Dubai: NMC Health stood its ground and sought to reassure investors on Wednesday after scathing allegations by US short-selling firm Muddy Waters wiped a third off the UAE-focused healthcare group’s stock price.
NMC, the largest healthcare provider in the UAE, dropped 32 per cent on Tuesday, wiping over $2 billion in market value, after the short seller raised “serious doubts” about the company’s financial statements, questioning the group’s asset values, cash balance, reported profits and debt levels.
NMC, in response, said on Wednesday it “understands its regulatory disclosure obligations and has nothing to add to disclosures already made”.
“NMC will review the assertions, insinuations and accusations made in the report, which appear principally unfounded, baseless and misleading, containing many errors of fact, and will respond in detail in due course.
NMC founder Dr. B.R. Shetty said in an earlier statement reported by Reuters that “We hold ourselves to the highest standards across our entire portfolio,” while adding that the company is “committed to offering world-class facilities and vital services to all sections of the community”.
London-listed shares of the company were largely unchanged at 1230 GMT on Wednesday. Before the short-seller’s report, NMC’s shares had gained more than twelve-fold since listing in 2012.
NMC, founded in 1974 in Abu Dhabi and listed in London in 2012, is now headed by Chief Executive Prasanth Manghat, who took over at the helm in 2017. The company has presence in 19 countries including the GCC, US, UK and Europe, owning hospitals, medical centres and fertility clinics across the Middle East.
Margins in question
Muddy Waters, founded by American short-seller Carson Block, alleged NMC “materially” overstated its reported cash balances, while adding that the company’s margins were “too good to be true” relative to UAE-focused peers Mediclinic and Aster DM Healthcare.
Looking to sooth rattled investors, NMC said it “remains a growth company, with a solid balance sheet generating strong levels of cash”. The strength in its balance sheet is backed by it buying back $200 million in shares on Wednesday, a day after it bought back $90 million in bonds, NMC said.
NMC also reaffirmed its fiscal guidance for this year and the next, saying it was on track for this year’s second-half results to be stronger than the first-half, while seeing double-digit revenue and core earnings growth in 2020. The company sees revenue this year in the range of $2.50 billion to $2.54 billion and within $2.85 billion - $2.92 billion next year.
Muddy Waters is widely known for declaring short equity positions in financial markets based on its own research. Short sellers borrow shares, quickly sell it, and then buy the stock back to return it to the lender, aiming to pocket a capital gain on the anticipated drop in prices. While some argues it depresses successful companies’ share prices, others say short sales improve market efficiency.
The US short seller accused the company of inflating asset purchase prices and capital expenditure, and “deliberately” understating its debt by about $320 million for the fiscal 2018 year by incorrectly reporting leases associated with its Aspen Healthcare acquisition. NMC reported net debt and payables of $1.89 billion at the end of 2018.
“The report looked targeted without any accurate data to support the information provided,” NMC said. “The company has so far given a good ROI [Return on Investment] and is a buy/hold for a majority of analysts.”
Analysts bullish
Analysts have been overwhelmingly bullish on NMC Health. While one equities research analyst recommended a sell rating, four others have given a ‘buy’ rating to the stock. The company currently has a consensus rating of “buy” and a consensus target price of 36 pounds ($47.46). Muddy Waters didn’t disclose the size of its short position in NMC Health in the report.
Jefferies, which is the lone bear with a sell-equivalent rating, issued a research note on Monday arguing against investing in NMC Health. The analysts put the company in a list of 5 shares they thought would underperform.
"Our forensic analysis of the accounts at NMC Health suggests additional downside risk to reported numbers", said Jefferies analyst James Vane-Tempest
Jefferies came about a ‘sell’ rating for the stock after conducting an in-depth analysis into NMC’s financials, corporate governance and historical accounting. “We believe the market is not focused on these aspects of the investment case,” the analyst said while noting that other points of concern included organic growth in its core healthcare business.
"Complex cross-holdings add conviction to our view that investors do not appreciate the risks at NMC Health," Vane-Tempest added.
Shetty owns about 15 per cent of NMC’s shareholding. NMC is also controlled by Abu Dhabi investors Saeed Bin Butti, who is the firm's largest shareholder with a 17.5 per cent stake, and Khalifa Bin Butti, who owns 14.7 per cent and is also executive vice chairman.
Another firm owned by Shetty is financial services company Finablr Plc, which dropped 11 per cent after the short-selling report. Finablr listed in London in May.
NMC’s shares fell in August after Muddy Waters tweeted that it was planning on going ‘short’ on a certain unnamed stock, which fueled speculation that it could be the Abu Dhabi-based firm. The target turned out to be London-listed litigation finance firm Burford Capital, whose shares tanked after the reveal. Burford later argued Muddy Waters engaged in “market manipulation”.
