BBPW3203

FINANCIAL MANAGEMENT II
SEPTEMBER SEMESTER 2021

Prepared by:
GOH CHANG SHENG
830401025077001
Table of Contents

1.0 INTRODUCTION......................................................................................................3

1.1 Companies’ background...................................................................................................3

1.1.1 KPJ Healthcare Berhad...........................................................................................................................3

1.1.2 IHH HEALTHCARE BERHAD....................................................................................................................4

2.0 Computation of dividend payout ratio....................................................................6

2.1 KPJ Healthcare Berhad.....................................................................................................6

2.2 IHH Healthcare Berhad....................................................................................................7

3.0 Evaluation of companies’ dividend decision............................................................9

3.1 KPJ Healthcare Berhad.....................................................................................................9

3.2 IHH Healthcare Berhad...................................................................................................10

4.0 Conclusion............................................................................................................12

5.0 Reference.............................................................................................................13
1.0 INTRODUCTION
This assignment is to study about the evaluation of dividend payout ratio and the relevant

important of the ratio to the investors and companies. The healthcare sector that has been

chosen is KPJ Healthcare Berhad and IHH Healthcare Berhad. Both companies pay for

dividend for the year 2016, 2017, 2018, 2019, and 2020 as what has been instructed. Further

elaboration and studies are as follow.

1.1 Companies’ background

1.1.1 KPJ Healthcare Berhad
KPJ Healthcare Berhad is one of the largest private service sectors in Malaysia that

conducting healthcare for the community. KPJ has been at the forefront of the healthcare

business since it opened the first private specialty hospital in Johor in 1981. KPJ's integrated

network, which includes more than 28 specialist hospitals around the country, is guided by its

fundamental values of Safety, Courtesy, Integrity, Professionalism, and Continuous

Improvement. With its international expansion, the Group now has two hospitals in

Indonesia, a significant stake in a Bangkok hospital, and a hospital in Bangladesh. KPJ also

has assets in an Australian retirement and age-care resort as well as in Siberia. The

establishment of KPJ Healthcare Berhad was 33 years ago, which there are 25 hospitals in

Malaysia that are operating currently other than Indonesia, Bangladesh and Thailand as

mentioned above. The business activity of KPJ in this healthcare sector is to give medical

consultation that is based of technology. Cloud Computing is adopted which enhanced the

ability to assess patient information in real-time for ensuring the delivery of a seamless

service. Other than that, with the base of technology, KPJ also explore the opportunities to

apply digitalized medical technology in real life. Some of the facility that they provide are E-

pharmacy which can be ordered through online, wearable technology, robotics, Artificial

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Intelligence (AI) and Internet of Things (IOT). Based on the analysis in the annual report in

2020, the revenue of this company has been declined for 12% which amounted to RM2.3

billion. However, due to the current situation, they took the incentives given through

PENJANA which accumulated to RM10.9 million that is enough to cover up some of the

operation cost.

1.1.2 IHH HEALTHCARE BERHAD

IHH Healthcare Berhad is the world’s largest healthcare network. It was established

on the year 1974 with 80 hospitals in 10 countries that are currently operating. The total

number of staff that helps to operate this service sector is around 65,000. The main location

or the head quarter is located at Kuala Lumpur. The business nature of this service sector is to

serve patients with healthcare service such as primary care. Primary care means IHH

Healthcare Berhad’s patients can access basic day-to-day healthcare services through the

outpatient treatment, routine checkup whether weekly or monthly and vaccines injection. It is

not only for preventive care, but patient education is also included. Other than that, specialist

consultation, local surgeries, emergency and laboratory services also provided. If we go

through for all business nature, basically IHH Healthcare Berhad covers all the medical

treatment needed. In terms of financial, as reported in the annual report 2020, the Group's

revenue and EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization)

decreased 10% and 13%, respectively. Meanwhile, they have further reduced their foreign

exchange exposure on their unhedged non-Lira gross debt to 37.0 million euros as of

FY2019, partly due to the problems of the COVID-19 pandemic, by keeping to their

objective established in 2018 to deleverage the non-Lira debt for the Turkey operations.

Patients put off non-urgent treatment and trips to hospitals and healthcare institutions when

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the health crisis began in January 2020. Since March 2020, the number of international

patients in many of our markets has remained low.

