CREDIT ANALYSIS REPORT

POINT ZONE (M) SDN BHD - 2022

Report ID 605389003787 Popularity 1028 views 102 downloads 
Report Date Mar 2022 Product  
Company / Issuer Point Zone (M) Sdn Bhd Sector Healthcare
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Rationale
Rating action     
MARC Ratings has assigned rating of AA-IS(CG)  to Point Zone (M) Sdn Bhd’s (Point Zone) proposed Islamic Medium-Term Notes (IMTN) programme (Sukuk Wakalah Programme) of up to RM3.0 billion. The rating reflects the credit strength of KPJ Healthcare Berhad, the parent of Point Zone, that is providing a corporate guarantee on the proposed programme. The rating outlook is stable.

Rationale     
The assigned rating reflects KPJ Healthcare’s strong business profile as a medical specialist healthcare services provider, leading to steady top-line growth and good cash flow generation. Its scale advantage and diversified operations have provided a platform for good operating efficiency and helped the company to better withstand competitive pressures compared with its smaller, less-diversified peers. KPJ Healthcare has an established 40-year track record and is the largest private healthcare provider in Malaysia, with an estimated 24% market share by bed size as at mid-2019. With 28 hospitals in Malaysia and four in the region, along with 1,352 physicians and five senior & assisted living care facilities, KPJ Healthcare reported revenue of more than RM2.0 billion a year in the last five years. Over the last four years, excluding fiscal year 2020 that was disrupted by the COVID-19 pandemic, KPJ Healthcare has posted revenue growth averaging 7% a year, supported by organic growth as well as acquisitions. 

Our outlook for the healthcare industry is stable, notwithstanding the current headwinds presented by the COVID-19 pandemic, given that much of the demand for healthcare is often urgent and non-discretionary in nature. The pandemic will likely delay earnings for healthcare service providers as elective procedures and non-urgent hospital visits are postponed; however, these are expected to resume after the crisis recedes. Taking the long view, we believe demand drivers for healthcare services are intact considering the increasing awareness for proper healthcare, rising affluence among Malaysians and a growing ageing population. 

We view KPJ Healthcare to have sufficient liquidity buffers to navigate current challenges. Sources of liquidity as at end-September 2021 include cash and bank balances of RM317.0 million and about RM440 million of available banking lines. Additionally, KPJ Healthcare derives ample financial flexibility from its unencumbered assets of around RM750 million, its listed status (hence avenue to tap the equity market) and its investments in Al-‘Aqar Healthcare REIT, worth approximately RM353 million as at end-2020. Its payor mix skewing towards commercial insurers is also viewed positively. 

Moderating the above positives is KPJ Healthcare’s fairly leveraged balance sheet with debt of about RM1.8 billion as at end-September 2021, which translates to a debt-to-equity (DE) ratio of 0.8x. KPJ Healthcare anticipates issuing the Sukuk Wakalah (RM1.13 billion) in 2022-2024. Proceeds from the issuance will be used for working capital, capex and refinancing certain outstanding facilities. KPJ Healthcare’s straight debt is expected to peak at about RM2.2 billion in 2023, but we believe the higher level of indebtedness will be partly mitigated by KPJ Healthcare’s stable organic performance. Under our sensitised case, we forecast cash flow from operations (CFO) to range between RM300 million and RM500 million, with an average of around RM430 million per year over the next five years to still provide a comfortable cover on debt of around 0.2x.

For healthcare service providers in general, exposure to regulatory risk and contingent liabilities are key event risks that could influence their credit profiles. The largest regulatory change risk, in our view, is related to pricing power and its impact on profitability and cash flow. While there is still no standardised fee schedule for products and services charged by private hospitals, regulatory controls may evolve as circumstances change. Should one be imposed, the profitability of healthcare providers may be affected if costs are not effectively managed. The nature of its business also poses a certain degree of contingent liability risk; negligence in professional services may cause significant financial impact due to legal awards and settlements. While the financial risk can be mitigated through professional indemnity insurance, it could still pose reputational risk. 

Rating outlook     
The stable outlook reflects our expectation that the current COVID-19 headwinds would not have a major impact on KPJ Healthcare’s earnings and patient volumes, and that the group will be prudent in its capex spending without aggressive debt funding.

Rating trajectory

Upside scenario     
Considerations for a positive rating action include a faster deleveraging process with a DE ratio of less than 0.5x and a demonstrated sustainable improvement in operating fundamentals translating to an increase in liquidity over time.

Downside scenario     
The rating may be pressured in the event of:
  • KPJ Healthcare’s revenue and operating margins weakening more than anticipated if macroeconomic conditions were to worsen over a prolonged period,
  • an overly aggressive growth strategy or high capital spending that requires significant additional cash or debt commitments, leading to pressure on credit metrics that would trigger downward rating migration.
Key strengths
Strong business position in competitive healthcare industry
Steady operations and cash flow generation given low demand cyclicality
Healthy financial liquidity and flexibility
Favourable payor mix
 
Key risks
Fairly leveraged balance sheet
Regulatory and contingent liabilities


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