More firms diversify into healthcare products sector
o They see continued demand for PPE, hand sanitisers and face masks, but diversification carries risks too
PETALING JAYA: Companies have been diversifying into the healthcare-related sector in view of the Covid-19 pandemic, but these moves are not without high risks and its feasibility remains to be seen, especially over the long term.
The diversification into healthcare/medical-related businesses includes the manufacturing of personal protection equipment (PPE), hand sanitisers, rubber gloves, ventilators and other necessities.
During the movement control order period, many companies ventured into face mask manufacturing and distribution, with more keen to jump on the bandwagon (see table below). Inter-Pacific Securities Sdn Bhd head of research Victor Wan said these companies see the supplying of healthcare/medical-related items as “another business”.
“It’s certainly the ‘in’ thing at this
point. Everybody is moving into something that is related to Covid19. However, for a lot of these businesses, it’s not their bread and butter. It’s not their core business, so they may not be well versed. That’s certainly one of the biggest risks,“he told SunBiz.
These new ventures are also exposed to technical expertise, material supply and the associated execution risks, as well as business risks in the industry including changes in political, economic and social conditions, government regulations and inflation.
Some companies reasoned that they have over the years established a track record in delivering manufacturing services which would help to mitigate the risks.
In addition, companies take the fastest and easiest way via merger & acquisition to buy into an existing businesses. Otherwise, they have looked to collaborate with other firms forming joint ventures to expedite the production process by sharing expertise.
“When they buy over a company, they already have people who are running it. What they need is capital so they can expand the business. In a way, it depends on the businesses they are in. If you look at it, there is still a lot of demand for rubber glove, PPE, hand sanitisers, and anti bacterial cleaning solutions, to name a few. Maybe they’re trying to capture a niche market.
“For the lack of other businesses, so diversification (into these areas) may help. It depends how soon they can get returns out of it,” said Wan.
As companies enter a new business, adjustments have to be made. For example, Pecca Group Bhd will repurpose some of its existing production lines and leverage on its present pool of craftsmen as well as production facilities to pursue the PPE business.
“Whenever you venture into a new business, there has to be some adjustments.
To some companies, it may be a big endeavour, to some it may be a small one,” said Wan.
Some companies view their diversification as an extension of their current services/products within their manufacturing realm. At the same time, many are taking this opportunity to address the shortage of PPE products in the healthcare ecosystem.
Wan said that in the case of medical-related products like rubber gloves, the product certification and approval process may take a while and may not be all that simple.
“It may not be that soon. But having said that, the order book/delivery time for the big glovemakers is 14 months so it would seem that there is a lot of demand for it. The smaller ones are probably trying to chip away some of the demand from the big boys, provided they get approval.”
Wan also pointed out that in the past, most of the PPE manufacturers were not listed companies but small players. “We never hear of them because we don’t need them. It’s only now that we need it because of the Covid-19 situation.”
Meanwhile, Leinves Plt chief investment officer William Ng sees companies that diversify into healthcare/medical-related products to be attractive in the short term, calling it a good move to generate revenue stream, especially when there is a shortage of such items now.
He favours fast-moving consumer goods (FMCG) like sanitisers, gloves, face masks over products that have a longer lifespan like medical beds and ventilators, on higher volume and repeat sales of FMCG, especially when the environment has turned more cautious now.
Most companies believe that postpandemic, these healthcare/medical-related products will continue to be essential to the medical industries, while face mask
manufacturers expect the global demand for face masks to be sustained as wearing face mask will become a new normal.
“However, the long-term feasibility is a question mark. If they put in a heavy investment, can the business work or not? What if there is an oversupply of such items in the future?”
One such company is Komarkcorp, which intends to invest up to RM20 million in total estimated costs to diversify into the manufacturing and sale of face masks. The move will be funded via a private placement of up to 30% of its issued shares, internally generated funds and/or bank borrowings.
Ng views the trading of healthcare products to be more stable compared with manufacturing, which is deemed more risky due to the large capital expenditure and particular worries if companies invest heavily for a manufacturing plant, for example.
“Recall that the smaller glove companies did not have much profit margin because the larger glove makers launched a price war when there was an oversupply of gloves,” he said.