NMC Health (NMC) has defended its accounting standards and governance policies in a detailed response to hedge fund Muddy Waters’ short attack.
The Middle East-focused healthcare company’s market capitalisation has almost halved since the short-seller’s report this week, its share price falling from over 2,500p to 1,285p.
Muddy Waters alleged NMC inflated asset purchase prices and its cash balances, calling this the “hallmarks of significant fraud”, as well as understating its debt by $320m (£243m) in 2018. The report also looks at supply chain financing, where a company borrows against supplier payments and this stays off the net debt figure.
In its rebuttal, NMC said Muddy Waters was wrong on several points and that it did not provide adequate context for others. On the allegation the company had paid double the going rate - $107m (£81m), or $7,700 per square metre - to redevelop Brightpoint hospital in Abu Dhabi, NMC said Muddy Waters had included lease capitalisation, which added around a third to the capital cost. Without this, the per square metre cost of $4,300 was only slightly higher than the industry average used by Muddy Waters, which NMC said was down to the hospital being in a 17-story building.
The healthcare company also argued it did not need to declare its procurement manager Pradeep Rai’s shareholding in the company hired to do the work on the hospital, Modular Concepts, as he was not senior enough to count as a related party. The company also said it was not his team that picked Modular to do the major works. Muddy Waters also raised the point that Mr Rai is a non-blood relative of NMC's founder and major shareholder BR Shetty, which the company confirmed.
Another angle of attack from the short-seller was the cash balance of $491m as of 31 December last year, which it said was suspicious because of the “low interest” paid out.
NMC said the 0.77 per cent average interest on the reported cash balance was “misleading” as it was the interest rate of total cash and bank rather than bank deposits. It said that Muddy Waters’ allegations around the under-reported debt from the Aspen Healthcare purchase were wrong because the $320m was an operating lease, not a finance lease, and so should not go towards net debt.
Muddy Waters, which usually issues several reports about companies it has taken short positions on, has not responded in detail to NMC’s rebuttal.
