site visit

I have gotten some good information from Hotcopper so am adding this to contribute. These are just my thoughts and not investment advice so DYOR etc etc. In the interest of full disclosure I currently hold PGC.

I only live 5 minutes from the Paragon Care Melbourne office so contacted the company earlier this week to request a site visit. The MD Mark Simari responded the same day and I arranged a visit the following day. Mark was very friendly and I appreciated him taking the time to show me through personally. The visit itself was about an hour in total but I will only mention what I think are the key points and concerns. I also asked Mark if he was happy for me to put a summary of the visit on Hotcopper.

For me personally this was the first time I had done a site visit or meeting with management of a share I own but plan to do more of it in the future. Firstly it was helpful to get an idea of the product range and their business model but also meeting management gives you an idea of the calibre of people running the business. Mark struck me as a good operator and shareholder friendly. The overall tone was quite bullish and I left feeling the next few years could see some good profit growth.

We discussed the large acquisition pipeline of possible companies they are looking at the moment, i.e. the industry is very fragmented and ripe for this type of aggregation. This is something I probably had not fully appreciated from just reading the company announcements. The business model is the tried and tested roll-up model to basically buy ma & pa run operations at lower income multiples than what the market will value them at. Assuming they do this selectively and manage debt properly it can be a very profitable strategy. Plus the current businesses they have should also organically grow given the sector it is in and Mark confirmed all the business have good organic growth prospects. If you can accept revenue may be a bit lumpy given the capital expenditure budgets can be volatile then I think profits and more particularly EPS should grow over time.

One of my biggest concerns given the current share price weakness is they may be planning a capital raising for future acquisitions. It’s funny how often the market can see a capital raising coming. Mark re-affirmed what Firsova said in an earlier post that no capital raising was planned in the near term and if there was any near term acquisitions they would be funded from cash (and possibly script to the seller, which is a good thing to keep their skin in the game). The latest half yearly report talks about 3 possible acquisitions so there is a good chance we may see one soon. It sounds like they aim to do capital raisings at progressively higher levels each time, i.e. the next raising if and when it happens should be above 37c. Again, assuming these acquisitions are sensible and done at good prices, the future raising should be EPS accretive and seen as a good thing for this type of business.

Another key concern of mine was how reliant they are to individual exclusive suppliers and what would happen if they lost the distribution rights to any of their products. This is clearly a risk but it sounds like they manage this by having quite long term contracts and managing the relationships well. I do not believe the loss of any one contract would spell disaster and they would look to replace with another similar range.

Finally I also asked Mark’s views on the current share price weakness. There was nothing new to add here that has not been mentioned on HC. Given he waded in with a not insignificant $30k purchase earlier this week he clearly thinks it’s undervalued. As long as they keep performing well then the share price should reflect value over time.

In all I can see this being a good long term grower. It’s not going to shoot the lights out but should be pretty safe, especially at these levels.