Radicare Sdn Bhd - 2007

MARC has assigned MARC-1/A+ and A+ ratings to Radicare (M) Sdn Bhd’s (Radicare) RM100.0 million Commercial Papers/Medium Term Notes (CP/MTN) and RM50.0 million Medium Term Notes (MTN) facilities respectively. The ratings carry a stable outlook. The ratings reflect the credit quality of the receivables securing the notes, a 1.20 times security cover of the amount issued under the CP/MTN facility, and increasing demand for hospital support services from contract hospitals and private medical institutions. These strengths are moderated by operational risks inherent in the nature of its business such as disputed invoices amount, delays in collection of payments and higher than anticipated demerit deductions; and its higher leveraged financial profile upon full drawdown of the facilities. The stable outlook reflects Radicare’s strong business position as one of the three concessionaires providing non-clinical support services to public hospitals and medical institutions in Peninsular Malaysia, which should enable the group to maintain debt servicing capacity consistent with its current ratings.

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.

Radicare was awarded a concession for the privatisation of hospital support services by the Government of Malaysia (GOM) through the Ministry of Health (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 up to year 2011. The Concession Agreement (CA) covers a total of 37 public hospitals and institutions (Contract Hospitals) and additional hospitals which the government may designate to the list of Contract Hospitals. The government has since 1996, awarded an additional 12 new hospitals and institutions to Radicare including three in 2006 and one in 2007 whilst one of the initial Contract Hospitals has ceased operations. Fees for services rendered to the hospitals and medical institutions are payable monthly by the government, in accordance with the CA.

Credit risk is mitigated as the drawdowns of the CP/MTN facility are based on assigned invoices net of demerit deductions acknowledged by the respective state’s Accountant General and issued to the MOH or Contract Hospitals by Radicare. The value of the assigned invoices will be at minimum, 1.20 times the nominal value of the CPs and/or MTNs to be issued under the CP/MTN Facility. For the MTN Facility, the assignment of all future revenues from the five identified contract hospitals will provide credit protection to MTN holders. An additional protection measure includes the remittance of monies received from the assigned invoices directly into respective designated accounts for the primary purpose of redeeming the notes. 

Radicare’s financial profile remained strong, underpinned by overall increased demand for its support services, increase in variation orders and the maiden contribution of two new hospitals. For FY2006, Radicare’s revenue grew by 13.2% while operating margin rose to 16.4% from 13.3% registered in FY2005. For the six months ended 30 June 2007, strong demand for its services brought about a 10.3% growth in revenue compared to the corresponding period a year earlier. Profit before tax (PBT), meanwhile, fell 13.2% to RM20.9 million mainly due to lower compensation received for linen loss and higher operating expenses. MARC is of the view that successful control of costs will be vital to the preservation of Radicare’s margins given its fixed fee structure.  

Radicare’s leverage, which was modest at 0.40 times in FY2006 is expected to rise close to the covenanted debt-to-equity (D/E) ratio of 1.50 times upon the issuances of the CP/MTN and MTN facilities.  

Funds from operations (FFO) debt coverage improved to 96.2% in FY2006 as compared to 52.8% in FY2005. Meanwhile, free cash flow (FCF) debt coverage also strengthened to 25.9% in FY2006 compared with 17.3% in FY2005. The group anticipates higher FFO for FY2007 in line with increased demand for its services. However, it is noted that the group’s liquidity is particularly sensitive to a longer receivables collection period at year end, of which administrative delay is the primary cause.