For those without access to the full Bell Potter report I've...

For those without access to the full Bell Potter report I've copied the text from the pdf, but no tables. Despite this still of some value I think.
Painful lesson for me here and reinforces my view that stop losses are important.

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PGC reported a net loss after tax of $14.4m inclusive of a loss from discontinuedoperations of $23.1m and a $2.4m once off charge related to systems implementation.Excluding these items, the normalised NPAT was $11.1m (FY18 $7.8m). Thesereported results remain subject to audit sign off.Revenues were 3.2% below forecast due to the under performance of one of the morerecent acquisitions in the Services Division. Comparison with prior year revenues isnot meaningful because of the volume of acquisitions completed in FY19. Relative tothe acquired revenue base for each divisions, we estimate revenue growth of 6% forDevices, 12% for Diagnostics and 7% for Capital and Consumables. Each of thesebusinesses was owned by Paragon for the full year.PGC exceeded EBITDA guidance of $28m by a mere $0.2m (i.e. underlying EBITDA$28.2m). The market may have some concerns with this result given the potential forcosts to be allocated between continuing and discontinued business, therefore the firstclean result will be in February 2020.Net cash outflow from operations was $6.7m, however this appears to includediscontinued businesses and is of limited use for analysis.The ratio of net debt to shareholders funds at year end was 34%. Net Debt/EBITDAfor FY20 is 1.5x. In our view the company remains well capitalised.As the company generated a statutory loss for the year, there was no final dividend.Maintain HoldChanges to earnings are not material. Target price is reduced to $0.44 (from $0.48).We maintain our Hold recommendation. The company did not provide guidance forFY20, however, it will focus on growth of high margin business and new technology. Itexpects the system migration will becomplete by the end of CY2019 and is targeting$6.5m in costs synergies thereafter.

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The company did not declare a final dividend in respect of the year ended 30 June 2019.Dividend policy is to pay out 40% to 60% of net profit after tax as dividends. As thecompany declared a statutory net loss for the year, the Board decided not to pay adividend. The non-payment of the 2cps final dividend (as was paid in respect of FY18)represents a capital sum of $6.75m. Our forecast assumes the company will resumepaying a dividend in FY20.Within each of the divisions, revenues were largely as expected with the exception of theServices Group which encompasses the recently acquired Total Communications.Revenues declined by ~6% on a pro rata basis for the division.Comparing the revenues for each of the other divisions to the acquired revenue base weestimate revenue growth of 6% for Devices, 12% for Diagnostics and 7% for Capital andConsumables.We regard the revenue growth achieved during this period as a commendable outcome,particularly given the level of back office change occurring across the group and thedistraction to management from the disposal process relating to the discontinued business.All discontinued businesses were sold at 30 June 2019, hence the company is now able torefocus on growing its continuing operations.PGC exceeded EBITDA guidance of $28m by a mere $0.2m (i.e. underlying EBITDA$28.2m). The market may have some concerns with this result given the potential for coststo be allocated between continuing and discontinued business, therefore the first cleanresult will be in February 2020.Excluding the $4m adjustment for the change of accounting policy related to the treatmentof operating leases, the adjusted EBITDA margin declined to 10.2% (vs 11.5% in the pcp).The decline in the adjusted EBITDA margin is a factor of the additional headcount boughtinto the business following the recent series of acquisitions. The addition of these costswas a significant factor in the earlier downgrade to FY19 EBITDA guidance. Some ofthese costs may have gone with the businesses that were disposed, but the situation is farfrom clear, hence the market is likely to wait for a clean result before re-rating this stock.Going forward EBITDA margins will be reported as per the management accounts whichwill reflect the new accounting standard for leases.1H18 2H18 2018 1H19 2H19 2019 2019$m Actual Actual Actual Actual Actual Actual % Change ForecastRevenues 52.5 84.0 136.5 119.4 119.6 236.1 73% 243.9Growth vs pcp -4% 35% 16.5% 127% 0% 73.0% 78.7%Gross profit 20.5 34.4 54.9 45.6 49.5 95.1 73% 92.6Margin 39% 41% 40.2% 38.2% 41.4% 40.3% 38.0%EBITDA - continuing business 5.5 10.2 15.7 14.6 13.5 28.2 80% 29.0EBITDA margin 10% 12% 11.5% 12.3% 11.3% 11.9% 4% 11.9%NPAT - normalised 2.4 5.4 7.8 5.1 6.0 11.1 42% 10.1NPAT - reported 10.9 -14.4 na -24.7Final dividend 2.0 0.0 -100% 2.0EPS - reported (cps) 5.4 -4.5 na -7.6EPS - normalised (cps) 3.8 3.4 -10% 3.1Net cash from operations -3.1 10.7 7.6 0.0 -6.7 -6.7 -188% 22.3

