NMC Health (LSE: NMC) was once a bit of a FTSE 100 growth darling, climbing by a massive 1,100% in the five years to August 2018.
But the slide that’s cut in since then shows that overheating growth stories aren’t restricted to the smaller-cap indices, and they can happen to top-index stocks too. We’ve now seen NMC shares lose 43% of their value since that peak, and the stock was one of Tuesday’s biggest morning fallers with a 4% drop.
But these share price movements on their own are fairly meaningless, and we need to put them in some sort of valuation context. Back in 2017 when NMC, a major healthcare provider based in the United Arab Emirates, was a big investors’ favourite, the shares ended the year on a trailing P/E multiple 37.6.
Valuation
That was high even by small-cap growth stock standards. But now the share price has fallen back so much, as so often happens when prospects for a growth stock retreat from brilliant to merely very good, there’s a forward P/E of 21 for the current year, dropping to just 17 based on 2020 forecasts.
Before the share price slump, NMC was recording solid annual growth, and that’s still forecast to continue with an EPS hike of 13% on the cards for this year and a further 28% pencilled in for 2020. And we’re looking at a 2020 PEG ratio of 0.6, which is a strong growth indicator that’s rarely seen at that level for a FTSE 100 stock.
I see no risks for the current year, with the company having told us at the interim stage that it’s primed to meet full-year expectations, as it recorded EBITDA of $323.5m (post IFRS 16), with the pre-IFRS16 equivalent up 22.5% at $276.3m.
Debt
One major issue, as with so many growth companies in their expansion stage, is debt. NMC’s stands at a net debt-to-EBITDA ratio of 3.4 times, now that the company has adopted IFRS 16. A meaningful prior comparison isn’t possible on that score, but the pre-IFRS 16 equivalent of 2.7 times represents a significant drop from the 3.4 times multiple a year previously.
Though I’m usually very wary when I see high net debt as a proportion of earnings, it’s mostly a problem for mature companies when they’re saddled with so much debt that their earnings can’t make much of an annual dent in it. But NMC is not remotely in that condition, and a company with very strong growth prospects having funded a lot of its expansion with debt is not necessarily a cause for concern — provided the cash flow is there and growing.
Flowing
In the case of NMC, despite earlier fears, cash flow is moving in the right direction. The firm recorded one of its highest EBITDA-to-free cash flow conversion rates in the half, and is significantly improving its cash flow metrics. The firm’s working capital cycle reduced to 90 days (from 106 days), receivable days dropped to 89 (from 99) and inventory days fell to 56 (from 74).
The healthcare market in the Middle East is still a relatively fledgling one, and I think NMC Health has used its early-mover advantage extremely well in a way that many fail to achieve. Liquidity is improving, I think management is top class, and I see a Buy now.
