Equity Research and Market Intelligence

Paragon Care Ltd(Ticker:ASX:PGC)September 15, 2011

Price (A$): 0.38

Beta: 0.91

Price/Book Ratio: 2.88

Debt/Equity Ratio: 31.0

Inorganic Growth Leading the Way

Paragon Care Limited (PGC) is a Melbourne, Australia based company which operates in the healthcare industry and primarily distributes medical equipment to both the health and aged care markets. PGC has won a new contract with a Melbourne based hospital to supply

the sale of the aged residential care business allows PGC to focus completely on the

Investment Arguments

PGC (LHS) ASX 200 (RHS)

Recent News

17/08/2011: PGC awarded a contract worth

$2 mn by St Vincent’s Hospital to supply 400

Volker hospital patient beds

08/08/2011: PGC completes sale of Aged

Care services business to Equity Trustees

20/03/2011: PGC completed acquisition of GM Medical for A$1.85m. GM Medical designs, manufactures and distributes healthcare products for the acute and aged care market throughout Australia and New Zealand.

29/04/2011: PGC won a major contract worth A$1.45 m. The contract is to supply medical equipment to a hospital in Australia

Shares in Issue

25.4m Market Cap (A$m) 9.65

52 Week (High): A$0.50

52 Week (Low): A$0.28

contract win on August 17, 2011 to supply 400 Volker hospital patient beds to St

Vincent’s Hospital (Melbourne). PGC is expected to supply these beds between August

2011 and February 2014, with the first 150 beds to be delivered before the end of 2011. The contract is worth A$2 mn and is fairly large as it represents 12% of its FY11 revenues and is the largest contract the company has ever won. In April 2011, PGC had won a contract from the New Royal Children’s Hospital, Melbourne for supplying various durable medical equipment products worth more than A$1.6 million. Clearly these large contract wins suggest PGC’s growing presence as a supplier of large medical equipment orders and its ability to bid for and service such large contracts. These contracts are fairly large when compared to PGC’s annual revenue and put the company on track for achieving its medium term goal of A$50 mn in revenues.

FY11 Results Encouraging. PGC announced encouraging FY11 results with revenues growing by 88% to A$16.3 mn while EBITDA and Net profit grew by 245% and 476%, respectively. These strong results were driven by several acquisitions completed over the last year and the strong performance of all its segments. Profitability was also driven by improvement in margins with the Gross and EBITDA margins expanding by 230 bps and 430 bps, respectively, while the net margin grew by

360 bps. In our view, the margin improvement was largely driven by synergies from

acquisitions and benefits from procurement. Overall, we expect the margins to improve going forward as the synergies begin to flow which will further boost the performance.

Completion of Sale of Aged Care Business. On August 08, 2011, PGC announced the completion of sale of its Aged Care services business to Equity Trustees Limited for a consideration of A$1.5 mn to focus on building its durable medical equipment distribution businesses. Although the Aged Care services business has grown over the last three years, it lagged behind the medical equipment division. During FY09-11, the aged care services business grew at a CAGR of 22% from A$1.1 mn to A$1.7 mn, while the medical equipment business over the same period has grown from zero to A$14.7 mn. Clearly PGC believes that the size of the opportunity is significantly more towards the medical equipment side and is rightly channelling its energies towards the development of that segment. In our view, an improved focus on a segment that is exhibiting healthy demand will help PGC post strong performance over the years to

come.

www.RBMILESTONE.com

Paragon Care Limited

Key Developments

Announces Major Hospital Bed contract worth ~A$2 million in August 2011

In August 2011, PGC revealed that it has won a major hospital bed contract worth ~A$2 million from St Vincent’s Hospital (Melbourne) Limited. PGC will supply 400 Volker hospital patient beds and associated furniture to St Vincent’s Hospital over the period of August

2011 to February 2014, with the first 150 beds to be delivered before the end of year 2011. It is the largest contract PGC has won so far and in terms of size is fairly large as it represents 12% of its FY11 revenues.

