Healthcare gives every indication of being an investment no-brainer: Australia’s ageing population will provide tailwinds for decades to come, boosting the demand for drugs, surgeries, hospital beds and services such as pathology and radiology.
The number of people aged over 65 years is expected to double over the next 15 years.
In 2015, average life expectancy was about 84 for men and 87 for women, but the over-85s are the most rapidly growing cohort of the Australian population.
According to Mercer, 50 per cent of retiring white-collar male workers are likely to live to 88 years, and 20 per cent are expected to live to 94. Half of female white-collar workers are likely to live to 91 years; 20 per cent are likely to live to 96, and another 5 per cent will raise the bat to salute a century.
At 65, says Mercer, males will have a 42 per cent chance of living beyond 90, and females will have a 55 per cent chance.
It’s no wonder that federal government health spending is projected to more than double in real terms over the next four decades.
Finding the stock market exposures to capture this should be on every investor’s mind.
One stock that should come up on the radar is Paragon Care Limited (PGC), a specialist medical equipment supplier to hospitals, medical centres, and aged care facilities. Since 2009 Paragon has built its business by acquiring and aggregating a succession of specialist medical distributors: the group has bought 13 such businesses over the journey, spending just over $90 million, funded by both debt and equity.
The upshot of this activity is a group holding exclusive distribution rights in Australia for leading brands of theatre and ward equipment, beds, mattresses, medical carts and trolleys, stainless steel equipment, medical refrigerators, storage, lighting and shelving products, plus a range of consumable items and other capital equipment items. Virtually everything you might see in a hospital or a consulting suite, Paragon supplies.
The most recent acquisition, of Electro Medical Group Pty. Ltd. in September last year, added service support and technology management to the service offering.
The company sells to a range of buyers including hospital (both public and private) as well as aged care and primary care providers. Hospitals are the largest market representing about 80% of revenue, but no one customer dominates the company’s revenue.
Paragon bills itself as Australia’s premier healthcare products and services provider, and it’s not finished yet: medical equipment distribution and hospital/aged care services is a highly fragmented industry, with a large number of privately owned small businesses regularly coming up for sale. Paragon will certainly add to its offering from this source.
But of all the acquisitions, three in September 2015 were particularly important to Paragon’s business. At this time the company bought:
- Western Biomedical, a leading supplier of medical and surgical products and consumables to hospitals and specialists in Western Australia;
- Designs For Vision, a supplier of diagnostic and surgical products to the ophthalmic and optometry sector throughout Australia; and
- Meditron, which supplies and services specialist medical devices, equipment, accessories and consumables to the urology and ultrasound markets, throughout Australia and New Zealand.
In particular, these acquisitions took Paragon into the consumables market: Meditron also represented its first foothold in New Zealand, while Western Biomedical was its first entry into the WA market.
The move into consumables was a company-changer. Whereas the company’s offering had been focused on relatively big-ticket capital items – which generated lumpy revenue – consumables, as the description suggests, are consumed, and need to be bought all the time. Examples include pumps, scrubs, masks, cannulas, valves, tubes, needles, surgical instruments, tourniquets, stethoscopes, spare parts for devices, sterilisation products, cleaning and protection products, gel packs, various pieces of diagnostic equipment, wheelchairs – even penlights, nurses’ pouches and watches, and doctors’ bags.
This financial year, for the first time, consumables will generate more than half Paragon Care’s revenue: in fact the company expects this contribution to be about two-thirds.
Just two years ago, revenue came one-third from consumables and two-thirds from medical equipment and devices. Paragon Care has made its revenue streams far more stable. Paragon also continues to introduce new and innovative products to its range.
The company offers a combination of strong organic growth and the likelihood of further strategic acquisitions, but above all it appears to be a low-risk exposure to healthcare, given that what it sells is non-discretionary, across virtually all the main sub-markets of health. The company has extensive distribution networks and high economies of scale.
Paragon Care has been a nice performer on the market, generating a 23 per cent return over the last year and 36 per cent a year over the past three years. And it looks capable of continuing to deliver.
On analysts’ consensus, Paragon Care is expected to earn 6.4 cents a share in FY17 – up from 5.58 cents in FY16 – rising to 7.2 cents a share in FY18. From that, Paragon is projected to pay a fully franked dividend of 2.7 cents a share this year – up from 2.2 cents in FY16 – and boost this to 3.2 cents a share in FY18.
At 82.5 cents, that prices Paragon, which is capitalised at $136 million, on 12.9 times expected FY17 earnings and 11.4 times expected FY18 earnings. Those are not expensive multiples by any means, especially when set against Paragon Care’s growth prospects.
The prospective dividend yields are 3.3 per cent fully franked in FY17 and 3.9 per cent fully franked in FY18 – the latter is starting to creep into the ballpark of where yield-oriented investors look, given that, with franking, it would be equivalent to a grossed-up yield of 5.6 per cent.
Lastly, the analysts that follow Paragon Care see quite a bit of scope for share price appreciation from the current level of 81.5 cents. According to Thomson Reuters, analysts have a consensus price target on Paragon Care of $1.06 – which would deliver capital gain of 30 per cent if reached.
