09-Mar-2021:  Taylor Collison: Paragon Care (PGC): Restructure Has Quickly Improved Financials

Analyst:  Campbell Rawson, crawson@taylorcollison.com.au, +61 415 146 725, www.taylorcollison.com.au

• Recommendation: Outperform
• Price Target: $0.32 - $0.39
• Share Price:  $0.245 ($0.24 on 12-Mar-2021)

Restructure Has Quickly Improved Financials

Our View:

We remain attracted to PGC on a valuation basis as it currently trades on 6.0x our FY21E EV/EBITDA, a 45% discount to the average of listed peers. Despite notable Covid-19 headwinds, 1H21 results show the restructure has quickly improved cashflow, working capital and earnings. We believe operating risk has declined and continue to be attracted to short-term tailwinds including the unwind of elective surgery backlog and increased access to aged care facilities. Given PGC’s debt forgiveness continues until September, we assume no repayments and forecast a net cash increase of $20.0m in FY21. We see debt covenant renegotiation as a formality and believe the reduced operating risk remains to be priced in. Our price target increases in line with our view PGC fair value is 7-8x EV/EBITDA with the expectation of double-digit EBITDA growth post Covid-19 to drive a further re-rating.

Key Points:

• 1H21 operating EBITDA of $11.7m, up 29% on pcp
  • After removing the $3m JobKeeper benefit, PGC delivered EBITDA of $11.7m, up 29% on pcp and representing a margin of 10.2% a 30bps increase on FY20 levels. We see this as a reasonable result given the significant impact Covid-19 had on the business in Q1. Lockdowns in VIC in particular halted all elective surgeries and access to aged care facilities across the country was unfeasible. Margin was impacted by a change in revenue mix as sales of higher end devices slowed (due to in-person training being required for users) and lower margin PPE sales filled the gap. Despite this, EBITDA in Q2 was $7.2m in a difficult market which bodes well for future periods once elective surgeries ramp up again and aged care facilities become accessible. The benefit of ~$7m of annualised cost savings will flow through in H2 with further (cost and revenue) synergies likely to be generated as a result of a more cohesive management structure and stable ERP operating platform. Given medical supplies are required in line with the service provided, there is little opportunity for ‘catch-up’ from lost revenue and subsequently we have lowered our FY21 revenue forecast by 3% to account for Q1 softness.
• Total Communications provides opportunity for rapid growth
  • PGC’s Service and Technology revenue fell 34% in the half as its Total Communications (TC) business was unable to access aged care facilities. TC provides aged care facilities with an integrated system including telephony, nurse call, CCTV, Wi-Fi and room access control to improve safety and operations. Findings of inadequate safety and care from the aged care Royal Commission are helping to drive change and with existing relationships with many of Australia’s largest aged care providers, TC is well positioned to benefit. TC is a lean operation with all staff being project managers and a network of contractors utilised to deploy hardware. Fixed service contracts are in place and ensure TC is profitable, irrespective of current activity levels. We understand there is a current backlog of ~15 projects which once aged care facilities re-open, will see earnings grow.
• Operational improvements making debt covenant negotiations easier
  • PGC’s debt obligations remain on hold with NAB until September ’21. We anticipate covenant renegotiations to be a formality with the understanding our FY21E ND/Equity (44%) and ND/EBITDA (2.3x) forecasts fall within current covenant levels. Operating cashflow improved $24m in H1 and all but $1m of vendor conditional payments remain after $14m was paid in the half. The significantly improved trading performance (despite headwinds), tighter working capital controls and our forecast net cash increase of $20m all contribute to our view that we see minimal risk in PGC’s capacity to service debt moving forward.

--- click on the link at the top for the full TC report on PGC ---

[I do not hold PGC.  Too much debt.  It could easily bring them down, in my opinion.  Too much risk of permanent capital loss, for me.  Could be a high risk, high reward play for people with a suitable risk tolerance.]

14-Oct-2020:  Taylor Collison: Paragon Care (PGC): Initiating Coverage – Cost Out Play in Buoyant Market

Analyst:  Campbell Rawson - email: crawson@taylorcollison.com.au - Ph: +61 415 146 725 - website: www.taylorcollison.com.au

• Recommendation: Outperform
• Price Target: $0.29 - $0.36
• Market Capitalisation: $64M
• Share price: $0.185
• 52 week low: $0.095
• 52 week high: $0.52

Our View

We are attracted to PGC on a valuation basis as it currently trades on 5.7x our FY21E EV/EBITDA, a 41% discount to the average of listed peers. PGC is emerging from a restructure with a leaner cost base, more clearly defined strategy and subsequently an improved and lower-risk growth opportunity. Earnings prospects are buoyed by long-term medical technology industry growth of 4-5% p.a. underpinned by an ageing population and increasing life expectancy. Short-term tailwinds include the unwinding of a backlog of elective surgeries due to Covid-19 lockdowns and increased sales of PPE and Covid-19 test kits. PGC is a scale business in a highly fragmented market. We see opportunity for meaningful market share gains with the new management team focused on sustainable organic growth and we forecast ~15% EBITDA growth for the next two years.

Following Covid-19 economic impacts, PGC’s banking partners have removed existing covenant obligations and debt repayments until September ’21. However, with an FY21 forecast ND/E ratio of 55% and covenant re-negotiation on-going, we see debt obligation breaches as the most significant risk to the business in the short term. FY21 sees the end of earn-out payments for past acquisitions ($15m) and with an improved earnings profile, we expect FCF generation through CY21 to significantly reduce debt and therefore view breaches as a low-risk scenario.

Key Points

• Vast cost-out programme nearing completion; yet to be priced in
  • Paragon has removed $8m (~10%) from its cost base with another $2-$3m to come during FY21. New management was appointed in November 2019 following a period of multiple, poorly integrated acquisitions. A strategic review identified significant savings could be made in logistics, property rationalisation, removal of duplicate admin functions and supply chain. LEAN principles are being implemented company-wide to improve operating efficiencies. Previous managements attempt to rollout an ERP system across multiple finance systems resulted in heavy losses and has been slowed to ensure functionality. This process is nearing completion and along with further warehouse and staffing rationalisation, an additional $2-$3m of annual cost savings will be achieved. The management changes and cost-out programme are the culmination of correctly integrating the 11 acquisitions made in FY18/FY19 and significantly helps to reduce operating risk whilst improving earnings. The new management team has moved the groups focus to higher margin, sustainable organic growth.
• Underlying medical technology industry is growing at 4-5% p.a.
  • The medical technology industry in Australia/NZ is estimated to be a ~$9bn market. PGC’s current offering addresses $4.5bn of this market. The industry in Australia is growing at 4-5% p.a and is driven by the following:
    • ~3% increase p.a in the population aged over 64;
    • ~4% increase in chronic diseases as % of total diseases;
    • ~5% increase in the total number of procedures conducted annually.
  • Notable subsets of overall industry growth are Eye Care & Medical Devices (they account for ~30% of PGC revenue) which are markets experiencing 8-9% growth p.a. As one of the larger medical technology distributors in Aus/NZ and with no single division accounting for >7% of its market, we see ample opportunity for market share gains in conjunction with the benefits of underlying industry growth.

--- click on link above (at the top) for the full TC report on PGC ---

[I do not hold PGC shares.]