This contract clearly reinforces PGC’s emergence as a distributor of wide range of durable medical products to the health and aged care sector. Prior to this, PGC had bagged a similarly large contract from the New Royal Children’s Hospital, Melbourne in April 2011 for supplying various durable medical equipment products. The value of the contract was in excess of A$1.6 million, which was the largest it had won by then. The recent large contract wins by PGC demonstrates its enhanced capabilities in health and aged care sector. In our view, PGC is building a strong capacity to participate in larger contracts and also service them, thanks to its diverse product portfolio, competent sales force and skilled management team.

As per PGC’s own research, there are close to 455 different healthcare projects (big and small) which are under development in New South Wales, Victoria and Queensland. These projects are at varied stages in the development phase and are expected to commence operations anytime before 2017. This healthcare development opportunity is estimated to be valued at $90 million for PGC over the next six years, based on the current product portfolio. We believe this assessment to be between fair to slightly optimistic and is close to a A$15 million revenue opportunity per year for PGC, over the next six years.

However, this opportunity is valued based on PGC’s current product portfolio, which in our view will undergo significant transformation over the coming years due to several additional acquisitions that the company is targeting and its expansion of its current product range once complete integration is achieved between all the present subsidiaries.

Completes Sale of Aged Care Services Businesses

PGC successfully completed the sale of aged care services businesses namely, Lifetime Planning and Tender Living Care, to Equity Trustees Limited. The sale was done at a final price of A$1.5 million before settlement adjustments. The effective date for the sale of businesses was August 1, 2011. The aged care services businesses of Lifetime Planning and Tender Living Care recorded good performance since their acquisition by PGC, however they always lagged behind the medical equipment segment which reported much higher growth rates. Subsequently, PGC sold these businesses to focus on developing its durable medical distribution businesses which accounted for 89.9% of the company’s revenues in FY11. The revenues of durable medical equipment distribution businesses

have grown at 77% to A$14.66 mn in FY11.

2

Paragon Care Limited

Completes Acquisition of GM Medical Pty Limited

PGC successfully completed the acquisition of GM Medical Pty Limited on July 1, 2011 for a total consideration of A$1.85 million. The company said that the acquisition will reaffirm its position as a leading distributor of durable goods to the health and aged care sectors and provide PGC with an opportunity to design and manufacture new and innovative product lines to meet the growing demands for quality products from the health and aged care sector. GM Medical designs, manufactures, and distributes medical equipment across Australia and NZ and provides PGC with added capabilities in terms of manufacturing and designing its own products.

Consolidation of Ordinary Shares listed on ASX

PGC announced its proposal to implement a 1 for 10 share consolidation on June 1, 2011. PGC had 253.95 million outstanding shares with a market capitalization of ~A$9.5 million. The share consolidation resolution was approved in the general meeting held on June 29,

2011. The company’s shares started trading on a consolidated basis (1 share for 10 shares) with effect from August 3, 2011. The company believed that the number of shares outstanding (253.95 million before the proposed consolidation) for a company of PGC’s size (market capitalization below A$10 million) was too large and caused number of disadvantages to the company. After consolidation of shares, PGC has 25.395 million

outstanding shares with a commensurate change in its share price listed on ASX.

3

Paragon Care Limited

Latest Financial Results

Exhibit 1 : Annual and Half-yearly Income Statements

Australian $`000 FY10 FY11

Y/Y

% 1H10 1H11 Y/Y %

Aged care services 1,120 1,655 48% 599 729 22% Medical equipment 8,285 14,661 77% 4,225 6,893 63% Revenues 9,405 16,316 73% 4,823 7,622 58% Cost of revenues (5,779) (9,659) 67% (2,910) (4,899) 68% Gross profit 3,626 6,657 84% 1,913 2,723 42% Other revenue 22 25 14% 20 28 40% Operating costs (843) (1,450) 72% (446) (562) 26% Corporate costs (120) (259) 116% (103) (119) 15% Finance Costs (225) (608) 170% (106) (267) 152% Selling and distribution (166) (187) 13%

Employee and consultants costs (2,232) (3,523) 58% (991) (1,534) 55% Share in profit or loss of associates 34 - NA 23 - NA Profit/Loss before income tax expense 95 656 591% 197 179 -9% Income tax credit / (expense) 52 196 277% - -

