I've copied the text from the pdf and tried to align the tables for readability. Hope it all helps. From the PE forecasts it looks like the price is very undemanding and hopefully this is a clear the decks moment.Clearly not a growth stock, perhaps more a utility
Strong Revenue Growth In Continuing Business Paragon has today announced a material downgrade to earnings for FY19 in additionto pre releasing 1H19 revenues and EBITDA.The company now expects FY19 EBITDA from continuing business of $28m. Theprevious guidance was for EBITDA of $36m. The downgrade follows the previousannouncement of a strategic review of the legacy capital equipment business. Weunderstand this business will now be reported as a Discontinued Operation as thecompany is pursuing its sale. The 1H19 loss from Discontinued Business isapproximately $5m and this item is the most significant driver of the downgrade. It isapparent the previous guidance had assumed this discontinued business wasprofitable. The company had also budgeted for a contribution from the Midas softwarebusiness which has been delayed.FY19 revenue guidance was cut from $260m to $240m (7.6%). Excluding revenuesfrom discontinued operations, organic revenue growth in continuing operations isestimated at 9% with gross profit margin at 38% relative to 39% in the pcp.FY19 EPS is reduced by 30% with FY20 and FY21 also downgraded by a similarquantum. Despite the downgrade the balance sheet remains well capitalised and thecompany is not at risk of a capital raise to reduce debt. Proceeds from the potentialsale of discontinued business are likely to be used to reduce debt. Price target amended to $0.53 The next 12 months will be an important period for the company to restore marketconfidence in earnings guidance. Despite the organic revenue growth, the share pricehas been severely marked down following consecutive misses on earnings guidance inFY18 and FY19. It is unlikely the stock will outperform in the short term and the marketis likely to re-assess at the time of the full year result. For these reasons we havereduced the target price to $0.53 and amended our recommendation to Hold from Buy. June Year End FY18 FY19e FY20e FY21e Revenues $m 136.5 241.5 256.3 272.1 EBITDA - underlying $m 15.7 29.0 33.3 36.7 NPAT (underlying) $m 7.8 16.1 19.4 21.5 NPAT (reported) $m 10.9 11.1 19.4 21.5 EPS underlying (cps) 3.8 5.0 5.7 6.4 Norm EPS growth % -38% 30% 15% 11% PER (x) 13.1 10.1 8.8 7.9 FCF yield (%) 1% 6% 10% 11% EV/EBITDA (x) 14.7 7.9 6.9 6.3 Dividend (cps) 3.1 3.1 3.2 3.2 Franking 100% 100% 100% 100% Yield % 6.1% 6.1% 6.3% 6.3% ROE % 4.6% 7.4% 8.6% 9.1%
Revenues Strong, Cost Control Poor The key points from the Paragon trading update are as follows: The company will report the legacy capital business as discontinued business in the upcoming half year result. The discontinued business will generate revenues of approximately $22m in 1H19 and a loss at EBITDA of ~$5m; At the time of providing FY19 guidance in August 2018, we estimate the company had budgeted the legacy capital business would generate EBITDA of $2m - $4m; This severe deterioration in earnings of the legacy capital business is responsible for the group’s miss against guidance; In all other sections of the business, revenue growth continues to accelerate. The 7% organic revenue growth reported at the time of the AGM continued in the second quarter. Organic revenue growth for 1H19 was 9%. The company will provide further detail at the earnings announcement later this month; The company estimates 1H19 revenues from continuing operations of $119m. The gross margin on continuing business is 38%, 100bps below the margin in 1H18; We had previously forecast 1H19 revenues (from all operations including the discontinued business) of $122m. Excluding revenues from discontinued operations, the reported revenues are 7% ahead of our forecast; 1H19 EBITDA from continuing business is guided to ~$14m representing a margin of 11.7% relative to 10.4% in the pcp. The implied cost base of ~$31m represents a cost ratio of ~26% for the half (excluding direct costs associated with discontinued operations) which is relative to 28% in FY18 and 24.7% in FY17.Based on our review it is apparent that following the sale (we assume) of the discontinued business, the key items will be to a) restore the GP margin to 39% from the current 38% and b) to reduce the cost ratio by a further 2%. The combination of these measures should be sufficient to restore the long term EBITDA margin to above 13%.The company’s plans to address the cost base are already well advanced and include amalgamation of numerous back office functions and rationalisation of IT and property costs. The business is well advanced in a system migration for all accounting and finance systems. This migration will be completed by the end of calendar 2019 with substantial components of the business on the new system by 30 June.As discussed previously, the company has approximately 12 property leases in Melbourne which it will rationalise as these leases expire. The rationalisation of property costs and headcount is expected to deliver at least $3m in cost savings in FY20.Paragon did not provide a balance sheet update. The company last reported net debt of $64m (as at 30 June 2018) however, since then it has raised $45m in new equity capital in addition to paying out ~$35m on acquisitions and dividend payments. We expect net debt at 31 December in the range of $55m - $60m. Accordingly we anticipate net debt/EBITDA (based on EBITDA from continuing business) at ~2x.Given this earnings downgrade, we anticipate the company will sustain the interim dividend at 1.1cps (fully franked).We do not anticipate the company will be required to take a significant book loss on the sale of the legacy capital businesses. Our records indicate the sum total of the acquisitions from prior to June 2014 was ~$10.5m. The proceeds from the sale of thesebusinesses are likely to be used to reduce debt.
