“Medical beds, peripherals and accessories are a relatively small industry with a market size of about RM86.3 mil in 2015. It is expected to expand at a compound annual growth rate of 11.3% to RM118.9 mil next year, according to a report by SMITH ZANDER International Sdn Bhd.”

Medical equipment supplier LKL International Bhd, which saw its shares hit an all-time low recently, has yet to reap the fruit of the growth plans it has put in place.

The stock’s tepid price performance is also not helped by what appears to be the market’s lack of understanding about the company’s market segment.

LKL produces medical and delivery beds based on manual, hydraulic and electric control systems. It also designs and manufactures medical peripherals and accessories like patient transport trolleys, examination tables, medical carts and instrument trolleys used mainly in hospitals and other healthcare facilities.

To help diversify its income stream, LKL had in March signed a memorandum of understanding with Sri Lanka-based TMI Solutions (Pvt) Ltd to distribute selected Japanese-made medical devices in Malaysia.

Under the collaboration, the partners expect to be awarded exclusive distributorship rights in Malaysia by Nihon Kohden Singapore Pte Ltd to distribute Nihon Kohden branded medical devices for a minimum of three years.

Nihon Kohden Corp is listed on the Tokyo Stock Exchange and is the developer, manufacturer and distributor of medical devices such as patient monitors and defibrillators, as well as neurosurgical equipment like the electrocardiogram, electroencephalogram and electromyography machines.

LKL says the joint venture would complement its existing business and diversify product offerings to customers as well as contribute positively to the future financial performance of the company.

“Being a new venture for the group, we are striving to grow the medical devices segment into a key revenue contributor. We have noted encouraging interest in the range of Nihon Kohden medical devices we currently distribute, which we hope would translate into orders in the near future,” group general manager Ben Lim Pak Hong tells FocusM in an email response.

“Going forward, we are also considering more tie-ups with reputed brands to broaden the range of products we offer. We are positive on the growth prospects of the segment, which stands to benefit from increasing demand on the back of an ageing population and adoption of new technologies,” he adds.

The group had previously said it is eyeing distribution opportunities in the US and its neighbouring countries. The only countries in the region that LKL exports to are Costa Rica and Mexico.

The group registered its operations with the US Food and Drug Administration in May but has yet to commence distribution.

Falling revenue

These efforts to branch out have yet to bear results for the group, as it posted declining earnings in FY17 ended April 30, before swinging into the red with a net loss of RM859,000 on lower revenue of RM4.8 mil for Q1FY18 ended July 31.

The fall in revenue was mainly attributed to lower contribution from the group’s operating segments, as well as having recognised a few large orders secured from a local customer in the previous corresponding quarter.

The decrease in earnings was in line with the drop in revenue, coupled with lower gross profit margin due to the product mix sold in the current financial quarter.

Lim says the group is striving for growth in annual performance, driven by increased marketing efforts.

“[There will be] participation in more domestic and international exhibitions in the medical and healthcare sector. This would not only allow us to target new customers and markets, but also help to enhance industry recognition towards the LKL brand,” he says.

LKL’s shares hit an all-time low of 19.5 sen on Dec 7. Year-to-date, its share price has declined 17.02% from 23.5 sen on Jan 2.

A local fund manager familiar with the company feels the stock’s performance is largely the result of the market’s lack of understanding about LKL’s market segment. “It does have a long history in Malaysia, but there is also no peer to compare it with.

“However, because the business is largely dependent on demand, there’s no order book. It would only know orders as they come in. It’s not a case of securing future orders which will ensure a steady income and I think that’s what investors tend to look at,” he explains.

Good fundamentals

The fund manager says the company’s fundamentals are good, but stable growth “would be challenging” unless it steps up efforts to gain additional distribution channels or export markets.

“Whatever it is doing now is a step in the right direction, but it needs to do more. Having a niche in the market is good, but that also means there is a lack of stability. Getting beds for medical facilities means the demand is not constant as the lifespan of these beds is quite long,” he says.

“Of course, to have new hospitals coming up every year in Malaysia is the best-case scenario since that would make for an easy supply situation, but it’s not always the case. It would be better if it can look at other ways of supplying beds and accessories, such as retail,” he adds.

Medical beds, peripherals and accessories are a relatively small industry with a market size of about RM86.3 mil in 2015. It is expected to expand at a compound annual growth rate of 11.3% to RM118.9 mil next year, according to a report by SMITH ZANDER International Sdn Bhd.

The fund manager points out that though the group exports to many countries, the volume is quite low.

Currently, LKL exports to over 30 countries in Asia, Europe, Africa, the Middle East and Central America. The export business contributed around 20% to its turnover in the last four years. Its export sales in FY16 ended April 30 rose marginally to RM7.71 mil from RM7.6 mil in the previous year.

Overall, however, the fund manager says LKL is still a company that shows promise. It should be noted that the group’s founder and managing director Lim Kon Lian and his family members hold a 73.9% stake in the company.

Looking ahead, Lim says the group is confident of its long-term prospects.

“We opine that while challenges are present, the long-term prospects of the medical and healthcare sector remain intact. This is supported by the anticipated increase in healthcare expenditure, including for the purchase of medical beds, peripherals, as well as medical devices.

“We are aiming to outperform last year’s performance,” he says.

Prospects for growth in medical beds and peripherals are fuelled by demand for healthcare services. More hospitals and medical centres operating will mean greater demand for beds and related apparatus.

Malaysia’s healthcare expenditure could rise to US$20 bil (RM81.40 bil) by 2020 from US$13-14 bil in 2015, driven by rising incidence of chronic diseases, increasing healthcare costs, and a weak ringgit.

Under the 11th Malaysia Plan launched in May last year, the government announced its aim to provide universal access to quality healthcare. In doing so, it aims to increase the number of beds in both public and private hospitals by 25% to 73,000 beds in 2020, from 58,530 beds in 2014.

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