Paragon Care (PGC) Software Acquisitions Improves Leverage...

Paragon Care (PGC)
Software Acquisitions Improves Leverage
Recommendation
Buy (unchanged)
Price
$0.71
Target (12 months)
$0.85 (previously $0.80)
Analyst
John Hester 612 8224 2871
Authorisation
Tanushree Jain 612 8224 2849
Expected Return
Capital growth 19.7%
Dividend yield 2.8%
Total expected return 22.5%
Company Data & Ratios
Enterprise value $135.3m
Market cap $115.3m
Issued capital 162.7m
Free float 100%
Avg. daily val. (52wk) $140,000
12 month price range $0.53 - $0.75
GICS sector
Healthcare Equipment and Services
Disclosure: Bell Potter Securities acted as Lead
manager to the company's 2015 capital raise of
$42m and received fees for that service.
Price Performance
BELL POTTER SECURITIES LIMITED
ACN 25 006 390 7721
AFSL 243480

Page 1
(1m) (3m) (12m)
Price (A$) 0.65 0.61 0.57
Absolute (%) 9.23 17.36 24.48
Rel market (%) 11.57 12.55 28.51
Expanding Into Complimentary Software
PGC has announced the acquisition of Midas Software Solutions (Midas) for the
upfront price of $2.0m payable in PGC scrip.
The software is essentially a reporting tool to aide sonographers, radiographers and
radiologist in reporting. The software has applications across urology, cardiology,
obstetrics and other medical specialist areas. The system automates the collection,
recording and reporting of measurements taken during radiology exams and presents
the data in a format suitable for inclusion in patient records and electronic health
records (EHR). It is a labour and time saving application which improves reporting
accuracy and workflow.
PGC has not previously invested in software assets, however, there is a long history of
other service providers in the health care sector successfully investing in
complimentary software assets. The vendors are strongly incentivised to continue to
drive the business following the transaction. The earnout component (which is in
addition to the $2.0m of scrip) is calculated based on a 4x multiple of incremental
NPBT between FY16 and FY18. The vendors will also receive a 2.5% royalty on
revenues after the earnout period so long as they remain with the company.
The Midas software is in the early stages of commercialisation, however, the clincher
for this transaction is likely to have been the new Bendigo hospital contract. The
hospital is due to open in January 2017 and will act as a high quality reference site for
the continuing roll out of the software to other sites. Potential users include the more
than 1,300 public and private hospitals in Australia as well as private consulting rooms.
We expect there is also potential to license the product to international markets.
Maintain Buy, Upgrade Price Target to $0.85
EPS is upgraded by 9.3% in FY16 bringing the forecast in line with guidance. EPS is
unchanged in FY17 and upgraded by 3.5% in FY18. Upgrades are driven by a
combination of acquisitions and organic growth. Target price is raised to $0.85 from
$0.80.
Absolute Price Earnings Forecast
June Year End FY15 FY16e FY17e FY18e
Revenues $m 32.2 93.6 118.4 124.6
EBITDA $m 3.7 12.1 15.7 16.5
NPAT (underlying) $m 2.1 6.9 9.2 9.9
NPAT (reported) $m 2.1 6.5 9.2 9.9
EPS underlying (cps) 3.2 5.0 5.7 6.1
Norm EPS growth % 18% 60% 13% 7%
PER (x) 22.5 14.1 12.5 11.6
FCF yield (%) -1% 7% 6% 7%
EV/EBITDA (x) 36.7 11.2 8.6 8.2
Dividend (cps) 1.4 2.0 2.3 2.4
Franking 100% 100% 100% 100%
Yield % 2.0% 2.8% 3.2% 3.4%
ROE % 10.2% 9.4% 11.5% 11.4%
SOURCE: IRESS
SOURCE: BELL POTTER SECURITIES ESTIMATES