The NMC Health (LSE: NMC) share price has recovered a little from its lowest point on 20 December, but it’s still down 35% since short-selling hedge fund Muddy Waters made some damning claims regarding the company’s reporting.
Muddy Waters reckons the UAE-based healthcare provider is painting an unduly rosy picture of its financial health, alleging that it keeps a substantial portion of its debt off its balance sheet by employing a practice known as reverse factoring.
And, as my Fool colleague G A Chester has explained, the Financial Times has weighed in with a claim that NMC tried to borrow €200m in 2019 via a complex chain, saying 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.”
Rebuttal
NMC has responded to the charges, refuting them strenuously. On 27 December, it said it had obtained independent confirmation of the built-up floor area of its NMC Royal Women’s Hospital (which was one of the issues of contention). The confirmation was done by the engineering consultant retained for the development project, so it’s not entirely clear how independent they are, but a floor area dispute is not my top concern.
Since then, on 6 January, NMC confirmed that a review announced on 23 December will be conducted by four non-executive directors, assisted by independent advisors whose appointment is yet to take place. The initial focus will be on the company’s cash balances, which will be released as soon as possible, with full findings set to be “published well in advance of the finalisation and announcement of the Company’s 2019 full year results.”
What the results of the review will be is anybody’s guess, but Muddy Waters has been rather scathing, saying that that NMC’s response so far has been “misleading, and outright false in certain portions,” and suggesting that such reviews can be “whitewashing that provide little to no transparency and accountability.”
Buy?
The question has to be asked – is it a good time to buy into the erstwhile darling of FTSE 100 growth investors?
I like companies whose accounts are relatively straightforward, and I’ve seen too many fraudulent ones going out of their way to make their accounts as impenetrable as possible while obscuring real earnings, cash flow, and debt.
I’m not making any assumptions  about NMC’s guilt or innocence, but the mere fact that Muddy Waters can make such accusations (and stake a big shorting bet on the outcome) means the accounts must, at the very least, be somewhat complex.
Another thing that concerns me is that the company appears to be controlled by a small group of UAE-based billionaires, which is far from an ideal form of company governance.
I think it would be massively risky to buy the shares right now, before the full review is published and full-year results are released. And even after that, the risk would still be huge – previous years’ results releases have looked fine.
No, it’s long-term bargepole treatment from me for NMC now.