The share price of medical equipment distributor Paragon Care Ltd. (ASX: PGC) has crashed 13% to 71 cents today following the release of its financial report for the first half of 2017. Here are the key takeaways.
- Revenue up 43% to $55.0 million
- Earnings before interest, tax, depreciation and amortisation (EBITDA) up 46% to $6.7 million
- Organic EBITDA up 14% on a like-for-like basis
- Fully franked dividend of 1.1 cents
- Expected full-year revenue of $115 million to $120 million and EBITDA of $15.7 million to $16.7 million
- Operating cash flow of $0.9 million compared to $0.3 million last year
- Earnings-per-share (EPS) of 2.3 cents down from 2.4 cents
On first glance these look like good results with revenue and EBITDA growing strongly. However, the improvements are mainly explained by acquisitions which required an increase in issued shareholder capital. The reason for today's market reaction is probably because EPS have gone backwards over the period.
Paragon is a cyclical business with most sales and profits coming in the second half of the year due to the seasonal nature of hospital procurement. Cash flow is also affected by seasonality and is expected to be stronger in the second half.
Given EBITDA was up on a like-for-like basis, I wonder if the weak EPS can also be explained by seasonal factors. For example, if profits of the acquired businesses are also heavily skewed to the second half of the year then perhaps EPS will still show growth on a full-year basis.
Based on full-year EBITDA guidance I think net profit after tax (NPAT) of $10 million is still achievable. This would translate to a slight increase in EPS over last year assuming no further shares are issued before 30 June 2017. However, capital expenditure was $1.7 million higher than depreciation this half and so perhaps EBITDA is not representative of the underlying performance of the business.
Trading at 13 times historical earnings, Paragon does not look expensive. However, I do not think it is a great quality business since it relies primarily on acquiring other companies to grow and must invest heavily in inventory which hinders cash flows. Unlike some commodity businesses, these inventories are diverse and subject to technological change and so obsolescence risk is high.
