Paragon surges, with more upside possible

Shares in healthcare equipment group, Paragon Care (ASX: PGC) spiked from Friday’s close of 81 cents to hit an intraday high of 93 cents on Monday. This occurred under the highest daily volumes recorded in the last five years. The intraday high was repeated again on Tuesday.

It should be noted share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.

Interestingly, the provider of medical equipment, devices and consumables to the health care industry has traded as high as 94 cents during its circa 10 year history as an ASX listed entity, and it could be technical selling that is currently keeping a lid on the company’s share price.

Certainly, the result appeared to warrant a rerating as the impressive key financials below indicate.

While revenues were broadly in line with management’s guidance, there was a slight outperformance at the EBITDA line.

Brokers see further upside

As indicated by John Hester from Bell Potter, PGC is best assessed on its earnings per share performance. As a growth by acquisition story, the company has issued new shares over the last two years, effectively diluting earnings per share.

Consequently, using this measure takes into account the impact of issuing scrip for all or part consideration in relation to acquisitions.

Bell Potter is forecasting earnings per share to increase to 6.9 cents in fiscal 2018, implying a PE multiple of 13.4 relative to its 12 month high of 93 cents. This represents a 50% discount to the broader sector average PE multiple of 26.8.

Of course broker projections and price targets are only estimates and may not be met.

However, some of the larger blue-chip companies tend to push the average multiple higher than what is normally representative of the mid-tier players.

The broker reactions have been interesting with Bell Potter maintaining its buy recommendation and slightly increasing its price target to $1.02.

By contrast, Ian Christie from Argonaut views the current price as good value with his valuation of $1.12 implying upside of 20% to the group’s current trading range. He expects PGC to achieve organic growth of 10% per annum over the next two years with EBITDA margins of circa 15%.

Again, broker projections should only be taken into account with all publically available information.

PGC’s Managing Director, Mark Simari was relatively upbeat with his outlook statement, saying that the company is well-placed to deliver growth in future years, driven by a combination of organic and acquisitive growth with the e-health sector offering a new revenue stream.

The addition of services and maintenance contracts will also help, as they provide recurring income to complement revenues generated from the sale of new equipment.