CREDIT ANALYSIS REPORT

POINT ZONE (M) SDN BHD - 2022

Report ID 6053890046953 Popularity 51 views 9 downloads 
Report Date Nov 2022 Product  
Company / Issuer Point Zone (M) Sdn Bhd Sector Healthcare
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Rationale
Rating action

MARC Ratings has affirmed its AA-IS(cg) rating on Point Zone (M) Sdn Bhd’s (Point Zone) Sukuk Wakalah Programme guaranteed by parent KPJ Healthcare Berhad (KPJ). Point Zone is a funding conduit set up by KPJ solely for the purpose of issuing the sukuk. The rating reflects the credit strength of KPJ by virtue of the corporate guarantee. The rating outlook is stable. Total outstanding under the sukuk currently stands at RM650 million. 

Rationale 

The rating reflects KPJ’s dominant position as the largest private healthcare provider in Malaysia with an estimated market share of 26%. Its strong business position translated to a steady financial profile and operating cash flow levels, which provide comfortable debt coverage. KPJ has an established history of over 40 years and a track record of consistent revenue and earnings before interest, tax depreciation and amortisation (EBITDA) margin in the RM2.5 billion to RM2.7 billion p.a. and 21%-22% range over the last four fiscal years. Pandemic-related business disruption — particularly felt in 2020 (lower patient volumes) — has shown signs of stabilisation. Through seven months of fiscal 2022, the number of outpatients (excluding Indonesia) grew to 1.78 million while inpatients improved to 172,000, a respective 10.9% and 28.8% y-o-y growth (annualised). KPJ’s bed occupancy rate (BOR) in Malaysia has also improved, tracking at 54% as at end-July 2022, back to its normal level of around 53%-55%. 

In 1H2022, KPJ posted revenue of RM1.36 billion and an EBITDA margin of 21.6%. On an annualised basis, KPJ could end fiscal 2022 with revenue of circa RM2.7 billion. Overall, we expect revenue and EBITDA to remain largely stable at these levels; strong brand awareness and a leading position in a non-cyclical healthcare market will support KPJ’s business stability, in our view. We also believe long-term demand drivers are intact for private hospital operators, supported by favourable demographics. An ageing population, longer life expectancies, higher health awareness, population growth and affluence, and growing insurance penetration will see demand for healthcare services continue increasing.

Meanwhile, sources of liquidity as at end-June 2022 include cash and bank balances of RM367.3 million. The company also derives financial flexibility from its unencumbered assets of around RM916 million as of July 2022, its listed status (hence avenue to tap the equity market) and its 37% interest in Al-‘Aqar Healthcare REIT, worth some RM335 million as at September 2, 2022. KPJ’s payor mix skewing towards commercial insurers is also viewed positively. 

Moderating these positives is KPJ’s fairly leveraged balance sheet with debt of about RM1.92 billion as at end-June 2022, which translates to a debt-to-equity (DE) ratio of 0.8x. The company projects its borrowings to hover around RM1.98 billion by end-2022, and to increase slightly to approximately RM2.0 billion to RM2.1 billion in 2023-2027. However, we believe the higher debt will be partly supported by KPJ’s stable organic performance. Under our sensitised case, which assumes a moderate average revenue growth of 2% and a lower EBITDA margin of 15%-18% over 2023-2027, we expect cash flow coverage on interest and debt to remain comfortable at around 5.1x-6.9x and 0.25x-0.27x through the forecast period. 

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 the 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 KPJ will maintain steady performance in the next 12-18 months and that the company’s relative credit strength will remain resilient as a result. 

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

Factors that could lead to a negative rating action include:

  • Evidence of sustained deterioration in KPJ’s operating performance leading to a weak credit profile. 

  • An overly aggressive growth strategy or high capital spending requiring significant additional cash or debt commitments that can exert pressure on credit metrics.  
Key strengths
  • Strong business position 
  • 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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