Consensus community valuation
$0.280
Average Intrinsic Value
43.6%
Undervalued by
Active Member Straws
#Risks
Last edited 7 days ago

Was glancing over paragon care. At first glance I have to admit it currently looks like a tempting opportunity. After a terrible couple of years the market cap is a measly $62.5 million with around $230 million in sales and ~40% gross margin. 

Covid has lead to widespread disruption especially to elective surgery but efforts to catch up the waiting lists over the coming 12 months could mean a surprising rate of recovery and potentially growth in not only revenue but margin. 

It is a fairly simple thesis. The previous roll up strategy seems well and truly abandoned and the company under new managment is rationalising costs and consolidating the fragmented business. 

However, low insider ownership and the company's debt worry me enough not to put on a position.

Whist I think there is potential for significant upside I think there is also a reasonable chance of the debt holders ending up owning the majority of the company or simply there being unimpressive business performance moving forwards leading to opportunity cost. 

I'll probably keep an eye out for insider buying.

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#Risks
Added 7 days ago

AlphaAngle I hope you are right because I own the stock. The narrative is good but the implementation by the management has been very poor so far. My patience is running out and I will take my medicine if they don't put rubber on the road soon.

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#Broker/Analyst Views
Last edited 11 hours ago

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.]

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