By Geoffrey Smith
Investing.com -- Wednesday's bounce in NMC Health (LON:NMC) looks to have been of the 'dead cat' variety.
Shares in the UAE-focused FTSE 100 member fell 9.6% in early trading in London on Thursday, back to the three-year low that they hit on Tuesday in response to an explosive new report by short-seller Muddy Waters Research.
The movement illustrates the limitations of NMC’s first response to the report, which seemed guided by the principle that enough long words taken from a quick look at a thesaurus will make the problem go away.
NMC had said on Wednesday it “will review the assertions, insinuations and accusations made in the report, which appear principally unfounded, baseless and misleading, containing many errors of fact, and will respond in detail in due course.”
It said it "understands its regulatory disclosure obligations and has nothing to add to disclosures already made. It has already responded to many of the allegations made in the report over the past 12 months."
The shares had fallen over 32% on Tuesday as Muddy Waters, owned by Carson Block, said it had “serious doubts about the company’s financial statements, including its asset values, cash balance, reported profits, and reported debt levels.”
Block drew attention to – among other things - what he considered to be serious overpayment for contractors ultimately controlled by parties related to NMC, and to a financing facility arranged by another related party, details of which the company has now removed from its website.
“We are unsure how deep the rot at NMC goes, but we do not believe that its insiders or financials can be trusted,” Block said.
NMC had had a terrific run from 2015 to 2018, capitalizing on booming demand for healthcare in a region where pockets of affluence are expanding. However, its shares had already peaked in the middle of last year, like many emerging-market stocks that ultimately depend on a benign global backdrop.
Already in August there had been suggestions that all was not as it seemed. When it was rumored that Muddy Waters would soon announce a new short position, many guessed it would be NMC, only for the blow to fall on litigation funder Burford Capital (LON:BURF). Burford is still down 50% from its previous levels, suggesting that when Block hits you, you stay hit.
Nor was Block the first to raise questions about NMC. Jefferies analyst James Vane-Tempest has had an underweight recommendation for months. A Reuters report citing unnamed sources in August about potential Chinese interest in buying a stake held by two long-term shareholders has come to nothing, also prompting doubts as to the reliability of information coming out of the company.
As noted above, NMC’s position is that it has already answered these questions once. However, the market reaction shows that those answers clearly haven’t convinced everyone. NMC has a hard slog ahead of it.