Radicare (M) Sdn Bhd - 2010

MARC has affirmed Radicare (M) Sdn Bhd’s (Radicare) ratings on its RM100 million Commercial Papers/Medium Term Notes (CP/MTN) and RM50 million Medium Term Notes (MTN) facilities at MARC-1/A+ and A+ respectively. The rating outlook has been revised to developing from stable to reflect the near-term expiry of Radicare’s 15-year concession agreement in October 2011. The extension of the concession to provide non-clinical support services to government hospitals is currently being evaluated by the government through the Economic Planning Unit (EPU).

MARC opines that the risk of non-renewal of the concession agreement is considered low given the group’s longstanding track record as a non-clinical support service provider and the near-term challenges for other players to replicate the fairly complex and logistics-driven services provided by Radicare to the existing government hospitals under its purview. Notwithstanding these factors, MARC considers the possibility that the terms of a renewed concession, if awarded, may differ from its existing concession. In this respect, MARC will assess the EPU’s pending decision on Radicare’s concession and take appropriate rating action to reflect its impact on the company’s business and financial profile.   

The affirmed ratings are underpinned by the strong debt-servicing ability and issue structure which ensures that the repayment under the rated facilities are backed by receivables from the government. Radicare is one of three concessionaires providing non-clinical support services in the country and serves 41 government hospitals and six unbedded medical institutions. The group’s revenue is primarily derived from government hospitals (95%) despite an increase of its services to private hospitals.

For financial year ended December 31, 2009 (FY2009), Radicare’s revenue growth moderated to 4.8% to register RM431.2 million year-on-year due in part to its clinical waste management divisions reaching capacity constraints. However, the group suffered a sharp turnaround in profitability by recording a pre-tax loss of RM50.4 million (FY2008: RM54.9 million) arising from a significant increase in its operating and administration costs. Operating costs arose due mainly to higher maintenance costs incurred for some of the hospitals, aged assets which had required additional maintenance, as well as major repair works carried out for air-conditioners and water-proofing at the hospitals. In FY2009, Radicare undertook impairment charges on linen loss (RM10.6 million), provision of doubtful debt (RM4.2 million) and expenses incurred for ceased ambulance services (RM15.8 million), all of which contributed to a RM49.1 million increase in administration costs to RM113.3 million in FY2009 (FY2008: RM64.2 million).   
 

MARC notes the company’s return to profitability for the first half ended June 30, 2010 (1HFY2010) with a pre-tax profit of RM39.3 million (1FY2009: RM15 million). Correspondingly, the group’s debt-to-equity ratio, which rose to 1.39 times in FY2009 on account of an erosion in its equity base following the losses, declined to 1.01 times in 1HFY2010, supported by a repayment of RM13 million on its rated facilities.

MARC observes that the balances in its designated accounts amounting to RM30.9 million and RM7.7 million partially cover the outstanding RM54 million CP/MTN and RM30 million MTN facilities as at June 30, 2010.  Coupled with cash and bank balances of RM71.03 million and unutilised credit lines of RM46 million and sizeable receivables due from government hospitals, the group has moderate financial flexibility to meet its financial obligations under the rated facilities.

MARC opines that success in negotiating a renewal of the concession agreement with favourable terms is a key element to strengthening Radicare’s performance. The rating outlook may be revised to take into account the outcome of negotiations with regards to the concession extension.

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