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Last edited 4 years ago
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#HY20 Market Update
stale
Added 4 years ago

3/2/20

Paragon has issued a update --what a shocker!

First half revenue expected to be essentially flat; $120.7m Vs $119.4 in pcp.

The lack of growth is due to a 45% drop in revenue from the group's Western Biomedical segment following the loss of some key clients -- it seems some former employees have left and taken these contracts with them. Paragon has already launched legal action.

EBITDA margins are expected to be ~10%, still below the targeted 13-14% (and this figure already excludes one-off costs associated with restructing). EBITDA is expected to be ~$12m from continuing operations; 14% below last year's first half.

Costs have been reduced by $2m pa, but the company has been targeting an $8m reduction. Still a long way to go.

Further, the new ERP system roll-out is not going to plan and the business wont be fully transitioned until FY21.

This is another reminder that turn-arounds are tough, and always take longer than expected (if at all). A new managemnet team have been in place since November, so maybe it's too jduge their effectiveness -- but clearly the challenge is significant.

Despite the well known problems of the company, I've been prepared to maintain my Stramwan recommendation as I felt that there was a decent business at the core, and that the low share price accounted for this.  Following today's ~18% share price drop, it's tempting to continue that rationalisation -- after all, shares are now on a EV/EBITDA ration of 3.9x. If the company can turn things around, this is dirt cheap. The other parts of the business are seemingly going ok, with revenue up 8.5% for the half.

Then again, that thinking has evidently been flawed previously, and this thesis creep has done me no favours.

Thesis busted -- I'm closing my Strawman recommendation. 

Full results will be released on Feb 27

ASX announcement is here

#Q3 FY19 Update
stale
Last edited 4 years ago

Paragon released a quarterly update, although it was light on any substance.

The company did reiterate guidance for $240m in revenue and $28m in EBITDA for FY19 for the core business.

The overall profit result will be below this as the (hopefully) 'discontinued' capital equipment business will inevitably drag on earnings.

Speaking of which, it seems Paragon is having no luck in finding a buyer for this business. That in itself is not a good sign -- if no one else wants it, presumably at a 'reasonable' price, it really must be unattractive. So the plan now is to try and break it up and sell it piecemeal or try and improve the component parts (shudder).

At least the core business appears to be doing well. The move to a new enterpirse platform and the ongoing cost out program is supposedly going ok too.

What keeps me interested is that the price seems quite cheap. Assuming they hit their projected savings, and manage ~5% top line growth, EBITDA should be ~$33m in FY20. An 8x multiple, which is undemanding for a business that should be capable of growing at mid- to upper-single digit rates would suggest a share price of ~77c in a little over a year. That's a good 70% above the current price.

That being said, there's a shed load of goodwill and intangibles, potentially some indigestion problems of all the recent acquisitions, and the dead weight of the legacy business. I still dont have a good handle on what a reasonable expectation for ongoing CAPEX should be.

So at present i'm happy to maintain my valuation and Strawman recommendation, justifying it by what appears to be a significant margin of safety. 

Not without risks though...

See the full ASX announcement from today here

#Results
stale
Last edited 4 years ago

FY18 results saw a better than expected pro-forma revenue growth, but a less than forecast EBITDA results. Overall, though, the business seems to be well and truly on-track and is guiding for 9%-odd sales growth in the current year, and 20% EBITDA growth.

Recent capital raising gives them $40m in cash -- a figure that will be supported by a further $45m due to a share issue to China Pioneer (one ofthe largest impiorters and distributors of medical products in China). Funds will be used for two further acquisitions, which are in the final stages of negotiations.

The placement does dilute things by about 6%, but the raise price of 91c per share was attractive and will help accelerate growth.

On balance, I've kept my valuation essentially steady (see forecasts page)

FY results presentation can be found here

#FY2019 Results
stale
Added 5 years ago

2019 was a disappointing year for Paragon as it continues its transformation to what (it hopes) will be a stronger business in the future.

There's a lot of moving parts to the results, but at a high level we saw revenue for continuing operations (i.e excluding divested and discontinued businesses) come in at $236.1m, just shy of guidance for $240m.

EBITDA was a slight beat to the forecast, coming in at $28.2m, compared to the target $28m.

Net profit, however, fell 37% to $8.8m due to a big jump in depreciation and amortisation (in large part due to a change in accounting policy) and one-off costs associated with a new enterprise IT system.

On a per share basis, the drop was more sevre due to an 18% lift in the share count over the year. EPS sits at 2.6c.

No final dividend was paid.

All that being said, continuing operations -- which are focused on higher margin, higher price products in growing catgories -- all saw an increase in sales (see attached ASX presentation, slide 6). For the current year, Paragon is taregting orgainic sales growth of 7% with an EBITDA margin of 12%+.

Meanwhile, a transition to a single IT system and a significant cost-out program are expected to improve business efficiency. That's hoped to remove around $6.5m in costs.

So this is all a question of whether the company can indeed turn things around. There's undoubtably some good parts to the business, and plenty of fat to cut. The segments in which it operates have a strong tailwind and there's a lot of potential market share to capture.

If paragon can right its ship, shares can be considered great value. A PE of ~15 (at time of writing, share price = 40c) for a business that is taregting a low double digit growth rate in earnings is a bargain. Especially given there are some one-offs in teh profit number.

But, as we all know, turn-arounds seldom turn.

Given the implied margin of safety on my valuation, I'm continuing to back here on Stratwman. The market will need to see some legitimate progress before we see any re-rate, and that could take some time. 

FY2019 Results presentation is here