Are These Two Small Cap Healthcare Stocks Too Hot To Punt On - PGC, IDX?

  • Apr 14, 2019 AEST
  • Team Kalkine
Are These Two Small Cap Healthcare Stocks Too Hot To Punt On - PGC, IDX?

Paragon Care Limited

Paragon Care Limited (ASX: PGC) caters to the Australian and New Zealand medical equipment devices and consumables market. The ageing demographics, constant upgradation in consumer expectations and coupled with resilient government spending augurs well for the company. The company has positioned itself as a provider of advanced technology solutions with a bent towards recurring revenue stream in acute ancillary care environments.

The company recently appointed Mr. Bruce Bian as a Non-Executive Director to its Board. Bruce holds a law degree from the Sydney University and has broad experience across multiple facets of practice including Chinese and Australian relations. He also has over 35 years of broad industry experience, with a strong understanding of market trends in the Asia Pacific region. With this appointment, the company board now comprises of six directors, five of whom are independent non-executive directors.

The company reported a 9% growth in its organic revenue in 1H19 which was approximately two times the overall market growth. The gross margin and EBITDA margin (for continuing business) for 1H19 was at ~38% and 12% respectively. The Company declared a fully franked dividend of 1.1 cent. The strong sales performance was a validation of the company’s focus in 2018 to strengthen sales leadership. The company has begun the migration to Microsoft D365 single platform to standardise systems and process across the group. Benefits of the same anticipated from 1 July 2019 and expected cost reduction of upwards of three million in FY20. PGC maintains a positive outlook for continuing business is expecting to generate $240mn of revenue and $28mn of EBITDA in FY19. The total health care spends stands at $190 billion in Australia and New Zealand. The addressable market opportunity for Paragon is at about $9 billion.

The company is currently focusing on transformation to accelerate the integration. To meet the target, the company has refreshed its Board and Senior leadership team, invested in systems, divested underperforming business and kept a focus on deep cost out program. The company has identified Devices, Diagnostics, Capital & consumables, and services as key sales and marketing verticals.

The shares of Paragon delivered a negative return of 38.89%, 25.42%, and 4.35% in the past six months, three months, and one month respectively. It last traded at $0.450, up by 2.27% on ASX (as on 12 April 2019) with a market capitalisation of $148.34 million.

Integral Diagnostics Limited

Integral Diagnostics Limited (ASX: IDX) is a Melbourne based leading medical imaging services provider across Australia and New Zealand.

Dr. Ian Kadish is the Managing Director of the company, and he joined the company in May 2017. Previously, he held roles in CSC Healthcare, Mckinsey and Company, Netcare a South Africa and UK hospital group. He has also served as CEO and MD of Healthcare Australia and CEO and MD of Pulse Health Group.

The company delivered a solid set of numbers in 1H19, witnessing growth. In comparison to its 1H18 numbers, the company reported: 23.2 % growth in operating revenue, 40.5% growth in operating EBITDA, 34.4% growth in operating NPAT and 25.6% growth in EPS. The company delivered an industry-leading EBITDA margin of 23.4% in 1H19 vs. 20.3% in1H18. This was possible due to the leveraging of the platform to drive cost efficiencies and revenue synergies. The company has also restructured its debt facilities. This has resulted in improved terms providing greater flexibility and lower cost of capital. It maintains a cash advance facility of $240 million and asset financing of $65 million.

In 1H19 company expanded its operations with the successful opening of facilities such as Miami Beach clinic, development of SJOG Hospital in Geelong, etc. Restructured radiologist remuneration and escrow arrangements, diversifying the radiologist shareholder base. On expenditure front, the company expects an additional cost in 2H19 due to radiologist recruitment. The normalised free cash flow conversion of 89.5%. The expected CapEx for FY19 is around $20 million. Replacement CapEx is around $12 million, and growth CapEx is around $8 million.

The Board has approved an on-market share buy-back of ordinary shares, which was scheduled to commence on 8th March 2019 and to end 12 months from the date of the announcement.

The IDX shares have delivered a positive return of 11.38 percent in the last year. It has delivered a return of 1.11 percent, 9.16 percent, and 3.40 percent in the past six months, three months, and one-month respectively. It last traded at $2.720 (As on 12 April 2019), down 0.73% from its previous close, with a market capitalisation of $430.36 million.


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