PGC - Paragon Care Limited

[bz1516]

Paragon Care is an Australian medical device and supply company.  It has enjoyed rapid growth by acquisition and has maintained double digit internal growth as well.  The stock is traded on the ASX.

 

In addition to cost synergies from its acquisitions the company primarily benefits from marketing synergies which are integral to its long term growth strategy.  Their acquisition strategy is based on acquiring compatible product lines to sell through their existing sales network.  They do not intend to purchase more than one company with a particular product line.  They believe it is cheaper to grow the business organically as they become more competitive.  There acquisitions are typically made with an earn out component.

 

PGC has a proven track record in integrating acquisitions and has demonstrated organic growth increases in both existing and acquired businesses.  The strategy works because of the large number of smaller, mainly family owned businesses available for acquisition in the Australian medical device and supplies market.  Typically companies are purchased between 3x and 6x ebitda, depending on size, much lower than the company’s current enterprise/ebitda ratio.

 

The company maintains a dividend growth policy with a target POR between 40% and 50%.  Paying out a dividend while growing rapidly is indicative of their business philosophy and that their business plan is working.

 

Here is a good description of the company:

 

Paragon Care is a roll up of specialist medical distributors. It has exclusive distribution rights in Australia for leading brands of beds, mattresses stainless steel equipment, storage and shelving solutions, plus a range of consumable items and other capital equipment items.

 

In September 2015 the company diversified into medical consumables via the acquisition of Western Biomedical, Designs For Vision and Meditron. Following this transaction more than 70% of its revenues will be sourced from consumable sales rather than capital items.

 

PGC has now completed 10 acquisitions since 2009 for a total of ~$87.0m. The market for medical distributors remains disaggregated and consequently we expect there is a pipeline of future acquisition opportunities. Paragon Care has funded acquisitions with debt and equity.

 

The company sells to a range of buyers including hospital (both public and private) as well as aged care and primary care providers. Hospitals are the largest market representing approximately 80% of revenues.

 

Industry growth will continue to be driven by Australia’s ageing population which may continue to demand high quality healthcare services. The products distributed by Paragon have a limited lifespan and will be subject to ongoing replacement.

 

The hospital industry is highly regulated and accreditation is dependent upon maintaining minimal standards for cleanliness – primarily for the purpose of infection control in the hospitals. Many of the products sold by Paragon are manufactured to satisfy these accreditation requirement and are therefore considered non-discretionary.

 

The sector is well funded through a combination of Federal and State funding for hospitals, aged care services and Medicare for primary health care. The vast majority of the customer group are healthcare service providers as opposed to retail.

 

The company is currently trading at 15x trailing 12 months eps.  I am looking for EPS to increase at least 10% in FY 2017.

 

The presentation and the two analyst reports below especially the Bell Potter report do an excellent job of explaining the company.  Normally I’m wary of roll-ups, but long term this one looks like they really do have the synergies and runway to grow.  I met with the CEO when I was in Australia and spent more than an hour with him.    I think I got a good sense of him, very impressive, and that he will be very accessible.

 

http://www.paragoncare.com.au/wp-content/uploads/Chairmans-Address-and-Presentation-to-Shareholders_2016-11-18.pdf

 

http://www.paragoncare.com.au/wp-content/uploads/PGC_Argonaut-Research-Report_160808.pdf

 

http://www.paragoncare.com.au/wp-content/uploads/PGC_Bell-Potter-Research-Report_PGC20160808.pdf