Shareholders of Abu Dhabi-based NMC Health (LSE: NMC) have been on a rollercoaster ride over the last few years. Between August 2016 and August 2018, the stock rocketed up from 1,200p a share to 4,060p a share. Since August 2018, the share price had see-sawed up and down, settling around 2,500p a share. Then, on December 17, Muddy Waters, a well-known short selling firm, released a damning report alleging that NMC has seriously overstated its financial position, causing the share price to plunge by almost 43%. Do the allegations have any weight to them? Let’s dig in.
What are the accusations?
Let’s get a sense for what Muddy Waters is accusing NMC of. Firstly, the research firm is claiming that it significantly overpaid for the construction of Brightpoint Royal Women’s Hospital. Instead of the estimated $3,500 to $4,000/m2 it should have taken (according to Muddy Waters), the project took $7,700/m2.
Secondly, Muddy Waters said that NMC significantly overpaid for the purchase of a 70% stake in Premier Care Home Medical and Health Care LLC. $36.4m (£28m) was paid for a business with just 10 employees, and very little in the way of real assets — 91% of the acquisition price was for intangible assets. Unverified accounts state that Premier Care has treated only 60 patients over the last two years, and that it occupies a very small office space.
Muddy Waters also has concerns about NMC’s cash balance and margins, among other issues. The report is extensive and draws on a number of sources, both those publicly available and private intelligence carried out by the firm. Unsurprisingly, NMC denies any wrongdoing, calling the report “false and misleading“. In a response to Muddy Waters, NMC management has said that the higher-than-expected Brightpoint costs represent factors relating to things like floor weight and cladding, and that the Premier Care acquisition was carried out using due diligence from a “Big 4 accounting firm“.
Investor’s verdict
As my colleague Alan Oscroft notes, NMC is one of the most heavily-shorted companies in the FTSE 100. Clearly, it’s not just Muddy Waters that thinks that it might be overvalued. Of course, it is impossible to know right now whether NMC is guilty of the things that it has been accused of.
As an individual investor, you are frequently going to have an informational disadvantage against the large professionals who have the capital and time to dedicate to an in-depth investigation into a company. Therefore, you should make the most of the data available to you — paying close attention to the short interest, for instance. In my personal experience, it’s rare that short sellers go after a company that doesn’t have issues. Muddy Waters has a strong track record of uncovering such issues in companies in developing economies, most notably in China. I would give NMC a wide berth for now until we have more information.