SUMMARY 2019 2020 2021 Old New % change Old New % change Old New % change Revenue 272.7 241.5 -11.4% 290.8 256.3 -11.9% 300.6 272.1 -9.5% EBITDA 38.2 29.0 -24.2% 43.6 33.3 -23.6% 48.1 36.7 -23.6% NPAT - pre abnormal items 22.9 16.1 -29.6% 27.1 19.4 -28.5% 30.0 21.5 -28.3% EPS - normalised 7.1 5.0 -29.7% 8.0 5.7 -28.2% 8.9 6.4 -28.3%
Paragon has guided to FY19 revenues of $240m and EBITDA of $28m. This implies 2H19revenues and EBITDA of $121m and $14m respectively at a margin of 11.5%. PGCalways has an earnings skew towards the second half, hence the guidance looksconservative in our view. Our forecast is very modestly ($1m or 3%) ahead of the full yearEBITDA guidance.Following this earnings downgrade (which follows the large earnings miss in FY18) ourprice target is reduced from $1.10 to $0.53 and we downgrade our recommendation toHold.The next 12 months will be an important period for the company. Despite the strongrevenue growth, the share price has been severely marked down following consecutivemisses on earnings guidance. It is unlikely the stock will outperform in the short term andthe market is likely to re-assess at the time of the full year result.We are confident the new management team lead by Andrew Just can execute on the costout strategy and restore earnings growth. We consider the cost out component of abusiness turnaround as being the lesser challenge as compared to 9% organic revenuegrowth.
Valuation Summary
Low High Sustainable EBITDA 29.0 29.0 Capitalisation multiple 7.0 8.0 Enterprise Value 202.8 231.7 Net debt - following acquisitions 60.0 60.0 Equity Value 142.8 171.7 Shares on issue (fully diluted) 337.1 337.1 Value Per Share $ 0.42 $ 0.51
The key driver of the reduced target price is the reduction in the capitalisation multiple. Inour view this is warranted as the company missed guidance in FY18 and now again inFY19.
Paragon Care Paragon Care is a roll up of specialist medical distributors. It has exclusive distribution rights in Australia for leading brands of beds, mattresses stainless steel equipment, storage and shelving solutions, plus a range of consumable items and other capital equipment items.In September 2015 the company diversified into medical consumables via the acquisition of Western Biomedical, Designs For Vision and Meditron. Following this transaction more than 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 total cash consideration of ~$119m being mainly services businesses.The company sells to a range of buyers including hospital (both public and private) as well as aged care, primary care providers and pathology. Hospitals are the largest market representing approximately 80% of revenues.The hospital industry is highly regulated and accreditation is dependent upon maintaining minimal standards for cleanliness – primarily for the purpose of infection control in the hospitals. Many of the products sold by Paragon are manufactured to satisfy these accreditation 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 the customer group are healthcare service providers as opposed to retail.Paragon is focussed on establishing the virtuous cycle of installing equipment, generating recurring sales of single use consumables, equipment servicing, maintenance and upgrades and cross selling across in wide base of clients.VALUATIONWe determine Enterprise Value by applying a multiple to the sustainable EBITDA. The estimation of the multiple is based on the market multiple of a peer group, plus our estimate 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 international companies in Australia. Should any of these businesses be acquired overseas or set up a direct 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 upon government funding and private health insurance for the majority of its revenues. A significant adverse change in the funding mechanism for hospitals in particular is likely to impact ordering patterns of key customers.Acquisition Driven Earnings Growth – forecast earnings growth is highly dependent upon revenues from acquired businesses. Should a significant acquisition fail to realise anticipated earnings, the group’s may not meet earnings guidance and this may lead to an impairment charge against acquired goodwill.
The last page was the financial summary in graph/table form which would have taken too long to transcribe for each individual item. I picked out the section on performance ratios only
(20min delay)