Part one – Capital Raising
Paragon provides medical equipment, devices and consumables to the healthcare sector – mainly hospitals, but also medical centres and aged care facilities. In very brief summary, it is acting to consolidate the highly fragmented health care supplies sector, through acquiring companies who provide specific supplies, integrating them into a larger and more efficient operation, and providing customers a more compelling ‘one-stop’ offering. We have been investors in Paragon Care since November 2013, and followed the development of the company from its early days to now heading towards inclusion in the ASX300 index.
This week it announced a significant capital raising, which we view as the next stage in the company’s development. The raising will be used to support some recently announced acquisitions (Insight Surgical, Medtech Solutions and Seqirus ImmunoHeamatology), and some further acquisitions that are still to be announced. These announcements are dependent on completion of due diligence and execution of transaction documents and are expected to be finalised in the Mar-18 quarter (so quite imminent).
Paragon has advised that the expected acquisitions are meaningfully EPS accretive (i.e. they will add value to shareholders). Furthermore, after with the raising the company will remain conservatively geared.
The raising will be done as a 1 for 2.8 entitlement offer at 72.5cents (last close as 76cents) to raise $43.2million, as well as a $26.6million placement. We plan to participate in the raising on your behalf.
Part two – H1 FY-18 Results
Paragon’s first-half results were, as expected, impacted by greater seasonality in revenue, and by one-off operating expenses. The latter pertains to investment in future growth (including the company’s Services & Technology business), and the establishment of a new warehouse in South Australia and recruitment of a new management team.
Paragon has historically been a highly seasonal business, meaning, in Paragon’s case, revenue is heavily weighted to the second half of the financial year. This is driven by budgeting and expenditure timeframes by clients such as hospitals. Paragon remains confident that it will achieve its full-year guidance for revenue between $125millon and $135million, and EBITDA of $18million to $19million (H1 EBITDA was $5.4million, which shows the extent of the half-on-half skew).