Paragon Healthcare: a long-term growth story
Paragon Healthcare is a company we have followed for a number of years. Clients with a discrete small cap allocation have owned it for more than 2 years. Paragon is a wholesaler to the healthcare sector, including hospitals and aged care, around Australia. It provides a variety of necessary consumable goods (such as surgical instruments) and equipment (such as beds). It operates in a very fragmented industry in Australia (elsewhere in the world it is much more consolidated). By being the early mover to consolidate the industry, Paragon is building scale and improving the economics for its clients (for instance, in better pricing through bundled deals). This is creating a barrier to entry, and will allow the business to grow at good rates into the future.
The share placement which we participated in allows Paragon to complete three concurrent acquisitions. These will effectively double the size of the business, and are significantly earnings per share accretive. The price we have paid is at a P/E of ~10. However, given the strong trading after the deal it is currently trading at a P/E of ~12. We will have to be patient to see this business execute, given some of the short-term gains have already been accrued. However, we are very confident that this is the start of its business growth (and thus continued share price growth), not the end.
We foresee being shareholders in Paragon for a number of years, and it fits our desire to invest in small caps for long term growth - rather than quicker turns on deals.