Net profit/(loss) 148 851 475% 197 179 -9%

Basic EPS (cents) 0.07 0.3 329% 0.09 0.08 -15%

Diluted EPS (cents) 0.04 NA 0.05 0.05 -15% Source: Company filings, RB Milestone

PGC reported strong revenue growth of 73% in FY11, bolstered by several acquisitions it completed in the last two years. The substantial increase in durable medical equipment distribution business was primarily driven by full year contribution of Iona and Volker Australia (which were acquired in June 2010) and seven months contribution of Rapini (which was acquired in November 2010). The aged care services businesses (Lifetime Planning and Tender Living Care) also witnessed revenue growth of 48% in FY11, PGC completed the sale of this segment to Equity Trustees in August, 2011.

Net profit grew by 475% YoY in FY11 to A$0.85 million mainly due to strong contribution from recently acquired businesses like Iona & Volker Australia and Rapini and improved profitability with gross margins higher by 225 bps to 40.8%. The net profit was partially offset by higher finance costs and acquisition costs. Finance cost increased 170% YoY to A$0.608 million in FY11. The performance on the margins and revenue growth has been encouraging and suggests strong business execution. This structure has set in place the foundation to drive organic growth which will help the company to achieve its medium term

annual sales target of A$50 million.

4

Paragon Care Limited

Valuation& Investment View

The healthcare sector in Australia is expected to post strong growth owing to favorable demographic factors and strong federal government spending expected over the next 3-4 years. Additionally, the ageing population also makes the aged care sector a growing subset of the healthcare industry. PGC foresaw the strong demand that is now being witnessed in both the health and aged care sectors in Australia. It completed several acquisitions since identifying this sector as a focus area in mid 2007, and is now well positioned to benefit from the anticipated growth in the sector.

We have revisited our revenue estimates for PGC’s following the large contracts wins it has seen in the last three months which includes contribution from the recently won large contract. PGC reported strong FY11 results benefiting from the several acquisitions it completed in the last two years. PGC reported a profit for the first time in 1H10 and has gone on to report stable and positive results since then. The company has benefited from its series of acquisitions since mid 2007 and has been able to move ahead in terms of integration. PGC announced improved margins in FY11 with gross and EBITDA margin improvement of +330bps and +430bps over last year. It has taken several steps to improve profitability which is showing results and along with the synergies through acquisitions and economies of scale, will lead to higher profitability, going forward. We have accordingly adjusted our estimates and for FY15, we are estimating a gross margin of 43.8% (currently

40.8%) and an EBITDA margin of 16% (currently 8.6%). Following the sale of its Aged Care business during August 2011, our model does not include contribution from this business.

We have used a DCF valuation model to arrive at the target price for PGC, given the stability and visibility associated with its cash flows. We are increasing our target price for PGC to A$0.76, an upside of 100%, on account of improved margins and improved market presence leading to relatively large contract wins. The company is currently trading at an EV/EBITDA multiple of 9.4x and 7.7x on our FY12E and FY13E, respectively. Our target price takes into account dilution resulting from exercise of all the options and dilution from convertible notes. The options exercise would also result in an inflow of A$3 million, which will strengthen PGC’s financial position.

Exhibit 2 : WACC Computation

Source: Company filings, RB Milestone

5

Paragon Care Limited

Exhibit 3 : Detailed Per Year FCFF

FY

FCF Gr. (%)

FCFF

D/(D+E)

