RAM: KPJ profit may be affected if 1Care fees standardised

The Star PETALING JAYA: KPJ Healthcare Bhd’s profitability may be affected if the proposed new healthcare system (1Care) for Malaysians imposes a standardised fee schedule, said RAM Ratings.

At present, the healthcare industry and KPJ are subject to regulatory controls, although this may evolve over time. The Health Ministry is looking to implement 1Care for Malaysians, which RAM Ratings said could change the landscape of the industry. At this point, details of the scheme have yet to be finalised.

KPJ is an investment-holding company with subsidiaries involved in the operation of hospitals and the provision of healthcare services.

“Following the implementation of 1Care, public and private hospitals may be integrated under a common network.

“Should a standardised fee schedule be imposed, KPJ’s profitability may be affected if operating costs are not effectively managed. As such, the impact of such a restructuring, including its effect on KPJ’s competitive position, can only be assessed upon more clarity of the said scheme,” said RAM Ratings head of consumer and industrial ratings Kevin Lam.

Lam also noted that KPJ remained exposed to persistent cost increases such as higher staff salaries and more expensive medical supplies and pharmaceuticals.

Overall, RAM Ratings does not expect these cost increases to exert overwhelming pressure on the group’s financial profile at this juncture, as the lack of a standardised fee schedule for pharmaceuticals and medical supplies charged by private hospitals allows for some pricing flexibility.

Meanwhile, RAM Ratings maintains a cautious view on the potential impact that a further debt-funded expansion could have on KPJ Healthcare Bhd’s balance sheet and debt-protection measures.

RAM Ratings was making reference to Point Zone Sdn Bhd, a special purpose vehicle set up as a wholly-owned subsidiary of KPJ to undertake the issuance of the Islamic commercial papers/medium term notes (ICP/IMTN) programme for KPJ.

RAM Ratings recently reaffirmed Point Zone’s RM500mil ICP/IMPTN (2011/2018) as AA3(s) and P1(s) for its long and short term ratings respectively.

The long term rating was given a stable outlook.

While RAM Ratings noted KPJ’s position as Malaysia’s leading private healthcare provider with steady operations and cashflow, strong liquidity and financial flexibility, it said KPJ’s aggressive expansion had resulted in a highly leveraged financial profile.

“The group’s lease-adjusted gearing ratio, although improved, was still relatively high at 1.26 times as at end-December 2011 compared to 1.4 times in the previous year,” said RAM Ratings’ head of consumer and industrial ratings Kevin Lam.

He added that KPJ’s adjusted gearing ratio is expected to peak at about 1.5 times over the next 3 years following the expansion of its hospital network.

Lam expects its adjusted funds from operations debt cover (FFODC) to remain at around 0.2 to 0.25 times.

For KPJ’s financial year ended Dec 31, 2011, the group’s revenue rose 14.3% to RM1.89 billion, while operating profit rose 20.1% to RM229.32mil

The group’s adjusted FFODC strengthened to 0.23 times as at end December 2011 from 0.9 times in the previous year.