MARC has reaffirmed the rating of Radicare (M) Sdn Bhd’s (Radicare) RM49.0 Million Commercial Paper Programme (CPs) at MARC-1 with stable outlook. The rating continues to reflect the secured cash receivables from the Ministry of Health (MOH) backed by invoices issued to the MOH; a 1.25 times security cover of the amount issued; stringent requirements of the issue structure; and increasing demand for non-clinical support services from contract hospitals and private medical institutions. The stable outlook reflects the improved operating and financial performance of the group and Radicare’s dominance as one of the three concessionaires which provide certain non-clinical support services to public hospitals and institutions in Peninsular Malaysia.

Through its subsidiaries, Radicare’s principal activities comprise the provision of hospital support services, which include, clinical waste management services, cleansing services, linen and laundry services, facilities engineering maintenance services and biomedical engineering maintenance services. Other activities of the group include designing, constructing, equipping and commissioning of hospitals.

Pursuant to the privatisation of hospital support services, Radicare was awarded a concession by the Government of Malaysia (GOM) via MOH in late 1996 to provide certain non-clinical support services to hospitals located in the Federal Territory of Kuala Lumpur and Putrajaya, Selangor, Kelantan, Pahang and Terengganu for a period of 15 years (up to year 2011). The Concession Agreement (CA) covers a total of 37 public hospitals and institutions (Contract Hospitals) and the government may from time to time, designate additional hospitals to the existing list of Contract Hospitals. To date, the government has awarded an additional 11 new hospitals and institutions to Radicare including three in 2005 and one in 2006 whilst only one of the initial Contract Hospitals i.e. the Health Education and Communication Centre has since ceased operations. Fees for services rendered to the hospitals and institutions are payable by the government monthly, in accordance with the CA.

The drawdown of the CPs is based on assigned invoices which are net of demerit deductions issued by Radicare to the MOH. The nominal value of the CPs to be issued shall not exceed 80% of the assigned invoice value, thus giving a security cover of at least 1.25 times. Condition precedent to the issuance of the CPs includes the acknowledgement by the respective state’s Accountant General in respect of the invoices to be assigned to the noteholders. Monies received from the MOH will be remitted directly to a Sinking Fund Account (SFA), predominantly for the purpose of redeeming the CPs. At the same time a Debt Service Reserve Account (DSRA) is also being maintained to provide additional comfort to Noteholders on the servicing of the debt.

Revenue growth for FY2005 was commendable at 19.1% driven by the three new hospitals which commenced operations during the year as well as increased need for non-clinical support services in its existing hospitals. In tandem with the revenue increase is the increase in operating profit margin to 13.3% for FY2005 (FY2004: 11.9%), which was mainly attributed to the compensation for linen loss recognised during the year. Excluding the linen loss claim, the operating margin declined to 8.0% mainly due to a one-off expense in relation to the voluntary separation scheme completed during the year and a one-off adjustment due to an overpayment by the government in respect of prior years’ revenue. For the nine months ended 30 September 2006, the group’s profit before tax (PBT) increased significantly by 60.1% on the back of a 10.8% increase in revenue as compared to the previous corresponding period,

derived from the new hospitals as well as the impact of various cost-cutting measures implemented during the year. Moving forward, the approval of the revision of fees which is currently being reviewed by the government should further improve the group’s financial performance.

Despite the increase in the debt-to-equity ratio arising from the issuance of the CPs in FY2005, the group’s gearing level is moderate at 0.67 times, well below the covenanted level of 1.50 times (60:40). The group’s strong debt service cover ratio (DSCR) of 3.72 times for FY2005 was also well above the minimum 1.50 times stipulated under the issue structure. The Group’s ability to generate free cash flow is constrained by its rising working capital requirements, which is a function of its elevated days’ receivables (or average collection period) and higher revenues. Nonetheless, the credit risk attached to the large receivables balance continues to be low given that the credit exposures were mostly in respect of government related entities. The group’s cash flow liquidity is particularly sensitive to delays in payment by its debtors during the year end which MARC notes were mostly administrative in nature. This has been exacerbated by excess monies tied-up in the SFA as well as the turnaround time required for the formalisation of contracts for the new hospitals and new assets at the existing Contract Hospitals. Payment for services rendered will only be made upon the formalisation of such contracts.