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One microcap that’s set for another multi-fold earnings surge

Hospital equipment supplier Paragon Care Ltd. (ASX: PGC) is on track to deliver another surge in earnings growth following the acquisition of three private companies.

The buyout deals will lift the microcap’s earnings before interest, tax, depreciation and amortisation (EBITDA) by over three-fold to $13.5 million from $3.7 million as revenue increases by a similar magnitude to $106 million from $32.3 million, according to The Australian.

While Paragon Care will have to undertake a massive $44 million capital raising that will double its market size to help consummate the marriages, the market will be supportive of the cash request given that the group’s earnings per share are forecast to surge 54.8% to 4.8 cents.

Hospital equipment like beds and storage solutions hardly makes for an exciting story, but those who bought the stock when I recommended it at the end of February will be sitting on a pleasing 43% capital gain.

The stock is likely to sink when it emerges from its trading halt tomorrow given that the new share offer is priced at 53 cents a pop, or a 21% discount to Paragon’s last traded price of 67 cents, but any dip in the stock should be seen as a buying opportunity because of its attractive valuation and growth profile.

Paragon’s chief executive Mark Simari said there’s plenty of room for Paragon to grow via acquisitions because there are more sellers of medical products companies than buyers even though Paragon’s larger rival Lifehealthcare Group Ltd (ASX: LHC) has been an active acquirer.

Simari plans to boost Paragon’s revenue to $200-$300 million although he is unlikely to make more takeovers in the short-term as he beds down the latest acquisitions of ophthalmology supplier Designs for Vision, Western Australia-based surgical products supplier Western Biomed and the ultrasound equipment provider Meditron.

What’s interesting about these acquisitions is that they are in the consumables space instead of capital equipment. This means a greater proportion of Paragon’s revenues will be recurring.

The stock will trade on a forecast post-acquisitions price-earnings multiple of just under 14x, but it’s likely to get cheaper as the stock will probably fall as I mentioned above given that most stocks that announce a discounted capital raising usually do for the initial period.

Paragon’s capital raising comprises of a fully underwritten institutional placement and a $7.1 million one-for-five rights issue to existing shareholders. But Paragon won’t stay down for long and will likely run up to my 80 cents a share valuation over the medium term.

What’s more, Paragon is one of the few stocks with a market cap under $50 million that pays a dividend. It paid a 1.25 cents a share distribution in 2013-14 and is expected to post its full year results before the stock resumes trade tomorrow.

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Motley Fool contributor Brendon Lau owns shares of Paragon Care Limited. Follow me on Twitter - https://twitter.com/brenlau

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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