliver high single-digit to double-digit upside in stock movement (%) in the medium term. Hence, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.750.
 

PGC Daily Chart (Source: Thomson Reuters)
 
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