A deep dive and a frustrating ACCC rejection

The Markets

This week: ASX v Wall Street

FYTD: ASX v Wall Street

A deep dive and a frustrating ACCC rejection

This week, we have decided to present (a) a deep-dive on a company we have held for several years and (b) a comment on a failed takeover.

Paragon Care: Investor Day Update

Paragon Care, a small company in which we invest, held an ‘investor day’ on Thursday. Your Investment Team attended.

The company

Paragon Care is a multi-disciplinary heath care company, with a $160m market cap; more than $300m of revenue; a forecast price to earnings ratio of 12x and a dividend yield of 4.5%. The strong components of the business included its surgery products and aged-care services businesses.

It has been a long-held position in client portfolios. Today, we are no longer an owner of 10% of the company, as we once were. But rather, collectively, First Samuel clients own just over 4%. Within client portfolios, the company has a weight of about 2% of the average Australian equities’ portfolio.

Recent history

One of the concerns the market and First Samuel had for the company was the lack of integration of the large range of businesses it had purchased. A succession of leaderships through the mid and later 2010s were responsible for a business model which didn’t maximise the integration of disparate businesses. Others, including possible suitors in 2019, saw the potential of alternative management focus.

Then Covid struck.

Covid affected Paragon to a larger extent than the rest of the portfolio because of its impact on aged-care services and extended interruptions to elective surgery. Paragon didn’t stand still, however, despite the lack of share priced support and market interest.

The key progress the company has made in the period since March 2020 include:

New CEO

In December 2021, the highly respected Mark Hooper was appointed. We continue to be impressed by his clear thinking and strategic focus, backed up by execution skills which have been proven through a range of roles.

Revenue changes

There have been gradual changes in the revenue mix for the company. There are lower revenues from equipment wholesaling and more from diagnostics and service-based revenue.

Merger

The company merged with Quantum HealthCare – a fascinating smaller ASX- listed business, majority owned and run by founder John Walstab. Quantum is a large distributor of medical devices throughout Australian and Asia. Fifteen months post-merger, Walstab both remains the company’s largest shareholder and occupies in a key role within Paragon as EGM of Asia.

Balance sheet

There have been two positive developments. Firstly, shoring up the existing debt arrangements with ANZ, including negotiated a better price.

Secondly, the merger with Quantum. This provided additional profit support for existing levels of debt:

It added capacity to the Paragon balance sheet and allowed the company overall to look towards Asian markets as a broader opportunity
The earnings power, global reach and lower volatility earnings have added to the attractiveness of the combined businesses.

Today

Paragon today is represented by four pillars of activity. Under the various pillars are parts and whole components of the more than 20 aggregated businesses.

The strategic direction, and market proposition of each pillar is clear.

Four Pillars of Paragon Care

We highlight the key growth driver of the Diagnostics pillar. The diagnostics business is a highly specialised provider of high value medicine. And within that pillar there is a most compelling business: Immulab.

Immulab

The company was formerly part of the CSL Blood Products divisions and was purchased by Paragon in 2018. Some aspects are:

Manufacturer of Immunohaematology In-Vitro Diagnostics used primarily in donor blood banks and clinical blood banks
Australian and New Zealand market leader of products used to screen donations and patients who require a blood transfusion
Market dominance provides access to every Australia and New Zealand laboratory / tertiary institution offering a unique cross selling platform across manufacturing and distribution businesses
Proven clinically superior products with global appeal

One of the Four Pillars of Paragon Care is Diagnostic – it is expected to grow at high rates following significant investment.

At the end of FY-24, one of the challenges for Paragon will be determining if the value of the Immulab/ Diagnostics business is adequately represented in its share price.

Summary

Overall, we remain pleased with our position in Paragon Care. It is an inexpensive health care exposure with a range of organic growth options. Given its size and ambitions it is also a company that may prove attractive to larger players.

TPG Telecom, the owner of telecommunications brand including Vodafone, TPG, iiNet and AAPT, is a small portfolio position for First Samuel clients. The company is a telecommunications provider, which sells mobile phone and internet packages to consumers and businesses.

A key component of its product offering over more than two decades has been affordable plans, which can be especially important for immigrants. Accordingly, it has relatively prospered since the re-opening of Australia’s borders post Covid lockdowns and the restoration of immigration at high levels.

The investment thesis for TPG Telecom had two drivers, along with the relative value the stock price represented on purchase. The first was the expected short-term growth in the revenues following the return of record migration, and the second related to the possible value created by the MOCN deal.

MOCN or Telstra TPGT Multi-Operator Core Network (MOCN) Agreement shared mobile spectrum and consolidated mobile towers.

The proposed arrangement with Telstra was designed to see TPG piggy-back on Telstra’s investment in its rural mobile and internet network. This would alleviate TPG problem of having to invest in its own network, which was likely to prove prohibitively expensive.

If the proposed network-sharing arrangement was allowed by ACCC (Australia’s competition regulator) rural and regional customers would have been able to add one more legitimate mobile/internet provider (TPG) to their choice of providers. In turn, it would have forced Optus as the third provider to continue to invest in regional areas to make sure it kept up.

Whilst the provision of another high-quality service to a larger proportion of Australia was likely, so to would have been slightly higher prices.

Our view is that the ACCC’s decision is a poor outcome for consumers as well as for TPG shareholders. It will rob the company of an opportunity to profitably add customer scale to its business.

Considering the number of previous mistakes made by competition authorities it this area over a 30-year period it isn’t entirely a surprise. Whilst more appeals are possible, it is likely the opportunity for a better network nationwide has now passed. The industry structure we are left with will continue to promote cheaper prices in the centre of Australian city at the expense of service quality throughout.

We have less interest in this outcome and have largely sold out of our position at a moderate profit.

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.