A Note On Low Quality Stock Paragon Care (ASX:PGC)

Claude Walker — Mon, 11 Feb 2019 23:08:58 +0000

I am very sad to say I have previously suggested Paragon Care (ASX:PGC) was worth buying (and indeed owned shares myself).

Today I must announce I was wrong and I am very sorry about that.

In what was without doubt a stroke of luck I sold my Paragon shares recently after they announced a "strategic review". I was fresh from being burned by Energy Action's (ASX:EAX) strategic review and basically thought I should sell first and ask questions later. The lesson for me is that I should have probably publicised that move sooner. I'm sorry about that.

Today, Paragon announced that it will make EBITDA of about $9 million in the first half, because their "discontinued business" will make a loss of $5 million. (This includes a free-kick of $1.8 million, based on an accounting standards change)

Everything about this is unacceptable, and I expect the shares to fall heavily, especially as it dawns on the market that the dividend is in danger. I would sell on open.

Longer term, I suspect Paragon is good value in the vicinity of $100 million market capitalisation, which means it might be worth buying at a share price around 30 cents. However, it is doubtful I would ever consider buying shares again given I lack confidence in management after this surprise downgrade. Keep in mind that foreign investors recently bought a large chunk of shares at 90 cents, so I think a takeover is an extremely likely outcome. Importantly, I've no doubt this business is worth something -- just probably less than I previously thought (upwards of 80c per share, was my old valuation).

Aiming for takeovers is not really my style.

Please feel free to sign up to the forums and let us know what you think!

For timely coverage of small-cap stocks, join the Ethical Equities Newsletter.

Disclosure: The Author, Claude Walker does not own shares in Paragon Care. This article contains general investment advice only (under AFSL 501223). Authorised by Claude Walker

All Research | EthicalEquities

A Note On Low Quality Stock Paragon Care (ASX:PGC)