RAM Ratings reaffirms Point Zone’s AA3(s)/P1(s) ratings

Published on 04 April 2012

RAM Ratings has reaffirmed the respective long- and short-term ratings of AA3(s) and P1(s) for Point Zone (M) Sdn Bhd’s (Point Zone) RM500 million Islamic Commercial Papers/Medium-Term Notes Programme (2011/2018) (ICP/IMTN); the long-term rating has a stable outlook.

Point Zone is a special-purpose vehicle set up as a wholly owned subsidiary of KPJ Healthcare Berhad (KPJ or the Group) to undertake the issuance of the ICP/IMTN. KPJ is an investment-holding company with subsidiaries involved in the operation of hospitals and the provision of healthcare services. The enhanced issue ratings are based on the credit-risk profile of KPJ, the provider of the unconditional and irrevocable corporate guarantee on the ICP/IMTN.

KPJ’s credit profile is supported by its position as Malaysia’s leading private healthcare provider, its steady operations and cashflow, its strong liquidity profile and financial flexibility, as well as sturdy demand for healthcare services. In FYE 31 December 2011, the Group’s revenue was lifted 14.3% year-on-year to RM1.89 billion – driven by an overall growth in same-hospital revenue, contributions from Sibu Medical Centre and full-year contributions from Tawakkal Hospital’s enlarged capacity (following its relocation to a larger building). KPJ’s profitability had likewise improved, with operating profit before depreciation, interest and tax augmenting 20.1% to RM229.32 million. Meanwhile, the Group’s adjusted funds from operations debt cover (FFODC) strengthened to 0.23 times as at end-December 2011 (end-December 2010: 0.19 times).

Offsetting the above strengths is KPJ’s aggressive expansion, which results in a highly leveraged financial profile. The Group’s lease-adjusted gearing ratio, although improved, was still relatively high at 1.26 times as at end-December 2011 (end-December 2010: 1.40 times). “Looking ahead, KPJ’s adjusted gearing ratio is expected to peak at about 1.5 times over the next 3 years following the expansion of its hospital network. At the same time, we expect its adjusted FFODC to remain at around 0.20–0.25 times. We understand that the Group is constantly on the lookout for growth opportunities and will continue expanding its hospital network. Under the circumstances, we maintain a cautious view on the potential impact that further debt-funded expansion could have on its balance sheet and debt-protection measures,” says Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

Elsewhere, KPJ remains exposed to persistent cost increases such as higher staff salaries and more expensive medical supplies and pharmaceuticals. Overall, RAM Ratings does not expect these cost increases to exert overwhelming pressure on the Group’s financial profile at this juncture, as the lack of a standardised fee schedule for pharmaceuticals and medical supplies charged by private hospitals allows for some pricing flexibility. Nevertheless, we note that the healthcare industry and KPJ are still subject to regulatory controls, which may evolve over time. The Ministry of Health is looking to implement a new healthcare system (1Care) for Malaysians, which could well change the landscape of the industry. Following its implementation, public and private hospitals may be integrated under a common network. Should a standardised fee schedule be imposed, KPJ’s profitability may be affected if operating costs are not effectively managed. That said, details of the scheme have yet to be finalised. As such, the impact of such a restructuring, including its effect on KPJ’s competitive position, can only be assessed upon more clarity of the said scheme.

Media contact
Low Su Lin
(603) 7628 1071
sulin@ram.com.my