Bio Osmo aims to return to the black via hotel segment
Liew Jia Teng
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The Edge Malaysia
August 09, 2017 16:00 pm MYT
This article first appeared in The Edge Malaysia Weekly, on July 31, 2017 - August 06, 2017.
We have remodelled ourselves from a low-margin water business to a high-margin hotel management and development business.” — Shahrizal Hisham
LOSS-making Bio Osmo Bhd is embarking on a turnaround journey with its foray into the hospitality business. The Johor-based bottled reverse osmosis water manufacturer has been in the red for the past eight years.
The emergence of a new substantial shareholder, Datuk Seri Ismail Farouk Abdullah, in April has stirred the market, with the stock rising 78% year to date. It closed at eight sen last Thursday, giving the company a market capitalisation of RM63.6 million.
With a 19% stake, Ismail Farouk is the single largest shareholder in Bio Osmo. Expectations are running high that his entry may further help Bio Osmo return to profitability for the first time since the financial year ended June 2008 (FY2008).
Ismail Farouk controls Impiana Sdn Bhd, the operator of Impiana Hotels & Resorts — one of the largest home-grown hotel groups in Asean. It is part of property developer KAB Group, of which Ismail is group chairman.
His emergence in Bio Osmo is a natural progression from an existing partnership, according to Bio Osmo executive director Shahrizal Hisham Abdul Halim. He described the partnership as basically “two parties [that] clicked at the right time”, given mutual understanding and a shared vision for Bio Osmo.
“We started talking to him (Ismail Farouk) about two years ago. He was looking for a right partner to develop the Cherating land [owned by Impiana] while we were also looking for business opportunity to create a new income base,” he tells The Edge in an interview.
The talks led to Bio Osmo and Impiana becoming strategic partners in the former’s hospitality venture. Last October, Bio Osmo bought a 75% stake in hotel management outfit Intra Magnum Sdn Bhd for RM18.75 million, with the remaining 25% owned by Impiana.
Despite its majority stake, Bio Osmo has taken a back seat, says Shahrizal Hisham, letting Impiana take charge — as the latter has the requisite expertise — while Bio Osmo learns the hotel business.
“The hotel business was already profit-making from the day we took over. So, at the group level, when contributions from the hotel segment surpass losses from the water segment, we will see a turnaround,” says Shahrizal Hisham, who assumed his position in March 2014.
Apart from hotel management, Intra Magnum also offers development consultancy. It owns three parcels of commercial land at the former Impiana Resort Cherating, a seafront beach resort 45km north of Kuantan.
The resort is being jointly redeveloped by Intra Magnum and Impiana Hotels Group into service suites and villas, with an estimated combined gross development value (GDV) of more than RM300 million. Intra Magnum also acts as the development consultant.
The tie-up extends to other Impiana resorts, with Intra Magnum performing the same role for Impiana Pangkor Hotel & Resort and Impiana Private Villas Tioman Island, both of which are being developed.
When the three developments are completed, Intra Magnum will manage the facilities for 10 years. It has already signed a 10-year management contract for Impiana Hotel Ipoh.
In a nutshell, Intra Magnum is currently seeing an income stream from managing the Ipoh hotel and providing consultancy services for the Cherating, Tioman and Pangkor projects.
Down the road, the consultancy fees will be replaced by hotel management fees when the Cherating, Tioman and Pangkor resorts are up and running.
As joint developer for the Cherating project, Intra Magnum will also enjoy a share of the development profits. Its estimated GDV of over RM300 million may translate into a gross development profit of RM50 million, although Intra Magnum’s share is not immediately clear.
The first phase of the redevelopment, with a GDV of RM125.8 million, comprises 261 serviced suites and eight villas, and was launched this year.
The remaining two phases will be launched over the next four to five years. The second phase comprises 70 villas with a GDV of RM59.4 million while the third phase (RM138.7 million), will see another 280 serviced suites and 17 villas roll out.
The venture has put Bio Osmo on a stronger footing as its share of income from Intra Magnum will boost its earnings, says Shahrizal Hisham, who has a 12% indirect stake in Bio Osmo.
“We have remodelled ourselves from a low-margin water business to a high-margin hotel management and development business,” he says.
He adds that a healthy and steady income stream from the joint venture should be able to offset any potential weakness in Bio Osmo’s bottled drinking water division, which has yet to be mitigated.
Between FY2009 and the nine months ended March 31, 2017 (9MFY2017), Bio Osmo registered total losses of more than RM100 million as its beverage business faced a gloomy outlook due to pricing squeeze and rising production costs.
For third quarter ended March 31, 2017 (3QFY2017), Bio Osmo’s hospitality segment generated a profit of RM572,000 on revenue of RM1.49 million. On an annualised basis, the segment could make RM2.28 million in profit on revenue of RM5.96 million.
Overall, the group posted a net loss of RM5.74 million on revenue of RM6.32 million for 9MFY2017. This means it may only return to profitability in FY2018 at the earliest.
Despite the bleak numbers, the bottled drinking water segment will remain Bio Osmo’s core business and the company will work to contain its losses as soon as possible, says Shahrizal Hisham.
In an effort to improve its cash flow, Bio Osmo has sold its main water bottling factory and office building in Batu Pahat, Johor, for RM12 million. Following the sale, the group signed a three-year tenancy agreement for premises, with the option to extend it for two terms of three years each.
With the new income stream from its hospitality venture, “as long as the water business breaks even, the group will start reporting profits. We can visualise this very clearly”, Shahrizal Hisham says.