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2.0 Computation of dividend payout ratio
The dividend payout ratio is the proportion of a company's net income to the total amount of

dividends paid out to shareholders. It is the percentage of profits distributed to shareholders

in the form of dividends. A dividend payout ratio shows how much of the company's overall

earnings is returned to shareholders in the form of dividends, as well as how much of the

profit is ploughed back into future investments, debt repayment, or cash reserves. Dividend

yield compares the dividend earned by the company to the share price of the company,

whereas this ratio compares the dividend generated by the company to the share price of the

company. The income statement of the company has all of the variables needed to compute

this ratio. The corporation keeps the money it doesn't pay out to shareholders to pay down

debt or reinvest in core activities. The payout ratio is also referred to as simply the payout

ratio. In order to calculate the ratio of dividend payout for a company. The formula to can be

expressed as follow:

TOTAL DIVIDEND
DIVIDEND PAYOUT RATIO= X 100
NET INCOME

2.1 KPJ Healthcare Berhad

Year Total Dividend Net income Ratio

(RM) (RM) (%)
2016 68421000 155875000 43.89
2017 74676143 166910000 44.74
2018 84680701 186185000 45.48
2019 86019280 226697000 37.94
2020 51355237 110812000 46.34

Based on the calculation above, it shows the trend of dividend payout for KPJ Healthcare

Berhad was slightly increase on the year 2017 with 44.74% compared to 2016 with a ratio of

43.89%. It was due to the increases in total dividend which is RM 74 676 143 and net income

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of RM 166 910 000 for the year 2017. On the other hand, the ratio kept on increase on the

year 2018 with the ratio of 45.48% and based on the calculation it is still due to the total

dividend and net income was increased by RM 10 004 558 and RM 19 275 000 respectively

for this company. However, there was a slightly decrease on the year 2019 with the ratio of

37.94%. Even though the net income is RM 86 019 280 and total dividend is RM 226 697

000 which is increased, but the amount of dividend paid is lower with the amount of the total

net income. The data of last year, 2020 shown that the dividend payout ratio was increased

with 46.34% but the total dividend and net income for the year show a huge decrease

compared to the past 4 years back. Overall, we can see the ratio is ups and downs within the

five years for KPJ Healtcare Berhad.

2.2 IHH Healthcare Berhad

Year Total Dividend Net income Ratio

(RM) (RM) (%)
2016 246944000 607992000 40.62
2017 247171000 829828000 29.79
2018 247338000 489860000 50.49
2019 263220000 514482000 51.16
2020 350960000 205856000 170.50

From the analysis above, the ratio shows a drastic drop on the year 2017 with 29.79%

compared to the year 2016 with the ratio of 40.62%. The drop was due to the amount of

dividend paid is lower if proportionate to its income that increases from the year 2017. Next,

on the year 2018 it shows increased with a huge ratio of 50.49%. It is cause by the amount of

dividend paid is RM 2 437 338 000 which almost half of the net income received by IHH

Healthcare Berhad, RM 489 860 000 on the year 2018. The trend was maintained for the year

2019 because the data shows only a slight increase of ratio which is 51.16%, increased less

than 1%. However, a rapidly increased can be seen on the year 2020, which is more than

100% the dividend was paid. The ratio is 170.50% where it is not a good practice because the
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dividend was paid more than the net income received. Overall, we can see the trend is only

drop for the first 2 years and come back increase on the year 2018 to 2020.

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3.0 Evaluation of companies’ dividend decision

3.1 KPJ Healthcare Berhad

Based on the trend above, the highest payout ratio of KPJ Healthcare Berhad is on the year

2020. This means, on the year 2020, the company pay almost half of its earnings for dividend

which will implies less retained earnings. Meanwhile, the lowest payout ratio is on the year

2019. However, it still can be considered healthy for the company because they afford to pay

for dividend not so lowest which means, investor will still consider investing in this

company. One of the main factors that influence dividend decision is the amount of earnings.

