MENU

Should you buy Paragon Care Ltd. (ASX:PGC) after its acquisition spree?

Shares in Paragon Care Ltd (ASX: PGC) rose 3% to $0.84c on Friday morning’s trade, after the company announced the acquisition of New Zealand-based healthcare business REM Systems for a net enterprise value of NZ$54 million (about $50 million).

The details of the transaction

Paragon will settle 80% of the purchase in cash and the rest through the issuance of 12.7 million shares at the 30-day volume-weighted average price of $0.76c. In addition, the deal includes earn-out provision of 4.5 times FY20 and FY21 incremental EBITDA from the acquisition. REM’s vendors and executive management will stay with the business throughout the earn-out period.

REM has a forecast FY18 revenue base of NZ$68 million and EBITDA of NZ$7 million.

Funding for the transaction derives partly from Paragon’s recent $70 million capital raising and partly from an increased debt facility with National Australia Bank (ASX: NAB). Paragon’s net debt to EBITDA ratio is expected to be between 2x and 2.5x following the acquisition.

Strategic rationale

Paragon’s Chairman, Shane Tanner, described REM as a “near perfect strategic fit”.

Through a series of acquisitions of suppliers of the healthcare sector – seven in the last four months –Paragon has grown to become an integrated healthcare equipment and services provider for acute, aged and primary care in Australia and New Zealand.

The acquisition of REM is particularly significant given the size of the target – in comparison with Paragon’s market capitalisation of $230 million – and the fact that REM itself is a diversified medical distribution company supplying 4,000 customers including acute care hospitals, day surgeries, medical practices and veterinary clinics throughout New Zealand and Australia, with an articulate structure that resembles Paragon’s.

Despite its strong organic growth – in the range of 6% to 8% per annum over recent years, according to Paragon’s announcement – REM is still a family run business

The acquisition is anticipated to be in excess of 10% EPS accretive in FY19 and beyond.

Foolish takeaway

I’m usually quite wary of growth built on an acquisition spree, but in this case I think the move makes perfect sense, given the homogeneity between Paragon and REM.

Based on the company’s forecast, the stock trades at just 11x FY18 earnings. With this valuation, I think Paragon is a good option to gain exposure to the healthcare sector, which is poised to grow in coming years as the Australian population ages.

But there’s another industry ready to take off. Click here to claim your free report.

7 of 8 People Are Clueless About This Trillion-Dollar Market

One of our investors has recently returned from a research trip to Silicon Valley... and has a warning for fellow investors:

Because he works for an organization dedicated to spreading great investing ideas, his video report is free today... so you can see it and decide for yourself.

Don't miss your chance click here to learn about this warning and how you might be able to profit!

Motley Fool contributor Tommaso Autorino has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Paragon Care Limited. 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 Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!