We are short NMC Health plc. We have serious doubts about the company’s financial statements, including its asset values, cash balance, reported profits, and reported debt levels. At the worst of times, the company has invested in large assets at costs that we find too high to be plausible – including from parties we believe are de facto under common control. This behavior gives rise to concerns about fraudulent asset values and theft of company assets. At somewhat better times, the company seems to “only” materially mislead, such as by trying to give investors the (false) impression it does not engage in reverse factoring, and by understating (we believe intentionally) lease debt.
Inflated asset purchase prices and capital expenditures are hallmarks of significant fraud – particularly in emerging and frontier markets. NMC’s $107.4 million investment in redeveloping NMC Royal Women’s Hospital (f/k/a Brightpoint Royal Women’s Hospital) contains numerous red flags. NMC’s $36.4 million purchase of 70% of Premier Care Home Medical and Health Care LLC appears to also be a significant overpayment. NMC’s reported cash balances show two red flags that indicate they could be materially overstated. NMC’s margins appear “too good to be true” relative to UAE-focused publicly traded comps, Mediclinic International plc and Aster DM Healthcare Ltd. We believe that a significant part of the reason for this outperformance is NMC materially underreports its rejection rate for reimbursement, thereby inflating its reported margin. Another factor that could be assisting this inflation is purchases from related parties – we do not advise investors to be sanguine about this possibility, as the price to be paid for what could perhaps be perceived as a subsidy from the privately-owned businesses – could very well be overpayment for long-term assets and capex.
We believe that NMC has manipulated its balance sheet to understate debt. Many investors are under the impression that NMC does not use reverse factoring. In addition to a Credit Suisse supply chain finance fund (of which some investors are aware) that holds notes issued by NMC, we found a reverse factoring facility arranged by an outfit called Channel Finance that appears to convert NMC payables into debt. The Channel Finance notes have been de-listed as of November 2019, which we suspect could be an attempt to cover up NMC’s use of this facility. The amounts used in each are material in our view, and we believe that they are not included in NMC’s debt figures.
In our view, NMC also deliberately understated its debt by approximately $320 million as of FY 2018 by not reporting leases associated with its Aspen Healthcare acquisition as finance leases.
Each of these problems would be less likely to exist if NMC had sufficient governance. In our view, it falls well short. We do not see the independent board members as being truly independent. The company’s relationship with its auditor, Ernst & Young raises flags. Executive compensation has nearly tripled in two years to $18.7 million a year, and insiders have monetized material amounts of stock.
We are unsure how deep the rot at NMC goes, but we do not believe that its insiders or financials can be trusted.
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