IJN Capital Sdn Bhd - 2009

MARC has affirmed the ratings on special purpose company IJN Capital Sdn Bhd’s (IJN Cap) outstanding RM100 million of the RM209 million Sukuk Musyarakah programme at AAAIS. The affirmed rating primarily reflects the credit quality of Institut Jantung Negara Sdn Bhd (IJN) which effectively funds the obligations under IJN Cap under the Sukuk Musyarakah. Key credit considerations include the government’s ownership of IJN Cap under the government’s ownership of IJN, its competitive standing as Malaysia’s leading cardiovascular and thoracic centre and its strong financial fundamentals. The outstanding Sukuk under the RM209 million programme additionally benefits from a requirement under the issue structure to set aside a proportion of government receivables into a specific revenue reserve account for its redemption on or before maturity in 2013. The remaining balance of RM109 million of the yet to be issued Sukuk, whose maturities extend beyond 2013, has been affirmed at AA+IS.

Under the rated programme, IJN Cap issued the Sukuk to fund the refurbishment of IJN’s existing hospital facilities, construction of a new block and purchase of equipment. IJN Cap and IJN will enter into Istisna contracts for the construction and delivery of the project. The issuer will pay an Istisna purchase price to IJN progressively over the construction period which will be applied towards the funding of the development of the relevant project parcel. IJN will subsequently buy back the particular project parcel at an Istisna sale price, which is essentially the payment source for the Sukuk obligations.

IJN, which was part of the Kuala Lumpur General Hospital until August 1992 when it was corporatised, provides comprehensive cardiovascular treatment including cardiology, pediatric cardiology and cardiothoracic surgery, supported by a team of 65 doctors. The hospital, which is Malaysia’s leading heart centre, has continued to invest in medical equipment to keep pace with the latest techniques in the field. To further strengthen its position in the healthcare sector, it is undertaking an expansion plan that will increase its present 274-bed and 5-operating theatre capacity to 428-bed and 7-operating theatre, to be fully operational by end-2010.

IJN’s regulated fee structure and non-profit maximising mandate of providing affordable cardiac care for Malaysians have restricted its ability to increase its medical fees despite rising operating costs which has continued to  dampen its operating margins. Any revision in the  medical fee structure, which is between 30%  and  50% lower than  its private  sector  peers, is  subject to  government approval. About 70% of  IJN’s patients comprise government employees and their dependents, government pensioners and the underprivileged, whose medical costs are borne by the government. This largely mitigates collection risk and, at the same time, ensures some measure of earnings stability, particularly in view of the growing demand from this segment for IJN’s services.

MARC expects the expansion programme, partly funded from the proceeds from the Sukuk issue, to support earnings and cash flow growth in the medium term.

For the financial year ended December 31, 2008 (FY2008), the group recorded an increase in revenue and pre-tax profit to RM310.5 million and RM32.5 million respectively on the back of an 9.1% increase in patients to 175,667. The group’s pre-tax profit is also supported by bad debt writebacks of RM2.9 million which led to a marginal increase in operating profit margin to 9.6%. The group generated cash from operations of RM84.0 million, and free cash flow of negative RM81.0 million after capital expenditures in FY2008. Based on IJN’s cash flow projections, capital spending should return to modest levels after FY2010, allowing IJN to generate sufficient discretionary cash flow to meet scheduled Sukuk redemptions. IJN’s low gearing, as reflected by its debt-to-equity ratio of 0.32 times (FY2007: 0.26 times), substantial unrestricted cash and bank balances of RM242.3 million and manageable debt maturities allow the group to maintain relatively robust cash flow coverage and liquidity measures.

The stable outlook for both ratings reflect MARC’s expectation that IJN’s credit profile will remain strong in the near term, underpinned by its strong financial profile and its position as the premier cardiac centre in Malaysia.

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