IJN Capital Sdn Bhd - 2007

MARC has reaffirmed the ratings of AAA_IS and AA+_IS  to IJN Capital Sdn Bhd’s (IJNC) RM100 million Sukuk Musyarakah due in year 2013 and RM109 million Sukuk Musyarakah with maturities of more than seven (7) years from the date of first issue. The ratings carry a Stable Outlook. The ratings reflect Institut Jantung Negara’s (IJN) leading position as one of the best cardiac centres in Malaysia, its excellent clinical reputation, ownership by the Minister Of Finance Inc, commendable operating performance, low debt burden relative to its earnings and cash flow generation, and strong balance sheet. This is partly moderated by the its regulated fee structure which limits IJN’s flexibility to raise fees in the face of pressure from the rising cost of services.  

The RM100 million Sukuk in year 2013 are rated one notch higher than IJN’s unsecured debt rating, at AAA_IS. The AAA Sukuk are backed by receivables from the Government; a specified percentage of which will be swept to a Specific Revenue Reserve Account. Proceeds from the Sukuk issuance are to be used for the refurbishment and improvement works on IJN’s existing hospital building and construction of a new hospital block adjacent to the existing building, including purchase of medical and non-medical equipment to be commissioned.

Formed in 1992, IJN is dedicated to serving the needs of heart patients by providing cardiology, paediatric cardiology and cardiothoracic surgery services for both adult and paediatric cases. Over the past 14 years in operation, IJN has seen a total of 1,204,492 outpatients and 132,448 inpatients. During the same period, IJN performed over 35,442 surgeries – open heart, closed heart and thoracic surgeries and conducted over 559,675 interventional cardiology procedures. IJN’s new facility can accommodate an additional 157 beds in addition to the 271 beds at the existing block.

The group posted an operating margin of 9.38% in year 2006, relative to 9.68% and 12.89% for fiscal year 2005 and 2004 respectively. Profitability measures remain strong, as the healthcare provider managed to increase revenue by 9% to RM257 million against RM236 million for fiscal year 2005, backed by strong outpatient and inpatient volume. During the fiscal year, the hospital treated 137,000 outpatients and 12,000 inpatients compared to 131,000 and 11,600 respectively in the previous year. However, operating margin continues to be pressured by higher manpower cost, repair and maintenance charges as well as medical supplies expenses. IJN’s fee structure is regulated under the Corporatisation Agreement with the Government of Malaysia and this affects its ability to pass on any increase in cost of services to its patients.

Cash generation should remain strong. In FY2006, the group recorded lower funds from operations due to an over provisioning of doubtful debts as well as inclusion of interest income, and posted negative free cash flow during the fiscal year. MARC expects this trend to continue in the short and intermediate term in light of its near term capital expenditure commitments. Nonetheless, for fiscal year 2006, IJN’s sizeable cash reserves which stood at RM276 million (excluding the bond proceeds) and short term investments in bond funds which stood at RM40 million during the period in review, provide the healthcare group with significant financial flexibility. Its ability to access capital markets also provides further support to its financial flexibility.

Capitalization of the group is strong as reflected in its shareholders’ funds which have been growing steadily year on year thorough its retention of earnings. Earnings growth is expected to continue to be supported by the completion of the new hospital block and returns from the investments of its growing cash balances and marketable securities.

The completion of IJN’s new hospital block is expected to substantially augment revenue and cash flows. The stability of cash flows is, meanwhile, aided by IJN’s limited exposure to economic cyclicality due to the essential nature of services provided. MARC sees the outcome of a pending negotiation of IJN’s fee structure as a key driver for further improvement in its credit quality. If IJN manages to secure a favorable revision of its fee structure and this results in continued strengthening of its cash flow measures, the outlook on the AA+_IS  sukuk could be revised to positive from stable.