The London-listed hospital operator NMC Health (LSE: NMC) is having a bad week – one of many it has had over the past year or so. In December, infamous short seller Muddy Waters raised serious concerns about the company’s finances. Since then, a number of questions have asked about the ownership levels of its major shareholders and the financing arrangements behind these positions, among other things.
The announcement yesterday, then, that its CEO has been fired, a member of the treasury team has been suspended, and that its CFO has been given “extended sick leave”, is perhaps no surprise. Trading in NMC shares was suspended today, with additional news emerging that it has been raising financing using its future customers’ credit card payments as collateral.
Betting on the future
As collateral for financing, the use of “credit card receivables” – effectively the money paid on credit cards for goods and services sold but not yet delivered – is not unheard of, but is usually undertaken only by small companies and/or those in dire financial straits.
The news came after NMC’s public filing in the United Arab Emirates showed that its holding companies in Dubai and Abu Dhabi were required to pledge these receivables as collateral at more than 20 of its hospitals and pharmacies, in order to raise funds.
Given that this kind of financing is often a last case resort – used only when financing from banks and other more credible arrangements can’t be made, I don’t think it bodes well for NMC.
More bad news
Much of the news and discrepancies coming out go beyond the scope of what was original covered in the Muddy Waters report. Indeed Carson Block, founder of the short selling company, said himself “At this point, the company’s announcements speak for themselves and seem to be even more damning than our initial report was.”
These announcements come amid an independent review into the company led by former FBI director Louis Freeh, and include supply-chain financing arrangements made by the CEO and a major shareholder without the board’s knowledge, and that stakes held by its three largest shareholders had been reported incorrectly.
Is there an investment case?
For me, at this point, NMC is clearly not an investment opportunity. When these kinds of revelations about a company are coming out – and at this point it is fair to say it seems like early days – I always believe there is still more to come, if not in financial discrepancies themselves, then certainly in the confidence hit to the market.
Most city analysts have been traditionally bullish on NMC Group shares, and it would be easy to see the price drop following the Muddy Waters report (NMC shares have fallen from the £24 region in December to £10 today) as an opportunity to get the stock cheap, but personally I think it has further to go.
I am of the opinion that one should stay well away from investing in situations like these.
