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StarBiz : OHB ventures into healthcare

PETALING JAYA: Diversified group Oriental Holdings Bhd, with cash reserves of RM1.1bil, has gone into healthcare business. The company, with interests from automotive to plantations, started its healthcare operations in January last year. It has a 300-bed fully-integrated hospital in Malacca called the Oriental Melaka Straits Medical Centre (OMSMC). Oriental operates the hospital through 51%-owned Melaka Straits Medical Centre Sdn Bhd.

Its healthcare division also houses the Oriental Nilam College of Nursing and Health Sciences, which is placed under Nilam Healthcare Education Centre Sdn Bhd, that provides nursing education programmes. Oriental managing director of healthcare division Dr Tan Hui Ling told StarBiz that the company is bullish on the outlook for the segment, given the macro dynamics that are favouring the sector presently.

The division is, however, still in a loss-making position due to high start-up and capital expenditure (capex).“At this moment, it is not contributing to our profits yet. It will still be making an operating loss until next year,” Tan said. “The healthcare division’s performance is expected to improve over the next few years, mainly from the results of OMSMC, and is expected to register yearly positive operating profits and net profits in the years 2017 and 2020 – in the third and sixth year of operations of OMSMC, respectively,” she added.

The healthcare division was the only loss-making one among Oriental’s businesses, accounting for a segment loss of RM26.4mil with a revenue contribution of RM14.19mil in the financial year ended Dec 31, 2015 (FY15). Due to high capital investments, FY15’s depreciation and amortisation costs for the division amounted to RM12.41mil, which is close to half of its segmental loss.

Oriental is able to sustain these short-term losses, given its strong capital buffers and a total group revenue that is manyfold of the healthcare segment. “The total start-up capex cost for the healthcare division is RM266mil for both the hospital and college,” Tan said. “Losses are still projected to be incurred by this segment in the second year of operations. Operating losses are projected to reduce by 30% and no significant reduction in net loss in FY16 due to increasing depreciation and interest costs,” she added. The healthcare division’s assets amounted to RM236.95mil in FY15.

Moving forward, Tan anticipates strong growth in both inpatient and outpatient numbers that will help increase returns to the group. “We are very confident that these figures will be achieved. OMSMC served 32,120 outpatients and 2,167 inpatients in FY15 and the numbers are expected to grow to 50,000 outpatients and 5,000 inpatients per year respectively in FY16,” she said.

The growth will be supported by a capex allocation of RM12.5mil for FY16. “This is mainly for opening new wards for inpatients and acquiring additional medical equipment for new disciplines and services to be introduced. We have opened 76 beds, and will be opening one more ward this year with 29 beds. So, all in all, we will have 105 beds by the end of the year,” Tan said. “We can build up to 300 beds at OMSMC but the Health Ministry only allows us to open it in stages,” she added. The company will fund the capex mostly through borrowings, she said.

Oriental’s projected strong growth in the healthcare segment is in line with that of other industry players such as IHH Healthcare Bhd. However, the break-even time for Oriental is longer compared to industry leaders such as IHH that has an average break-even time of less than three years, likely due to the latter’s economies of scale dynamics. IHH’s break-even time also depends a lot on the location of its hopitals.

With its entry into the healthcare sector, Oriental joins a growing list of diversified groups such as Sunway Bhd and Sime Darby Bhd that have an interest in the sector. Oriental’s interests are far-ranging and highly diversified. The company, which was founded by the late Tan Sri Loh Boon Siew, is also involved in the automotive, plastic products, hotel and resorts and plantation industries.

Datuk Loh Kian Chong, who is Boon Siew’s grandson, has been leading the company as its executive chairman since the beginning of 2015. On its financials, Oriental also has a strong capital buffer position that it had built up over the years. In FY15, its reserves jumped by more than 50% to RM1.1bil on the back of an unchanged share capital of RM620.4mil while retained earnings rose to RM3.95bil. Given this scenario, management’s decision to venture into the healthcare sector could not come at a better time. Dividend payout ratios had also risen to 20% in FY15, close to double that of FY13 payout.