Beta

WACC

PV

FY12E

1,927,200

35.4%

0.93

9.3%

1,791,586

FY13E

-16.6%

1,607,087

35.4%

0.93

9.3%

1,366,153

FY14E

23.6%

1,987,074

35.4%

0.93

9.3%

1,544,893

FY15E

21.7%

2,417,681

35.4%

0.93

9.3%

1,719,126

FY16E

20.7%

2,917,564

35.4%

0.93

9.3%

1,897,376

Sum of PV of FCFF 6,421,758

Source: Company filings, RB Milestone

Exhibit 4 : Per Share Value

Source: Company filings, RB Milestone

Exhibit 5 : Target Price Sensitivity to WACC and Perpetual Growth

Weighted average cost of capital Step

1.0%

Perpetual growth

6.5% 7.5% 8.5%

9.5%

0.580

0.620

0.666

0.719

0.781

0.855

10.5% 11.5% 12.5%

0.501 0.439 0.388

0.532 0.463 0.407

0.566 0.489 0.429

Perpetual growth

1.5% 1.016 0.821 0.682

2.0% 1.133 0.898 0.737

2.5% 1.280 0.991 0.801

9.5%

0.580

0.620

0.666

0.719

0.781

0.855

10.5% 11.5% 12.5%

0.501 0.439 0.388

0.532 0.463 0.407

0.566 0.489 0.429

Perpetual growth

3.0% 1.469 1.105 0.876

9.5%

0.580

0.620

0.666

0.719

0.781

0.855

0.605 0.519 0.452

Perpetual growth

3.5% 1.721 1.247 0.966

4.0% 2.078 1.431 1.077

9.5%

0.580

0.620

0.666

0.719

0.781

0.855

0.650 0.553 0.478

0.702 0.591 0.507

Perpetual growth

0.5%

Source: Company filings, RB Milestone

We expect PGC revenues to double to A$30 mn in FY15 driven by inorganic growth and its ability to participate in larger projects through a broad product range. In our view, the M&A activity for PGC going forward will be relatively muted given that it has acquired seven companies over the last three years. Hence, our forecasts do not assume any more acquisitions and are therefore completely based on organic growth of its existing subsidiaries.

In terms of the profitability, we expect margins for PGC to improve going forward through a combination of economies of scale; synergies through efficient and integrated operations; and through the product sourcing options it is evaluating for its medical equipment segment in Asia. Based on this, we expect PGC’s EBIT margin to improve from 7.7% in FY11 to

14.9% in FY15.

6

Paragon Care Limited

Exhibit 6 : Revenue and EBIT margin estimates, in A$ Millions

30.0

16.0%

25.0

20.0

14.0%

12.0%

10.0%

15.0

8.0%

10.0

5.0

6.0%

4.0%

2.0%

0.0

FY10 FY11 FY12E FY13E FY14E FY15E FY15E

Reven ues EBIT margin

0.0%

Source: Company filings, RB Milestone

7

Paragon Care Limited

Disclaimer

Some of the information in this report relates to future events or future business and financial performance. Such statements constitute forward-looking information within the meaning of the Private Securities Litigation Act of 1995. Such statements can be only estimations and the actual events or results may differ from those discussed due to, among other things, the risks described in Paragon Care Ltd reports. The content of this report with respect to Paragon Care Ltd has been compiled primarily from consultations and, information provided by Paragon Care Ltd and information available to the public released by Paragon Care Ltd through news releases and SEC (if applicable) or other actual government regulatory filings. Although RBMG may verify certain aspects of information provided to it, Paragon Care Ltd is solely responsible for the accuracy of that information. Information as to other companies has been prepared from publicly available information and has not been independently verified by Paragon Care Ltd or RBMG. Certain summaries of scientific or other activities and outcomes have been condensed to aid the reader in gaining a general understanding. For more complete information about Paragon Care Ltd, the reader is directed to the Company's website at www.paragoncare.com.au. RBMG is an investor relations firm the operations of which seek to increase investor awareness to the small cap community. RBMG research analysts do not invest in or own shares of companies analyzed and reported on by them. RBMG is not responsible for any claims or losses sustained by an investor resulting from any of its reports, company profiles or in any other investor relations materials disseminated by them. This report is published solely for information purposes and is not to be construed as advice designed to meet the investment needs of any particular investor or as an offer to sell or the solicitation of an offer to buy any security in any state. Investing in the Stock Market past performance does not guarantee future performance. This report is not to be copied, transmitted, displayed, distributed (for compensation or otherwise), or altered in any way without RBMG's prior written consent. RBMG is not compensated for the analytical research and evaluation services that were performed in connection with the preparation of this report for Paragon Care Ltd; but RBMG has received cash compensation (under forty two thousand US dollars) in exchange for other segregated services. We strongly urge all investors to

conduct their own research before making any investment decision.

8