RAM Ratings has revised the outlook on the long-term rating of Point Zone (M) Sdn Bhd’s (Point Zone) RM500 million ICP/IMTN Programme (2011/2018) from stable to negative.

Published on 20 August 2014

RAM Ratings has revised the outlook on the long-term rating of Point Zone (M) Sdn Bhd’s (Point Zone) RM500 million ICP/IMTN Programme (2011/2018) from stable to negative. Concurrently, the rating of the ICP/IMTN has been reaffirmed at AA3/P1.

Set up as a special-purpose vehicle to undertake the issuance of the ICP/IMTN, Point Zone is a wholly-owned subsidiary of KPJ Healthcare Berhad (KPJ or the Group). The enhanced ratings are premised on an unconditional and irrevocable corporate guarantee from KPJ and, as such, reflect the credit profile of the Group.

The revision of the outlook from stable to negative reflects the strong downward pressure that the ratings will come under should KPJ exhibit another year of results that are below expectation following an unexpectedly lacklustre operating performance in FY Dec 2013. Its weaker performance resulted from a significant spike in staff costs and the higher operating expenses of newly-opened hospitals as well as increased debt amid aggressive expansion. This further amplify the weakening of its financial profile over the past 5 years. The Group’s operating profit before depreciation, interest and tax (OPBDIT) margin steadily declined from 12% in FY Dec 2009 to 8.9% in FY Dec 2013 owing to the gestation period of new hospitals and persistent upward cost pressures. During the same period, aggressive expansion had resulted in its total adjusted debt surging from around RM900 million to RM1.76 billion.

“The ratings have been reaffirmed, nonetheless, based on our view that there are some early indications that the Group may be able to restore its financial metrics going forward,” said Kevin Lim, RAM’s Head of Consumer & Industrial Ratings. In 1Q FY Dec 2014, KPJ’s performance showed improvements, underpinned by higher patient volumes and an upward revision of medical fees. Future growth will be supported by healthy revenue growth at the Group’s existing hospitals, stronger contributions from its new hospitals and a further revision of medical fees. “These factors, coupled with KPJ’s plans to deleverage, could push its financial metrics closer to our expectations. We will monitor the pace of its expansion programme and deleveraging exercise as well as its operating performance,” Lim adds.

KPJ’s topline rose 11.2% in FY Dec 2013, supported by higher patient volumes due to the larger capacity of its existing, newly-opened and newly-acquired hospitals. However, higher staff costs (from the implementation of a minimum wage) and the increased operating expenses of new hospitals resulted in the Group’s OPBDIT margin thinning to 8.9% (FY Dec 2012: 10.3%). At the same time, the Group’s total adjusted debt rose to RM1.76 billion. Nonetheless, KPJ managed to post slightly improved financial metrics in 1Q FY Dec 2014, with its adjusted gearing and adjusted funds from operations debt coverage (FFODC) ratios standing at an estimated 1.48 and 0.15 times, respectively. Its OPBDIT margin also improved to 10.5% due to higher patient volumes and revisions in medical fees. For the next 3 years, KPJ’s adjusted gearing ratio is expected to hover at 1.3-1.4 times while its adjusted FFODC ratio is envisaged to stay slightly below 0.2 times.

KPJ’s credit profile continues to be supported by its established market position as the leading private healthcare provider in Malaysia and steady demand for healthcare services. The Group’s dominant position, with a close to 20% market share (by bed count) in 2013, remains unrivalled. Growth prospects for the local healthcare industry continue to be encouraging in view of increasing awareness of proper healthcare, rising affluence and an ageing population. Moderating the abovesaid strengths are KPJ’s suppressed margins, leveraged financial profile and exposure to regulatory risk.

Media contact

Fam Pei Xin

(603) 7628 1187

peixin@ram.com.my