BUYING A HOSPITAL TO OVERCOME A DEPENDENCY ON BOOZE

LISTED MELSTACORP MAKES MORE THAN HALF ITS REVENUE DISTILLING AND MARKETING LIQUOR; IT'S BOTH A LUCRATIVE AND VULNERABLE INCOME SOURCE

A company that dominates Sri Lanka’s hard liquor market diversified Melstacorp Plc bought a 70-bed hospital for Rs1.6 billion in February 2020. The hospital at Ragama, a forty-minute drive from downtown Colombo, had belonged to the listed Browns group. Browns had intended to develop a chain of hospitals. Sri Lanka has an ageing population and a public health service that cannot cope with the demands of a rising middleincome population. However, Browns sold the hospital after government price controls on room-rates, medical tests and drugs made the venture untenable. This may not be the case for Melstacorp.

The hospital fits nicely into its strategic plans for growth and would minimise the volatile impact from all too frequent ad hoc liquor taxes and bootlegging. More than half of Melstacorp’s reported group revenue of Rs156 billion in the year to end-March 2019 came from public quoted distilleries, its booze manufacturing and distribution unit.

Another subsidiary, Aitken Spence Plc with businesses in hotels, port & logistics, and plantations, accounted for 37% of Melstacorp’s revenue that year. Fitch Ratings believes Melstacorp’s foray into the healthcare industry will help diversify its cash flows away from its focus on spirits over the longer term. The mostly debtfunded acquisition will not have an immediate impact on Melstacorp’s rating due to its small size, it said. Healthcare is estimated to contribute as little as 2% to group revenue in the short term.

According to Fitch, Melstacorp’s hospital acquisition follows several investments by the group into the healthcare sector. It manages a small niche-hospital in Colombo that specialises in caring for women and children, Joseph Fraser Memorial Hospital. Melstacorp also owns a network of standalone diagnostic laboratories.

“We believe Melstacorp’s management has the necessary experience to run a healthcare business as the group managed Lanka Hospitals PLC, one of the largest private-sector hospitals in the country with 350 beds, until its divestment in 2009,” Fitch Ratings said.

What happened was that the state expropriated Lanka Hospitals.

Melstacorp’s hospital acquisition is a part of a series of investments to further diversify the group. Fitch says Melstacorp will likely invest Rs5 billion annually over the next few years in inorganic expansion, including the healthcare sector.

“A meaningful increase in cash flows from the healthcare sector over the longer term could help offset the challenges the group faces in its telecom and plantation sectors, which accounted for operating losses of around Rs1.8 billion in the nine months to endDecember 2020,” Fitch said.

While cashflow diversity will help mitigate regulatory risks in its liquor business, a large debtfunded acquisition that provides limited medium-term upside to operating cashflows could pressure Melstacorp’s triple-A rating.

However, the demand for private healthcare is expected to increase over the medium term as Sri Lanka’s population ages and incidence of non-communicable diseases rise as lifestyles of a growing middle-class evolve. Public hospitals are underfunded with successive governments investing 1.5% of GDP annually in the last five years, Fitch says. This places Melstacorp and its hospital in a favourable position. Geriatric care tends to be long term, Fitch notes. Treatment of NCDs requires long hospital stays, long-term medication and, in some cases, palliative care.

“There has also been a wider acceptance of medical insurance over the last few years, helped by government-led insurance schemes and increasing personal income, which should also boost demand for private healthcare,” Fitch says. Melstacorp also owns Continental Insurance which provides health insurance coverage. However, healthcare price regulations, and the shortage of qualified doctors and nurses limits the full growth potential of the sector, Fitch says.