RAM reaffirms Lanka Hospitals’ ratings at A+ and P1

RAM Ratings Lanka has reaffirmed Lanka Hospitals Corporation PLC’s (LHC or the Hospital) respective long- and short-term corporate credit ratings at A+ and P1; the long-term rating has a stable outlook. LHC is a private healthcare provider in Sri Lanka. The ratings are upheld by the company’s strong financial profile, liquidity, expected state support and bright outlook for private healthcare in Sri Lanka.

RAM said LHC’s financial profile is reflective of its conservative investment policy; its cash flow protection metrics were strong while its gearing ratio stood at a low 0.03 times as at FYE 31 December 2011 (FY December 2011).

“The hospital’s funds from operations (FFO) debt coverage were also healthy at 6.73 times. Looking ahead, we envisage LHC’s gearing and FFO levels to moderate amid increased debt to funds its growth plans in 2013,” RAM added.

Meanwhile, the hospital’s liquidity profile continued to be solid, with its cash and cash equivalents (CCE) providing a strong buffer against its short-term borrowings; its ratio of CCE to short-term debt rose to 7.74 times as at end-December 2011 before moderating to 5.12 times as at end-September 2012.

RAM noted that LHC’s current and quick ratios are also strong at a respective 2.73 times and 2.40 times as at end-September 2012.

Elsewhere, subsequent to the renationalisation of Sri Lanka Insurance Corporation PLC (SLIC) – LHC’s major shareholder – in 2009, the Government of Sri Lanka (GOSL) indirectly owns 54.61% of the Hospital.

State support is, therefore, expected through SLIC and the hospital’s board that is largely represented by key Government personnel. An increasing number of patients have, over the years, sought treatment at private hospitals as opposed to the Government sector, owing to better service quality and shorter waiting times.

The growth prospects of the local private healthcare industry remain encouraging, underscored by greater health awareness among the public, higher disposable incomes, Sri Lanka’s increasing ageing population and healthcare insurance coverage among the working population, RAM said.

However, LHC’s overall profitability is hampered by its high cost profile. Also, amid keener competition in the fragmented healthcare sector, the hospital’s revenue growth had been relatively slower in FY December 2011 than a year earlier.

LHC’s operating profit before depreciation, interest and tax (OPBDIT) margin remained relatively low at 11.82% in FY December 2011, thinning further to 9.91% in 9M FY December 2012.

Moreover, a significant challenge to the private healthcare sector’s growth potential is the shortage of skilled personnel and the resultant impact on staff costs, which have escalated over the years.

As these cost increases cannot be fully passed on to customers, given the competitive nature of the industry, persistently rising costs may continue to pressure LHC’s profit margins.

The local private healthcare sector is fragmented; competition is keen within Colombo, where most of the established players are concentrated and where demand is high owing to higher disposable incomes. Competition from other private hospitals with multiple branches is also viewed with concern.