RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Diagnosticos da America S.A. (DASA):
--Foreign and Local currency Issuer Default Rating (IDR) at 'BB+';
--National Scale rating at 'AA(bra)';
--Local debentures due to 2016 and 2018 at 'AA(bra)'.
In addition, Fitch has withdrawn the following rating for DASA's subsidiary, DASA Finance Corporation:
The corporate Rating Outlook is Stable.
KEY RATING DRIVERS
DASA's credit ratings reflect its leading position in the Brazilian medical diagnostics industry, its strong and diversified portfolio of services and cash flow diversification from multiple counterparties, as well as the favorable long-term industry fundamentals. The ratings also incorporate DASA's track record of strong credit profile supported by adequate leverage ratios and liquidity position. DASA's ratings, though, are tempered by the ongoing challenges related to switching its business model to be more focused on medical excellence while it operates its business under a new profitability level. DASA's ratings are also limited by the rapid consolidation of the diagnostic industry, which could increase competitive pressures in the near term.
Strong Business Position
DASA is the largest company in the fragmented medical diagnostic industry, with an estimated market share of 12%. The company's size, reputation, multi-brand portfolio, and broad geographic diversification are considered by Fitch to be competitive advantages that support the ratings. Besides the outpatient and inpatient services, which represent around 83% of the company's revenues, DASA also operates lab-to-lab services (10% of its revenues) and offers services to public entities. The company has a track record of a diversified portfolio of payers, nevertheless the past years of consolidation in the Brazilian healthcare supplementary sector have somewhat resulted in greater counterparties concentration in DASA's clients portfolio.
Fitch sees as credit positives the long-term focus of DASA's current shareholders, as well as its conservative track record in managing business in the healthcare industry. The company's management has passed through different phases over the last five years. At this stage, DASA's strategy is focused on long-term medical excellence and quality of service. Fitch does not expect any relevant acquisition in the short term as DASA is focused on organic growth and on integrating the acquired assets from MD1. Moreover, Brazil's anti-trust agency, CADE, has imposed some mild restrictions, including the prohibition from doing M&A transactions in several municipalities in the Rio de Janeiro metropolitan area for the next three years, as well as the metropolitan areas of Sao Paulo and Curitiba until 2016. DASA is also required to sell assets in the Rio de Janeiro area in order to limit its market share at 20% maximum. This pool of assets generates around BRL110 million of revenues (4% of consolidated sales).
New Business Profitability; Limited Medium-Term Improvement
Dasa's change in business strategy along with inflationary pressures has led the company to operate under a new profitability level. Since mid-2011, the company has taken several initiatives to improve customer service, medical excellence and efficiency, which resulted in increasing cost and expenses. Fitch base case scenario foresee DASA's EBITDAR margin to move to around 18%, a relevant drop from the 25% average between 2010 and 2011.
DASA generated BRL560 million of EBITDAR during 2013, an increase of 11% compared to 2012. EBITDAR margin marginally improved to 22.5% from 22.1% in 2012, reflecting the operational restructuring process. For the LTM period ended March 31, 2014, DASA's EBITDAR was BRL579 million, while its margin was 22.5%.
Lower Capex to Benefit Free Cash Flow
As of March 31, 2014 (LTM), DASA generated funds from operations (FFO) of BRL286 million and cash flow from operations (CFFO) of BRL227 million. These figures positively compare to BRL214 million of FFO and BRL205 million of CFFO in 2012. After two years of negative free cash flow (FCF) in 2011 and 2012, the company returned to positive FCF in 2013 and in the LTM period ended March 31, 2014, which reached BRL27 million and BRL97 million, respectively. This improvement resulted from lower capex of BRL115 million in 2013 and BRL109 million for the LTM period ended March 31, 2014 which compares to BRL208 million in 2012. Going forward with continuous investments in equipment and organic growth, FCF should be neutral to slightly negative. In Fitch's base case scenario, the agency is not including the asset sales related to CADE's decision on MD1 merger due to uncertainties related to the timing of the sale and use of the resources. Fitch expects the sale to be around BRL100 million.
Leverage to Marginally Decline
DASA has a good track record of maintaining an adequate capital structure, demonstrated by its four-year (2009-2013) average net adjusted debt/EBITDAR ratio of 2.5x. As of LTM ended period March 31, 2014, the company's net adjusted debt/EBITDAR ratio was 2.7x, which shows a marginal improvement from 2.8x in 2013 and 2.9x in 2012. Fitch's base case indicates a net adjusted leverage ratio of 2.7x in 2014 with a gradual improvement to 2.5x in the next three years as result of improved services levels.
The successful debentures issuance in late 2014 has enhanced DASA's liquidity position. Refinancing risks are mitigated and currently cash position is sufficient to cover debt amortizations until mid-2015. As of March 31, 2014, DASA's cash and marketable securities was BRL697 million while its short-term debt was BRL464 million, which translated into a cash-to-short-term debt ratio of 1.5x. Cash plus CFFO-to-short-term debt was 2.0x for the period. As of March 31, 2014, DASA's total adjusted consolidated debt was BRL2.2 billion, which primarily consists of BRL1.4 billion of local debentures and BRL655 million related to rental obligations.
Rating upgrade could occur as a result of a complete successful switch in the company's business strategy that results in a sustainable recovery in EBITDA margins above 19% associated with net adjusted leverage, measured by Net Adjusted Debt/EBITDAR, below 2.5x and strong liquidity position, measured by cash-to-short-term debt ratio around 1.5x.
A continued EBITDA margin compression to below 15% that results in net adjusted leverage consistently above 3.5x, without recovery prospects in the near term, would lead a downgrade.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage