NMC Health shares: Bargain or no-go area?

Investors in the healthcare provider had their nerves tested again after further large-scale selling. 

A heavily-discounted share sale added to the pain for NMC Health (LSE:NMC) investors today as the former rising star of the FTSE 100 index plunged to within a few pence of its lowest level in more than three years.

With the UAE-based healthcare provider still reeling from last month's criticism by US hedge fund Muddy Waters, shares plunged as much as 20% first thing this morning to 1,200p as it emerged that two of its major shareholders had sold stock worth £375 million at that price.

NMC said the disposals related to the financing of the investors' shareholdings and had nothing to do with the company's operating performance or long-term prospects. It has previously rebutted allegations by Muddy Waters questioning the accuracy of its financial statements.

But the attack has left its mark, with shares halving in value since the middle of December and at the lowest point since before NMC's entry into the FTSE 100 index in 2017.

NMC listed at 210p in April 2012, eventually multiplying 18 times when it breached the 4,000p level in 2018 as one of that year's best performing top-flight stocks and worth £7 billion.

It was attracting broker price targets as high as 3,900p as recently August, which is why some brave investors may still sense an opportunity given the scale of the latest sell-off.

Source: TradingView Past performance is not a guide to future performance

NMC is one of the largest healthcare operators in a wealthy region, having started out from a one room clinic in Abu Dhabi some 40 years earlier. It has two main branches — NMC Healthcare and NMC Trading, which is a leading distributor of pharmaceutical products.

A key part of the investment case is that NMC is well placed to benefit from trends involving the consolidation of smaller players and a tightening regulatory environment.

An opposing view was laid out by our companies analyst Edmond Jackson in August. His “Avoid” critique now looks well timed, particularly as strong interim results that month were accompanied by a US$200 million (£152 million) buyback programme.

Revisiting the stock last month, Jackson wrote: “I was concerned NMC’s interim figures looked too good to be true, typifying indebted acquirers that end up in controversy. Can, and indeed should, hospitals/healthcare be delivering net profit up 30% near £113 million equivalent, on an 18.5% operating margin?”

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Jackson's concerns included the lack of a breakdown on underlying performance versus the contribution from acquisitions. He added that the balance sheet was swollen with $2.8 billion total debt including lease liabilities and convertible bonds.

He said there was wider relevance in the way companies with a low “free float” may be prone to a lack of transparency, with their stocks kicked around by momentum traders.

NMC's response to the report and allegations by Muddy Waters has included the appointment of independent advisers to undertake a review of the business. It added last month: “The company believes that the current share price is not a fair reflection of the value of the company which has a consistent track record of strong growth and cash generation.”