Radicare (M) sdn Bhd - 2008

MARC has affirmed the ratings of MARC-1 /A+ and A+ 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 outlook is stable. The affirmed ratings reflect steadily rising revenues underpinned by increasing demand for hospital support services for contracted hospitals that has strengthened the company’s credit profile. Moderating the ratings include the risk of concession non-renewal in 2011 and Radicare’s rising operating costs.

Radicare is one of the three concessionaires providing non-clinical services to public hospitals and medical institutions. Under a 15-year Concession Agreement, the company provides a range of services that includes clinical waste management, cleansing, linen and laundry, facilities and biomedical engineering maintenance. Radicare’s services are provided to 47 hospitals and medical institutions (Contract Hospitals) in West Malaysia: the densely populated Federal Territory and Selangor state (central zone) as well as the east coast states of Pahang, Terengganu and Kelantan (eastern zone).

Radicare’s revenues rose by 16% to RM360.8 million in FY2007 (FY2006:RM311.4 million) as a result of generating higher fees from new and existing Contract Hospitals. However, net profit fell to RM30.5 million in 2007 (FY2006: RM33.7 million) mainly due to rising operating costs. In addition, the company’s net cash flow from operations deteriorated to a negative RM10.8 million owing mainly to delays in collections from the new Contract Hospitals. Radicare’s debt to equity ratio rose to 0.59 times in FY2007 (FY2006: 0.40 times) as a result of additional borrowings to fund investments in new plants, although it remains well within the covenanted cap of 1.5 times.

While the Company is currently expanding capacity to cater for an increase in business volume, especially for linen services, it is also rationalising existing facilities to contain costs. These measures will enable the group to improve margins and service quality going forward.

MARC notes that the issue structure provides strong credit protection to noteholders as the drawdowns of the CP/MTN facility are backed by assigned invoices to Contract Hospitals, which have to be at least 1.20 times in value to the nominal value of the CPs and/or MTNs issued. For the MTN Facility, the assignment of all future revenues from five identified contract hospitals further mitigates credit risk. An additional protection measure includes the remittance of monies received from the assigned invoices directly into designated accounts for redeeming the notes. 

The stable outlook reflects Radicare’s position as a concessionaire and MARC’s expectation of continued strong revenue and profitability for the remaining duration of the concession ending in 2011. Overall MARC takes comfort from the resilient nature of the healthcare industry and the protection afforded by the issue structure.

Major Rating Factors

Strengths

Challenges/Risks

• Renewal of the concession beyond 2011;
• Revision of its fee structure;
• Timely start-up of new plants; and
• Procurement of non Ministry of Health (MoH) contracts