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The net cash outflow from operations was $6.7m relative to a net cash inflow of $7.6m inFY18. The FY19 result was adversely affected by the payment of $9.4m in corporate tax,however, we note that the company had a refund of $5.7m due from the ATO as at 30June 2019.This poor cash flow result reflects a difficult year and is also likely to have been affected bycosts associated with discontinued business in addition to many one off costs associatedwith the systems migration (including the $2.4m in consulting fees for implementation).The cash flow from operations does not distinguish between ongoing and discontinuedbusiness, therefore it is of little use in analysis. Working capital management and cashflow are expected to be two of the key management focus areas following completion ofthe systems migration.Net bank debt (excluding the balance sheet liability relating to long term property leases)was $65m. The Net Debt/Equity ratio at 30 June 2019 of 34% is not excessive. Forwardinterest cover at year end was 5.3x.The balance sheet also includes $9.6m in earnout payments to vendors (all non-current).For valuation purposes we treat this item as debt (when determining equity value).The company’s goals for FY21 are: 7% organic growth in revenues; EBITDA margin of 12%+; Customer net promoter score of +5 year on year; and Employee net promoter score +5 year on year.In our view the 7% organic revenue growth is a stretch but achievable. The EBITDAmargin of 12% is also realistic (2H19 margin was 11.3%) as the group has a short termcost savings goal of $6.5m over 18 months from the transition to a single finance andoperational platform. This transition program is well advanced with 70% of the group’soperating companies now live on the new system. There is a shopping list of low hangingfruit for the cost out program following completion of the consolidation.As the FY19 result was largely in line with expectation, there are no significant earningschanges.In our view the non-payment of the final dividend and the poor cash flow result are the keydrivers of the share price weakness following the result. We await further clarification ofthe company’s position with regards to dividends and an update on cash generation andearnings (unencumbered by discontinued business) before considering any change ofrecommendation.We maintain our hold recommendation. Our price target is lowered by 4 cents for $0.44.

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Paragon Care is a roll up of specialist medical distributors. It has exclusive distributionrights in Australia for leading consumable items and other capital equipment items. It alsohas a service division for laboratory instruments and a diagnostics business which itacquired from CSL.In September 2015 the company diversified into medical consumables via the acquisitionof Western Biomedical, Designs For Vision and Meditron. Following this transaction morethan 70% of its revenues will be sourced from consumable sales rather than capital items.PGC completed a further 9 acquisitions in the period from Dec 17 to October 18 for totalcash consideration of ~$119m being mainly services businesses.The company sells to a range of buyers including hospital (both public and private) as wellas aged care, primary care providers and pathology. Hospitals are the largest marketrepresenting approximately 80% of revenues.The hospital industry is highly regulated and accreditation is dependent upon maintainingminimal standards for cleanliness – primarily for the purpose of infection control in thehospitals. Many of the products sold by Paragon are manufactured to satisfy theseaccreditation requirement and are therefore considered non-discretionary.The sector is well funded through a combination of Federal and State funding for hospitals,aged care services and Medicare for primary health care. The vast majority of thecustomer group are healthcare service providers as opposed to retail.Paragon is focussed on establishing the virtuous cycle of installing equipment, generatingrecurring sales of single use consumables, equipment servicing, maintenance andupgrades and cross selling across in wide base of clients.VALUATIONWe determine Enterprise Value by applying a multiple to the sustainable EBITDA. Theestimation of the multiple is based on the market multiple of a peer group, plus ourestimate of value for particular matters as they apply to Paragon Care.The cross check of value is a discounted cash flow model.RISK AREASThe key risk areas are:Loss of a major distribution agreement – Paragon represents many internationalcompanies in Australia. Should any of these businesses be acquired overseas or set up adirect business in Australia, it is likely PGC would lose the distribution arrangement.Fortunately no supplier represents more than 10% of the company’s revenues.Regulatory reform – the healthcare industry is highly regulated and is dependent upongovernment funding and private health insurance for the majority of its revenues. Asignificant adverse change in the funding mechanism for hospitals in particular is likely toimpact ordering patterns of key customers.Acquisition Driven Earnings Growth – forecast earnings growth is highly dependent uponrevenues from acquired businesses. Should a significant acquisition fail to realiseanticipated earnings, the group’s may not meet earnings guidance and this may lead to animpairment charge against acquired goodwill.