MARC Ratings has affirmed its AA-IS(cg) rating on Point Zone (M) Sdn Bhd’s Sukuk Wakalah Programme guaranteed by KPJ Healthcare Berhad (KPJ). The rating outlook has been revised to positive from stable. 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 positive outlook mainly reflects KPJ’s strengthening operating performance, underpinned by its improving leverage position. Meanwhile, the rating affirmation considers KPJ’s strong business profile, driven by its leading position in the resilient Malaysian healthcare sector. This is counterbalanced by its exposure to regulatory risk and concerns on shortage of key medical personnel in the healthcare industry that could impede growth.
MARC Ratings opines that KPJ’s ability to build a strong brand over 40 years is the key reason behind its market position as the largest private healthcare provider in Malaysia, with 29 hospitals, 3,776 licensed beds, and a 22% market share based on bed count. KPJ also has presence in Bangladesh, Thailand, and Australia, but their contribution to group revenue is small; in 2022, Malaysia accounted for 96% of total revenue, 98% of which came from hospital operations.
KPJ’s performance continued to be driven by favourable patient volume trends through September 2023; outpatient volume was down slightly to 2,063,630 (-1.7% annualised), but inpatient admissions showed a strong growth to 259,172 (16.3% annualised). Notwithstanding the lower outpatient volume, KPJ’s revenue in 9M2023 expanded 19.4% y-o-y as higher charges and patient severity (inpatients) more than offset the decline in outpatient volume. Its bed occupancy rate also improved to 67% as at end-September 2023, up 9 percentage points from 2022; this showed an overall stronger performance compared to the past average of 55%-62%. The rating agency views long-term industry growth as sustainable, driven by favourable demographics, increased health awareness, and growing affluence. Growing insurance penetration has, and will continue to be, a significant factor to support long-term demand for private healthcare services.
KPJ’s profitability margin remains healthy; earnings before interest, tax, depreciation and amortisation (EBITDA) continues to exceed 20%, hovering around 25% in 2023. KPJ’s revenue for 9M2023 amounted to RM2.55 billion, a 16.6% improvement from 2022 on an annualised basis. The growth was supported by bed capacity expansion, and contributions from newer hospitals including Damansara Specialist Hospital 2, KPJ Bandar Dato’ Onn, KPJ Batu Pahat, KPJ Perlis and KPJ Miri.
For 2023, cash flow from operations (CFO) could reach around RM700 million (9M2023: RM527.4 million), which compares well with KPJ’s average of around RM500 million p.a. over the past five years excluding periods affected by the pandemic. Total borrowings stood at about RM1.92 billion as at end-September 2023, slightly lower than the previous forecast of about RM2.0 billion. KPJ now projects its borrowings to hover around RM1.8 billion to RM1.9 billion between 2024 and 2028. MARC Ratings’ sensitised case — assuming an average revenue growth of 10% p.a. and a lower EBITDA margin of 20% over 2024-2028 — projects CFO interest and debt coverage to be around 3.1x-4.4x and 0.2x-0.3x over the forecast period. The rating agency has kept the assumptions for dividends as per the base case (about RM260 million p.a. on average) but believes KPJ has room to reduce dividends, if needed, which would add to its financial flexibility. Liquidity position remains strong with sufficient cash balances of RM837.0 million as at end-September 2023.