The smart money has already been made on NMC Health8 Feb 2020 05:53
Investing, like everything else of late, has become polarised. On one side is an ever-expanding universe of passive funds and trackers, all taking a few pennies in exchange for quietly hugging an index. On the other side is an increasingly loud group of active investors, the activists and attack-dog short-sellers, whose strategy to create outperformance is mostly through shouting.
One stock to be caught between these two camps is NMC Health. The Middle East hospital operator has lost 73 per cent of its value since late December when Muddy Waters, a brash US short-selling outfit with a nose for publicity, alleged that it was understating debt and inflating cash flow — claims NMC rejects. The latest in a series of lurches lower arrived on Friday, when shares fell by 22.2 per cent to hit their lowest since 2015.
NMC’s tumbling share price will have affected anyone invested in a FTSE 100 tracker fund, with the exposure remaining at least until an index reshuffle scheduled for late March.
The short-sellers, meanwhile, seem to have been taking profit. Shares on loan as a percentage of NMC’s free float, an indicator of bets against the stock by these investors, have fallen from above 30 per cent in the days immediately after Muddy Waters’ report to just over 9 per cent per cent on Friday, IHS Markit data show.
Part of the reduction in short interest reflects share sales last month by two of NMC’s controlling shareholders, Saeed Bin Butti and his relative Kalifa Bin Butti, who dumped a 15 per cent stake to cover personal debts. Investors were led by management to believe that the sales had cleared the entire overhang of shares pledged as debt collateral, one of the bears’ main arguments.
But then Dubai lender Emirates NBD unloaded a further 1 per cent stake linked to Bin Butti debt a few weeks later. Confidence disintegrated and NMC has been in a tailspin ever since, in spite of claims this week that company founder BR Shetty has been investigating ways to wrest back control.
These recent events tell only half the story, however. Long before NMC graduated to the FTSE 100 in 2017, investors had been questioning an apparent disconnect between its sector-leading margins and underwhelming cash generation.
Many of Muddy Waters’ attack lines should therefore have been familiar to long-term shareholders. Red flags on asset valuations and related-party transactions had already been discussed during post-results Q&A sessions and had featured in dozens of analyst notes, the majority of which saw nothing amiss and argued for calm. Anyone interested in the NMC investment case had plenty of time to get comfortable with its many complications.
Yet it seems that only the bears were paying attention. NMC’s opaque and overlapping shareholder register complicates the process of finding shares to borrow, yet by early December the stock lent out was already equivalent to more than 20 per cent of the free float. Short-sellers had ...
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