Ann: Appendix 4E - Preliminary Final Report, page-52

Watching the share price getting beaten down is hard. I've been reflecting on this Ann for the last few days.

Thought I'd try my hand at a SWOT analysis to see whether I should continue holding, or divest. My thoughts are below - feel free to criticise/comment (for the record, my background is medical). They incorporate input from many others on this thread, to whom I am grateful.


STRENGTHS
- Diverse range of capital and consumable products, as well as services. The diversity should serve as "insurance" against a particular product/technology falling out of favour.
- Present in all parts of the country, and therefore poised to rapidly supply nearby hospitals/clinics
- A relatively acyclical sector (healthcare) with tailwinds in the form of an ageing population.
- Theoretical economies of scale (especially on cheaper products, which, as someone mentioned above, can be lumped in with more expensive purchases).

WEAKNESSES
- Massive problem with administrative opex resulting in a negative cash flow. In fairness, I don't think we actually know how much of the $70m administration expense consists of one-off vs recurrent expenditures. Looking at future reports will be helpful here.
- Lack of future direction: Right now, I don't have a feel for where this company hopes to be in 5 years' time. The best I got was that "high roads" slide in the presentation. What is the endgame for PGC? Will all of the different subsidiaries continue as seemingly independent entities with somewhat limited board oversight? Or will we begin to see rebranding and geographic unification (e.g. migration of all their products to 1-2 warehouses per state, reducing capex)?
- Relatively small moat. AFAIK, PGC and its subsidiaries do not manufacture or supply any products that are truly unique. Even their "high roads" products (e.g. intraocular lenses) are either sourced from, or directly compete with much larger companies (e.g. Rayner lenses, sold by Design for Vision). I admit that I did not consider this before buying into the company.

OPPORTUNITIES
- Solid profit margins and potential NPAT if costs can be managed in the coming year.
- Dividend-paying stock (though as we all know, this has been suspended for the moment)
- In the longer term, PGC may be eyeing potential expansion into Asia (Bruce Bian's appointment Ann specifically highlights his understanding of Asian market dynamics)

THREATS
- Cultural conflicts with acquired companies
- Mismanagement: pursuit of further acquisitions to boost EBITDA before realising cost-outs and any potential synergies. A rational management team should ensure that every dollar of earnings retained by the company (and not paid to investors as a dividend) should be invested in such a way that it generates at least one dollar of income. Clearly this was not the case - lemons must have been purchased at some point.
- Difficulties offloading "dead wood" middle managers (see @gozberg's post above). While I completely agree that a lean management team is necessary, I suspect this will be difficult to do in practice. AFAIK, Paragon has its fingers in a lot of different pies through its subsidiaries (intraocular lenses, ultrasound probes, radiology reporting, telecommunications/support). I'm not convinced that senior management has the scope of knowledge to run each of these companies without at least some middle managers (how can one person be expected to understand the market for IOLs and also for ultrasound probes?).

I think the next 6-9 months will help me decide whether to continue holding this stock, or whether to divest myself of it. For the moment, my plan is to sell around half my holding (as I feel I am risking a bit too much). All IMHO. Please DYOR as I have been wrong before.

I really think PGC could learn a few lessons from the fall of General Electric, which made (and lost) billions through M&As. I recommend this video to everyone who holds this stock: https://www.[youtube.com]/watch?v=F5NumiX-yfI (remove square brackets).