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Why the Paragon share price has plummeted 19% today

The Paragon Care Ltd (ASX: PGC) share price has taken a sharp nosedive this morning after the medical equipment supplier released its preliminary half year FY20 financials.

At the time of writing, Paragon shares are down by 19.51% to $0.33 per share.

What did Paragon Care report today?

Paragon’s first half of FY20 overall revenue from continuing businesses was $120.7 million, up from $119.4 million in FY19, an increase of 1.1%. Excluding Paragon’s Western Biomedical business in Western Australia, revenue from continuing businesses grew half year on half year from $102.3 million in FY19 to $111.2 million in FY20, a growth rate of 8.5%. Gross margins have remained constant at approximately 38%, half year on half year.

These results are still subject to audit review. Official H1 2020 results are expected to be released on or about 27 February 2020.

Western Biomedical 

Paragon reported that Western Biomedical (WBM) revenues declined from $17.1 million in first half FY19 to $9.5 million in the FY20 first half due to the loss of a number of key clients/contracts. Legal proceedings have been issued by Paragon via its fully owned subsidiary Western Biomedical Pty Ltd in the Supreme Court of Western Australia against 2 former employees and the vendor of Western Biomedical as a consequence of these lost contracts. The proceedings are being defended.

EBITDA performance and cost out program

The company reported normalised FY20 half year earnings before interest, tax, depreciation and amortisation (EBITDA) was reported as approximately $12 million. This represents a 10% margin on revenue, and is still below the 13–14% EBITDA/revenue margin the company is targeting. One-off costs for the period associated with structuring and redundancies of approximately $3 million have been excluded to calculate the normalised FY20 half-year EBITDA.

The company’s cost out program continued during the first half of the financial year. To date, $2 million in annualised savings from its original target of $8 million have been achieved. 

New management 

Paragon’s new CEO Phil Nicholl and CFO Stephen Munday both commenced their new roles by late November 2019. Paragon reports that the general managers of all its businesses are now more integrally involved and supported with an increased level of transparency and a specific target of keeping solid organic revenue growth on track.

System review

Poor implementation of Paragon’s new enterprise resource planning (ERP) system (Microsoft Dynamics 365) put severe pressure on invoicing and debtors’ collection during the September quarter. Paragon’s normal trade debtors’ balance of around $35 million blew out to over $50 million by the end of quarter one. By December 2019, trade debtors were reduced to approximately $41 million. The management expect a return to debtor normality by June 2020. Until debtors recover in full, dividend payments will remain suspended.

A complete review of the ERP system will be undertaken, with the aim of a more measured phased roll-out. As a consequence, the company will not see all businesses on the new system until FY21.

PGC’s cash balance at 31 December 2019 was approximately $18 million.

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Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. 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.

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