IJN Capital Sdn Bhd - 2008

MARC affirms its AAAIS rating on IJN Capital Sdn Bhd’s (IJNC) outstanding RM100 million Sukuk out of RM209 million Sukuk Musyarakah programme. The rating reflects the group’s strong business profile as the leading and premier cardiac centre in Malaysia, its ownership by the Minister of Finance Incorporated (MOF) and robust liquidity profile. Moderating the rating is the regulated fee structure of its main operating entity, Institut Jantung Negara (IJN), which exposes it to rising costs and narrowing profit margins.

IJNC is a special purpose vehicle company set up for the purpose of facilitating the issuance of the RM209 million Sukuk Musyarakah Programme where the proceeds of which are used to fund expansion-related capital spending of IJN. Under the Programme, Sukukholders participate in the venture for the refurbishment of existing hospital facilities, the construction of a new wing and purchase of new equipment. While IJN remains primarily responsible for all Sukuk service payments under the Sukuk issuance, additional Sukukholder security is provided in respect of the RM100 million Sukuk maturing in or before 2013 through a pledge of a certain percentage of available collections from the Government of Malaysia (GOM) to support obligations under the Sukuk. GOM receivables available for Sukuk service and repayment are expected to be adequate. The remaining balance of RM109 million unissued Sukuk, whose maturities extend beyond 2013, rated solely based on the credit strength of IJN has been affirmed at AA+IS. Both ratings carry a stable outlook.

IJN was established in 1992 to provide cardiology, paediatric cardiology and cardiothoracic surgery and care. Since its incorporation, IJN has seen 1,353,110 outpatients and 144,838 inpatients; and performed 38,512 surgeries and 87,092 interventional cardiology procedures. More than 80% of IJN’s patients are paid for by the government which include government employees, their dependents, government pensioners and underprivileged patients.

To meet the rising demand for its services, IJN has embarked on an expansion programme. The expansion is scheduled for completion by the end of first quarter 2009 and operational by the second quarter of the same year. Upon completion IJN’s capacity will increase to 439 beds and 7 operating theatres from 274 beds and 5 operating theatres currently. The increased capacity and enhanced services is expected to support near-to-intermediate term earnings and cash flow growth.

IJN’s operating margins have been trending downwards over the last three years registering a low of 6.57% in financial year ended December 31, 2007 (FY2007) compared to 10.78% in FY2006 and 11.16% in FY2005. Profit before tax declined 36.8% to RM20.6 million in FY2007 from RM32.6 million in FY2006. This was primarily due to the escalating costs of medical supplies and services as well as one-off training expense associated with the expansion. Business volume has continued to grow as is evident from the 8% improvement in the number of patients to 161,008 in FY2007 (FY2006: 148,959) which boosted revenues by 11% to RM287 million (FY2006: RM258 million). IJN posted two straight years of negative free cash flow of RM67.9 million (FY2007) and RM14.9 million (FY2006) due to amounts spent on capital expenditures (FY2007: RM87 million and FY2006: RM38 million). A further RM180 million capital expenditures is planned for FY2008 to complete the expansion programme.

IJN maintains a robust liquidity profile which is underpinned by unrestricted cash reserves and marketable securities of RM124 million and RM195 million respectively as at end FY2007. The group’s gearing as measured by the ratio of its debt to equity, has stayed relatively constant at 0.26 times for the last two financial years with additional debt supported by fresh injections of equity. The stable outlook reflects MARC’s expectation that the group will maintain its strong business and financial profile in the near term. The AA+IS rating on the Sukuk maturing between 2013 and 2016 could be upgraded if IJN’s financial performance show improvement resulting in strengthening credit protection metrics.

Major Rating Factors

Strengths

• Strong business profile based on its position as leading cardiac centre in Malaysia; and
• Ownership by the Minister of Finance Incorporated.

Challenges/Risks