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.]
