Monash Investors Pty Limited

Paragon Care (PGC) is a supplier of medical equipment and consumables to Australian hospitals and aged care centres. It reported on Monday 7 August. Organic sales growth grew 15% for the year with acquisition growth adding another 10% to sales. At the same time EBITDA margins have been expanding with increased scale and private label substitution. Paragon beat consensus earnings expectations by about 10% and over the next two days, its share price was up 14%.

The market had been concerned that organic growth was slowing, with Paragon still digesting previous acquisitions. Another potential headwind was that Paragon is still working through the impact of its decision to hand back a number of agency products in order to launch its own private label beds. As a result, the 15% organic growth was a positive surprise. Looking forward we expect the roll out of PGC’s proprietary beds in FY18 to generate substantial growth and strong margins, supporting further upgrades.

Good working capital management resulted in inventories being down 4% while operating cash flow was up 54%. The balance sheet was strong with Net Debt / EBITDA only 1.1x, leaving plenty of scope for further growth capex without an immediate call on shareholders.

We see Paragon as being particularly cheap right now at 14x FY18 EPS given the visibility of its earnings (63% of sales are consumables), its growth outlook, and the likelihood of further upgrades.

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