The Paragon Care Ltd (ASX: PGC) share price is down 4% after it held its AGM and gave a business update.
As a reminder, Paragon is a healthcare distributor of products like beds, devices and surgery equipment.
Paragon has calculated that its addressable market is a $9 billion segment and it's growing faster than the broader healthcare sector.
Trading update
Paragon said that it has had a solid start to FY19. It has achieved around 7% organic growth year to date compared to the pro-forma figures in FY18. Paragon has an organic growth aim of 10%. The gross profit margin for FY19 to date is around 40%.
However, operating costs are running at around 30% of revenue for the first four months against a target of 26% due to recent acquisitions. Management have started a 'major' cost program to combat this.
What are Paragon's growth plans?
The Paragon model is to sell more products and services via one platform to more customers.
Paragon is trying to create common warehousing and distribution logistics to lower costs. When it acquires a new business it can boost that target to selling their products nationwide.
The one-platform model gives Paragon cost synergies through centralised functions and the single procurement platform gives efficiency for the customer too. The bigger the range of products Paragon can offer the more entrenched it can become with customers and perhaps additional sales opportunities – this is very useful for hospital clients.
Update on a recent acquisition
Total Communications is one of Australia's leading telco providers in the health and aged care sectors. It had an earnings before earnings before interest, tax and amortisation (EBITDA) margin of around 31% and management think it will be earnings per share (EPS) accretive by more than 10% in FY19 and beyond.
This business is growing faster than quite a few of Paragon's businesses.
Is Paragon a buy?
Paragon revealed that its product mix is evolving with a shift towards consumables not capital products, reducing the seasonality between the first and second half of the year.
Management said that progress is still early on leveraging the greater breadth of the platform to deepen customer relationships and expand the share of the customer wallet. This hopefully means there's a lot more to come.
Paragon is trading at around 10x FY19's estimate earnings with a grossed-up dividend yield of 6.3%.
Whilst Paragon's organic growth and costs were not good as good as hoped so far, I think the cost increase is likely a short-term thing and organic growth of 7% for a business trading at low double-digit forward earnings is a good result considering the long-term tailwinds.
I think Paragon looks like a solid long-term buy at the current price and I'm glad it's in my portfolio.
