Above Street and our estimates. 4Q08 revenue grew 12.4% yoy to S$51m, fuelled by Hospital Services (+20% yoy). Stripping out one-off fair-value gains from the disposal of Raffles Hospital in FY07, FY08 core profit was up 35% yoy to S$31.5m, or 16.7% above our estimate and 8% above consensus. The main differences were higher operating margins and lower interest payment.

Margins and balance sheet improved. 4Q08 EBITDA margins expanded 1.1% pts yoy (1.3% pts qoq) to 24.5% despite higher staff costs, suggesting still-strong operating efficiencies. What contributed to the reduced interest payment was prudent debt management, which brought down borrowing and turned the balance sheet into a net cash position of S$17.9m in FY08 (net debt of S$5.5m in FY07). Operating cash flow remained robust and unchanged from a year ago, at S$40m.

Broke even in insurance management business. The group has also been seeing healthy patient load increases in Jan-Feb 09, while average occupancy rates are hovering at 50-60% (45-50% in FY07). RFMD will, moreover, enjoy a deductible tax incentive of S$2.5m-3m from the government’s Jobs Credit scheme in FY09.

Operational efficiency will forge defensive qualities. RFMD has not elaborated on its expansion strategy or provided sufficient figures for a full appreciation of its good set of results. As such, we believe its ability to bolster margins has not been well appreciated. Higher non-bed-related fee income could come from: 1) recently initiated customer segmentation to derive higher revenue from primary healthcare services; and 2) a channelling of insurance customers to Raffles Hospital, strengthening margins in Hospital Services. We have revised our hospital growth assumptions to 10-15% for FY09-10 (from 8-12%) to capture higher non-bed medical income.
Estimates raised; upgrade to Outperform from Underperform; target price raised to S$0.88 (from S$0.64). Our FY09-10 estimates have been raised by 18.3- 15.5%. Our target price rises from S$0.64 to S$0.88, in line with our higher CY09 P/E target multiple of 13x [(1 - growth/ROE)/(cost of equity - growth)] from 11.9x. We also introduce FY11 forecasts. On the back of our renewed confidence in the group, we upgrade the stock from Underperform to Outperform.