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What you need to know about the surge in Pargagon Care’s share price

The Paragon Care Ltd. (ASX: PGC) share price shot to a more than three-month high on Monday after the healthcare equipment and services group announced the divestment of Axis Health, which is its Legacy Capital business, to Cabrini Health Limited.

The PGC share price jumped 9.6% to 46 cents as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and the All Ordinaries (Index:^AORD) (ASX:XAO) indices gained less than 0.5% each.

However, the stock has still lost nearly half of its value in FY19 even though other medical equipment stocks like the Azure Healthcare Ltd (ASX: AZV) share price, Nanosonics Ltd. (ASX: NAN) share price and RESMED/IDR UNRESTR (ASX: RMD) share price have made good gains over the past year.

Turning on an Axis

The Paragon share price should have also held up well amid the uncertain economic outlook but investors have been spooked by its restructure under new chief executive Andrew Just.

The company believes the sale of Axis Health marks a significant milestone in Paragon’s transformation programme, which aims to increase the group’s focus on “high end technologies and recurring revenues”.

While the divested business generated around $20 million in revenue, or 8% of group sales, it made a pre-tax loss of $4 million to $5 million in the last financial year. This will force management to take a circa $25 million write-down due primarily to goodwill, stock value reductions and IT impairments.

Cabrini, which is a highly recognised provider of hospital and age care facilities, will pay $1.8 million upfront in cash to Paragon and $2.7 million over the next 12 months. The buyer will also take responsibility for the 50 staff working at Axis Health and all properties used by the business.

A cleaner and leaner group

Paragon explained that the remaining businesses are less commoditised, less competitive and command higher margins. Management is also anticipating further significant savings from its cost reduction and efficiency initiatives that are currently under way.

“This is a clean sale of our legacy capital businesses to a well-respected buyer who is strategically focused in this sector to more efficiently manage this portfolio of businesses. We are pleased to now focus on our continuing portfolio of stronger margin products and services,” said Paragon’s chairman, Shane Tanner.

“The sale is consistent with our strategic direction and should prove to be a major positive for Paragon as we move into the 2019/20financial year”.

Paragon grew very quickly through an aggressive acquisition strategy and the refocusing of the group in more recent times introduces a different kind of execution risk.

Today’s asset divestment will help to alleviate some of the worry and the stock could be worth keeping an eye on.

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Motley Fool contributor Brendon Lau owns shares of ResMed Inc. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia has recommended Paragon Care Limited and ResMed Inc. 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.

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