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Should you buy Paragon Care Ltd shares as profits jump 215%?

operating theatre
Credit: Phalinn Ooi

Paragon Care Ltd. (ASX: PGC) may not be the most well-known healthcare stock on the ASX, but following the release of its interim results yesterday, it will certainly be on the radar of many more investors.

Paragon Care is a supplier of medical equipment, devices and consumables to healthcare companies and professionals in Australia and New Zealand. According to the company, it is the only non-global provider in the market with a full range of products that creates a ‘one stop shop’ for clients.

The company has a clear strategy to acquire complementary businesses that can be easily integrated into its own platform. Since 2009, Paragon Care has successfully integrated 11 acquisitions with three of these in the past 12 months alone. The market capitalisation of the company now stands at $106 million.

FY16 Half Year Results

Paragon Care released its interim results yesterday and some of the highlights included:

  • Revenue of $38.4 million – an increased of 185% over the prior corresponding period (pcp)
  • EBITDA of $4.6 million – an increase of 186% over the pcp
  • NPAT of $2.6 million – an increase of 215% over the pcp
  • Earnings per share (EPS) of 2.38 cents – an increase of 87%
  • Dividend per share of 0.8 cents per share – an increase of 33% over the pcp

Although the headline profit and revenue numbers look impressive, Paragon Care undertook a $42.2 million capital raising in 2015 to fund a number of acquisitions that helped to drive revenue higher. This resulted in a more than doubling of the number of shares on issue and the effect of this is seen clearly by the lower comparative increase in the earnings per share result.

Despite this, Paragon Care’s first half result appears quite solid and all of its new acquisitions are performing either at or above expectations. The company also generated organic growth from its existing operations and increased its product catalogue to target a larger customer base.

One point investors should note was that the company only generated $0.25 million in operating cash flow and this was significantly less than the pcp. Although the company stated this was a one-off event due to timing differences and an increase in inventory, investors should watch this space closely, as continuing poor cash flows will have a significant impact on the business moving forward.

Outlook and Strategy

Capital expenditure in the healthcare sector is often hard to predict and can result in large variations in sales volumes as it usually requires a substantial investment. Consumables, on the other hand, need to be purchased regularly in order to keep a business running. As the chart below shows, Paragon Care has recognised this and is shifting its product mix towards consumables and this should provide far more stable revenues in the years to come.

Source: Company Report

Source: Company Report

With the aid of full contributions from recent acquisitions, Paragon Care is confident of a stronger second half result. Additionally, sales are typically stronger in the second half for equipment sales and this should also drive revenues higher.

The company has re-affirmed it expects double-digit earnings growth for the full year and expects to maintain this momentum into 2017 financial year.

Foolish takeaway

Assuming Paragon Care generates EPS of around 4.5 cents for the full year, the shares are currently trading on a price-to-earnings ratio of around 15x. This appears quite reasonable if the company can continue to generate positive returns from its recent acquisitions and begin to generate stronger operating cash flows.

Investors should note however, the stock can be quite illiquid, and therefore suitable only as a small holding of a well diversified portfolio.

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As of 2.11.2020

Motley Fool contributor Christopher Georges owns shares of Paragon Care. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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