So, the growth and profitability of KPJ Healthcare Berhad has influence the dividend

decision. The company has successfully grown, and the profitability is sustained. If we

observed from the data, throughout the five years, the net income of KPJ Healthcare Berhad

is reasonable even though not each year the net income is increasing. The distribution of

dividend is also proportionate with net income each year. Free-cash flow is one of the factors

that influence the company dividend decision which decision is made to pay dividend higher

than those company who is not stable and in terms of the earning. Under free cash flow, the

theory is that the company is simply pay out the dividend such that any cash surplus after the

investment in all available positive net present value projects. Financial report of KPJ

Healthcare Berhad shows the cash-flows are positive and in a stable situation, thus they have

no problem to payout the dividend to its shareholder.

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 3.2 IHH Healthcare Berhad

From the data above, the highest payout ratio of IHH Healthcare Berhad is on the year 2020.

The payout ratio is more than 100% which can cause problem to the company itself. This is

because the dividend is paying out more than what the net income received. IHH Healthcare

Berhad should refinance in terms of the net income and the dividend as it is unsustainable

practice if they proceed with the style of paying it can cause bankruptcy to the company.

Meanwhile, the lowest payout ratio is on the year 2017, within the range of 0% to 35%, it

shows that the company just initiates the payout ratio. This might be this company is typically

‘value’ stocks. If this company is just initiate the payout ratio, investors might keep in view

this company for investing until the payout ratio is high like almost half of the net income.

One of the main factors that influence the dividend decision of IHH Healthcare Berhad is the

liquidity. As we know, dividends represent a cash outflow, thus it follows financial position

and total liquidity of the firm, the greater is the firm’s ability to pay a cash dividend. As what

can be observed from the financial report on the year 2020, IHH stated that ‘The Group’s

Balance Sheet and Statement of Cashflows at the end

of financial year 2020 illustrates that they are in a strong cash position to meet their working

capital and CAPEX requirements for the next 12 to 18 months. Besides managing payments,

receipts and financial risks effectively, they constantly review the funding strategy for IHH

and their subsidiaries to ascertain that they have sufficient liquidity to meet their

obligations. Other than free cashflow, the dividend clientless is also one of the major

dividend theory. It is a sort of stockholder may benefit more from a certain dividend payout

schedule than another. A retiree may like to invest in a company that consistently pays a

high dividend yield, but someone with a large income from employment may prefer to avoid

dividends because of their high marginal tax rate on income. By catering to a specific

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customer for specific dividend payment patterns, a company may be able to optimise its

stock price while lowering its cost of capital. This approach could explain why most publicly

traded companies have fairly consistent dividend practises.

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4.0 Conclusion

In conclusion, dividend payout ratio is importance to be maintained in a good range for each

of companies. This is to rate the company ability and stability to pay for the dividend to each

stakeholder. For these two companies, we can see the payout ratio is quite stable with no

records of negative ratio of 0% ratio. This is because of the healthcare sector is the main

service sector in community which is rare to loss and the attitude of people nowadays that is

very care about their health. In terms of investment potential KPJ Healthcare Berhad might

be the most potential company that investors would invest as among the five years, the ratios

are the most stable. However, investor do not only look for the dividend payout ratio but also

other liabilities that the company is paying each time. Based on the financial report, KPJ

Healthcare Berhad paid out all the liabilities without any arrears. Thus, KPJ Healthcare is a

good company to be invested. Meanwhile for IHH Healthcare Berhad, the data and ratios

don’t show any risk or possibility investor do not choose to be invested, but the dividend

payout ratio on the year 2020 is very risky if it will be continued for the future years. This is

because the dividend was paid more than what they receive and obviously it will affect the

financial stability of the company. Therefore, IHH Healthcare Berhad need to plan and

restructure its financing so that the percentage of ratio will not keep on above 100% because

it can cause risk to the company itself not only just to attract the investor.

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5.0 Reference

Dividend payout ratio: Importance & limitation of dividend payout ratio. EDUCBA. (2021,

March 23). Retrieved October 21, 2021, from https://www.educba.com/dividend-

payout-ratio/.

Dividend decision. MBA Knowledge Base. (2018, May 14). Retrieved October 21, 2021,

from https://www.mbaknol.com/financial-management/dividend-decision/.

What is an ideal payout ratio? Dividend.com. (n.d.). Retrieved October 21, 2021, from

https://www.dividend.com/dividend-education/what-is-an-ideal-payout-ratio/

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