The NMC Health (LSE: NMC) share price crashed 50% last week, wiping £2.7bn off the value of the FTSE 100 UAE-based healthcare provider. The collapse followed the release of a scathing  research dossier by short-seller Muddy Waters, with a subsequent report by the Financial Times adding fuel to the fire.
With its shares in freefall, NMC published rebuttals of the claims, but to no positive effect. There’s been a lot for investors to digest. Here’s my view of the situation, and what I’d do now.
Misjudgement
I covered NMC in an article back in August, saying no FTSE 100 company divides investor opinion more than this one. I noted: “Its supporters argue it’s the biggest growth bargain in the top index. Its critics reckon it’s a disaster waiting to happen.”
I outlined the bear case — centred principally on debt and cash flow criticisms — but saw some signs of progress in these areas in the company’s half-year results, which had just been released.
In what has turned out to be a facepalm-inducing misjudgement, I concluded: “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.”
Hidden debt?
Muddy Waters has sunk NMC’s share price, but could the implications of its research sink the company itself?
Excessive debt is a key risk for any company, and one plank of Muddy Waters’ thesis is NMC has substantial debt it keeps off its balance sheet. It suggests NMC makes extensive use of reverse factoring , something that contributed to the collapse of Carillion.
Meanwhile, the Financial Times claimed the company sought to raise a €200m loan this year through a complicated chain of special-purpose vehicles. The FT said it had seen the draft deal documents and that “two people with direct knowledge of the deal said the complicated structure was aimed at allowing the company to exclude the facility from its corporate debt figures.”
Empire built on sand?
I found NMC’s responses to reverse factoring and the proposed loan inadequate, due to an absence of documentary support in its ripostes, and seemingly its view that the loan is irrelevant simply because it didn’t go ahead.
The company’s balance sheet isn’t what I’d call robust — latest reported tangible net assets of just $79,459 and net debt at 3.4 times EBITDA — but if there’s substantial off-balance-sheet debt, we could be looking at an empire built on sand.
Furthermore, such a situation could further red-flag more serious matters that Muddy Waters suggests raise questions about possible fraud and theft of company assets. It should be pointed out that NMC denies any wrongdoing.
Further developments
In this kind of situation, I wouldn’t expect a bear thesis to prove accurate in every detail. Some facts, assumptions and interpretations will inevitably be off the mark. If the evidence was incontrovertible the share price would already be near to zero pence and it closed Friday at over 1,300p.
The question for investors is always whether the company’s rebuttal tears apart — or undermines — the circumstantial evidence presented by the bears, making it a good risk/reward proposition.
For me — so far, at least — NMC hasn’t done enough. I’d avoid the stock at this stage and await further developments, including the outcome of an independent review the company’s just announced will be undertaken.