NMC Latest Victim Of Muddy Waters Shorting Attack

17th Dec '19 by andrea34

10 comments 986 reads

Today NMC Health (LON:NMC) are down currently (@ ~midday) 23-24% after Muddy Waters announced less than two hours ago that they have taken a short position on the stock.

This is on the same day that NMC announced the result of yesterday's offer for it to buy back from holders of its U.S.$450 million Convertible Bonds (1.875%, due 2025) up to U.S.$90 million of those Bonds.

Muddy Waters states they have "SERIOUS DOUBTS" about NMC's financial statements including asset values, cash balance, debt levels, and reported profits.

Up to now, NMC's growth has on the face of it seemed healthy, with high-teens/low-20% growth in revenue and profit, and the company has recently announced a very positive trading update in October after the price previously tanked below £20, where they raised their EBITDA range for both this year and next, with a "stronger H2 expected".

I am not an accountant and, compared to many on here, don't have the best grasp on a company's accounts. However, Stockopedia would seem to helps us in this respect. Looking at the latest, interim balance sheet it looks like gearing for the company, on the face of it, is only 57%, This doesn't seem excessive. However, this takes into account a huge amount of goodwill as assets, which I wonder if it artificially inflates the asset position - if I simplistically assume that it does, then updating the debt equation makes the gearing quite an unhealthy 83%.

I do wonder why NMC announced this buyback of such a small amount of the bonds compared to the overall size of the company, especially when the bond interest rate is so low and the expiry is so far into the future. This debt reduction was flagged up in the October trading update. I do wonder if some of their other debt is being paid at a higher rate of interest.

Does anyone have any views on this company, and the accusations made by Muddy Waters, famous of course for their attack on Burford Capital (LON:BUR) earlier this year? I do wonder as to how Muddy Waters are held in such high esteem, for their actions to be so immediately acted upon by both traders and market makers. This latest attack seems…

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sharw

17th Dec '19

andrea341 - had a look at this company after reading your post and decided it would be difficult to work anything out because of its labyrinthine structure. NMC Health plc is registered in England and Wales with a serviced/virtual office address and is simply a holding company.There is such a vast number of subsidiaries that it takes four pages of the last annual report (165 - 168) to list them all. the largest proportion of these is in the UAE and from which I presume the company is run.

wilkonz

Now down 42.98%.

I'm reminded of the Enron style of complex financial statements. No one had the slightest idea what was going on, so they believed the hype until the credit ran out. My view is that Muddy Waters does the market a great service in highlighting overvalued companies and getting them properly valued, although it's painful for the shareholders.

Gromley

I don't know the company, and it doesn't look like the sort of operation I would normally look at.

However, it does seem to me that the complexity you refer to here is absolutely what Carson loves - plenty of room to cast aspersions and innuendo.

Maybe he is right on this one - I really cannot say, but it seems to me wide of the mark to suggest that he does the market a service by bringing valuations back to reality.

He is entirely self serving, he knows that (for now) his reputation is such that he can open a short position in a target company, publish his "research" and then buy back as the panic sets in.

There also seem to be a cabal of followers who have the exceptional skill of being able to second guess what and when he is going write and therefore amplify the effect. (Possibly some of that grouping also involve themselves in illegal market manipulation as alleged by Burford capital.

As far as I can see it does not make sense to be too quick to bet against Block as these effects take a while to wear off.

Carson Block made his name by uncovering some Chinese frauds a while back, I am not aware however of any meaningful claims (or assertions) that he has made in the recent past that have actually been substantiated.

As I say I have no knowledge of whether this actually the one that he called right, but I suspect if it isn't then his pronouncements will have rapidly decreasing credibility.

ambrosia

18th Dec '19

I took out a small position on Burford at 698, presently sitting on a very small and diminishing profit, but I will continue to hold as the 'end of year' for Burfords is the end of this month, after which we might start to see if Muddy Waters accusations hold-up

If Burfords does start climbing and the accounts stand up (if all the realised, reported, and actual profit becomes clearer), people will be that bit less likely to react next time Muddy Waters starts an attack

19th Dec '19

It's now 4 months since Muddy Waters attacked Burford Capital (LON:BUR) . The price effectively halved from around 1500 pence to 750 pence and has stayed down. The message is that the market still agrees with Muddy Waters. I have no doubt that a large number of financial experts have combed over Burford's financial statements and found nothing to encourage a higher valuation. Even if they're being overcautious in their assessment, the intrinsic value of Burford Capital is unlikely to be more than 15-20% above its current price. (It's worth noting that the price of Burford Capital (LON:BUR) fell from 2100 to 1300 last year without any help at all from Muddy Waters.)

Mike888

There is only one thing that moves a stocks price, and that is the sentiment towards it. True that sentiment is usually based upon fundamentals, the macro environment, price movement etc.but at the end of the day, people move the share price.

When a short attack occurs sentiment takes a bashing, and that will persist until something occurs to counter it. Muddy Waters wade into complex situations with supositions and opinions that are difficult for investors to qualify. This lack of qualification keeps the price depressed, nothing more, it is sentiment fueled by doubt not proof that causes the impact until something occurs to counter it. We all know companies that are highly rated and expensive, many of which could be easy pickings for Muddy Waters, many of which would suffer from similar drops, but this doesn't make Muddy Waters perspectives right, or indeed necessarily wrong. Personally I'm not a fan of them, they prey on market sentiment and make good money by doing so.

cmpeckham

Muddy Waters is not the only one to highlight concerns. Some of these have been raised before. I think the balance of evidence suggests that there is no smoke without fire.

However, while it is no problem at all for companies to cook the books on profits, asset values etc., it is not so simple to fake cash. Doing so usually requires outright fraud e.g. Patisserie Valerie. This is a higher hurdle. I doubt that NMC's cash position can be significantly awry. Burford never generated much cash, so questions about their profits were more likely to stick.

NMC's management have taken a serious reputational hit. Some will regard them as uninvestable. But in my view every asset has a price and based on the cash flows, NMC is starting to look very interesting. I intend to take a small starter position when the volatility has subsided a little. It is possible that the cash position has been misstated, but I think we're now being paid to take the risk.

21st Dec '19

Yes, NMC could be undervalued currently (at 1300 pence).

Burford Capital (LON:BUR) hit a low of 380 pence after Muddy Waters attack and has now risen to the 700-800 range.

Plus500 (LON:PLUS) fell to 399 pence earlier in the year after the infamous 'typo' and have since risen to 852.

There does seem to be a pattern of panic selling followed by a sharp price rise when the dust has settled.

Edward John Canham

22nd Dec '19

....."no smoke without fire"; the phrase that has destroyed more individuals and organisations than facts ever could.

23rd Dec '19

Not true. If there really is no "fire" then nothing will be destroyed. In fact it's a magnificant opportunity. Individuals involved can back up the truck and load up on under-priced shares. It's a bonanza for them.

As I said, in the case of NMC, I suspect the "smoke" is indicative of some adventurous accounting. Assets are probably overstated and leverage understated (which is true of many companies). But I hope nothing too bad because I took that initial position I mentioned and its currently up 12%.

NMC Latest Victim Of Muddy Waters Shorting Attack

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Andrea34

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