budget pick

From tuesday's Kohler report - may help explain the current rise in demand.

Budget brings small cap winners and losers

Brendon Lau15 May 2013
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Summary: The National Disability Support Scheme and additional funding to infrastructure stand to benefit some small caps, while cuts to foreign aid green initiatives will put others on the back foot.
Key take-out: The overall number of small cap budget beneficiaries is low, and very few will be substantial winners in dollar terms.
Key beneficiaries: General investors. Category: Growth.
There would have been more than a handful of small cap chief executives who stayed up last night to mull over the federal government’s budget.

You might not have suspected this given that the sharemarket has typically greeted budget week with little more than a yawn, thanks to selective leaks, with the average return on the ASX All Ordinaries hovering close to zero over the past decade.

But budgets always create winners and losers, even at the junior end of the market; and there are a few emerging companies that are worth keeping an eye on in that they are directly affected by how Treasurer Wayne Swan allocates government resources for the year ahead.


I’ll start with some winners, even though identifying these stocks is like trying to find loose change behind the dresser: there are precious few, and those you find are generally not material beneficiaries, with the government wielding an axe to spending to plug a gaping $18 billion budget hole.

National Disability Insurance Scheme (NDIS)

However, the grin on the face of Paragon Care’s (PGC) chief executive, Mark Simari, was a giveaway.

The company is arguably the best placed Australian listed company to benefit from the fully funded $14.3 billion National Disability Insurance Scheme, as Simari suspects the scheme will drive demand for the company’s medical equipment, such as wheelchairs, shower trolleys and home care beds and mattresses.

“We will benefit materially from the NDIS,” he said. “We currently supply equipment [to families] through the Department of Human Services, and the $1 million to $2 million [revenue we get from this business] we think might grow to $2 million to $4 million.”

The federal budget is the second tailwind for Paragon Care. The Victorian state budget (released last week) also put the company in the winner’s circle.

The Victorian government reaffirmed its commitment to build the Bendigo Hospital and the Monash Children’s Hospital, and has undertaken a number of new regional medical facility initiatives.

Simari believes the company will hit the top end of its 2012-13 revenue guidance. Paragon Health is forecasting full-year revenue of between $16 million and $17 million compared with last year’s $15.8 million, and net profit of $700,000 to $1.2 million versus a loss of $100,000 in 2011-12.

This puts the stock on an attractive price/earnings multiple of around nine times for the current year, which is three times below other global hospital equipment providers.

The company has undertaken a cost cutting drive, which helped it post a 164.7% surge in net profit to $564,000 for the December half, although sales dipped 7.1% to $9.2 million.

The $9.7 million market cap stock closed flat at 30 cents on Tuesday.