Medi Innovation Sdn Bhd - 2008/2009

MARC has placed its AID and MARC-2ID /AID ratings of Medi Innovation Sdn Bhd’s (MISB) RM100 million Islamic Medium Term Notes Issuance Facility (IMTN facility) and RM50 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes Issuance Facility (MUNIF/IMTN) on MARCWatch Negative. MISB operates a chain of medical aesthetic clinics in Singapore and Hong Kong through Astique Medical Pte Ltd (AMPL), its sole operating subsidiary. The MARCWatch Negative considers the uncertain cash flow generation prospects of AMPL’s chain of medical aesthetic clinics following a period of rapid business expansion in its other key market of Hong Kong as well as the recent departure of a key member of its team of medical aesthetic doctors in Singapore. Group earnings have not kept pace with increases in revenue and consolidated cash flow generation has been uneven to date. Because of the group’s extensive use of MTNs, scheduled annual maturities are substantial relative to its cash flow generated from operations, hence exposing MISB to significant liquidity risk. MISB’s rather aggressive debt leverage and the large amounts of goodwill relative to total assets and borrowings contribute to increased balance sheet vulnerability.

AMPL is wholly-owned by MISB and is the latter’s sole operating subsidiary. AMPL was acquired by MISB in a leveraged buy-out in March 2006. The group owns five medical aesthetic clinics in Singapore and has briskly expanded its operations to Hong Kong since March 2007. The group entered into joint-ventures with Hong Kong-based individuals or companies and has opened a total of five clinics in Hong Kong over a period of 20 months. MARC is concerned that the more onerous profit sharing arrangements under these joint venture agreements may lead to further strain on the group’s cash flows and debt servicing ability. 

AMPL group’s revenue increased by 23.9% to RM37.2 million (SG$16.2 million) in financial year ended December 31, 2007 (FY2007) compared to RM30.0 million (SG$13.0 million) in FY2006, arising mainly from higher contributions from its Tiong Bahru Medical Centre in Singapore and from its newly opened Astique Clinicentral in Hong Kong. Its operating profit margin declined to 48.4% in FY2007 from 59.7% in FY2006 on account of higher rentals at a new location as well as outfitting costs. For FY2007, profit after tax (PAT) of RM14.5 million (SG$6.3 million) fell short of the minimum profit guarantee of SG$10.0 million for the year that the vendors of AMPL had provided. The shortfall was recovered from the stakeholder monies and applied to the redemption of the debt facilities. The two-year profit guarantee will no longer apply in FY2008.
  
For the six months ended June 30, 2008 (1HFY2008), AMPL group recorded 21.6% increase in revenue and marginal increase in pre-tax profit to RM21.0 million and RM8.3 million respectively compared to 1HFY2007. However, in the same period, its operating profit margin narrowed further to 39.7% (1HFY2007: 47.3%), mainly attributed to higher employee benefits expense.

MISB’s Consolidated Gearing Ratio (CGR), which incorporates shareholders’ advances in its denominator,  improved to 1.35 times in FY2007 on the back of larger shareholders’ funds (FY2006: 1.46 times). For FY2007, MISB maintained satisfactory headroom in respect of the financial covenants contained in its rated facilities. MISB redeemed RM15.0 million of Tranche 2 and RM15.0 million of Tranche 3 of the IMTN facility in March 2008 and 2009 respectively. 

The expiry of the profit guarantee on AMPL’s performance and its more onerous profit sharing arrangements in respect of its Hong Kong joint ventures raise uncertainties about MISB’s ability to generate sufficient operational cash flow to meet the next redemption of Tranche 4 of the IMTN facility amounting to RM20.0 million in March 2010. The rating on MISB is currently under pressure and could be lowered if the group’s cash flow profile does not improve sufficiently in the near-term and operating cash flow generation remains below expectations.

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