UAE-based healthcare provider NMC Health (LSE: NMC), which released its half-year results today, is not one of the most prominent names in the FTSE 100. However, it divides opinion among investors who’ve looked at it possibly more than any other blue-chip stock.
Its supporters argue it’s the biggest growth bargain in the top index. Its critics reckon it’s a disaster waiting to happen. Rarely has the old saying ‘it takes two to make a market’ been so amply demonstrated. Here, I’ll discuss the bull and bear cases, review today’s results, and give my view on its valuation and prospects.
Fiasco
The market’s sensitivity to the divided opinion on NMC was displayed earlier this month when its shares fell sharply on Tuesday and Wednesday 6/7 August. Renowned US short-seller Muddy Waters tweeted on Tuesday it would announce a new short position the following day, “on an accounting fiasco that’s potentially insolvent.”
It seems some in the market suspected NMC was the company in question. However, it transpired on Wednesday that the target was AIM-listed litigation funder Burford Capital. Despite this, and a statement by NMC on Thursday that “trading in the business remains in line with management expectations,” its shares ended the week 16% down from where they were at the start.
Bearish
Disclosed short positions in NMC have steadily risen over the past nine months from 0.5% to 5.4%, ahead of today’s results. While this is some way below the most heavily-shorted London stocks — Kier (11.9%), AA (9.5%) and Thomas Cook (9.3%) — it nevertheless represents a fairly substantial bet against NMC (by four separate hedge funds).
My colleague Roland Head has previously highlighted two of the points in the bear case. Namely, the company’s high level of gearing and the length of time it takes to collect payment on customer bills. Indeed, cashflow generation generally is one of the more prominent matters highlighted by bears as an issue.
Bullish
NMC is evidently acutely aware of the bear criticisms. The ‘Key Highlights’ that headed today’s results included: “Working capital cycle days reduced substantially, supporting one of the highest EBITDA-to-Free Cash Flow for H1 in the history of the company,” and “delivering balance sheet strength, with net debt-to-EBITDA improving.”
Reporting 33% revenue growth and 30% bottom-line growth for the first half of the year, NMC is on track to meet full-year expectations. The company added it believes its growth strategy “will continue to create significant value for shareholders over the long-term.”
New development
The shares soared as much as 42% in early trading this morning. The results were good, but not that good. The reason for the leap was a report from Reuters yesterday evening that two groups, including one backed by China’s Fosun, have made competing offers to buy a 40% stake in the company.
The shares have fallen back somewhat from the early spike, and are trading 27% up on the day at around 2,400p, as I’m writing. Nevertheless, they remain far below their 52-week high of near to 4,000p. At 19 times forecast full-year earnings, with annual growth expected to average over 20% for the foreseeable future, the stock looks good value on paper.
I think the company is moving towards addressing and satisfying the bear issues, rather than being sunk by them. On this basis, I tentatively rate the stock a ‘buy’.